Quarterly Summary of Financial Data(Unaudited)

               The unaudited quarterly results of operations for the years endedDecember 31, 2004 and December 31, 2003 are as follows:

                                                                             
|                                    | (Dollars in thousands, except Per ShareAmounts)                                                                                                               |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    | 2004                                                                                                                                                          |
|                                    |                                                                                                                                                               |
|                                    | First                                                                                                                                                         | Second | Third | Fourth |
|                                    | Quarter                                                                                                                                                       | Quarter | Quarter | Quarter |
| Interest income                    | $                  4,923                                            | $                4,795 | $                4,364 | $                4,160 |
| Interest expense                   |                     1,654                                 |                    1,656 |                    1,607 |                   1,034 |
|   Net interest income         |                     3,269                                 |                   3,139 |                   2,757 |                   3,126 |
| Provision/(credit) for loan losses |                           56     |                    (492) |                           - |                          - |
|                                    |                                                                                                                                                               |  |  |  |
|   Net interest income after   |                                                                                                                                                               |  |  |  |
|   provision for loan losses   |                     3,213                                 |                   3,631 |                   2,757 |                   3,126 |
|                                    |                                                                                                                                                               |  |  |  |
| Net securities gains               |                      795                             |                        51 |                      349 |                          - |
| Other income                       |                        995                 |                      957 |                      752 |                      692 |
| FHLB prepayment penalty            |                           - |                          - |                   4,402 |                          - |
| Other expenses                     |                     3,643                                 |                    3,269 |                   2,968 |                   2,624 |
|                                    |                                                                                                                                                               |  |  |  |
| Income before income taxes         |                     1,360                                 |                   1,370 |                 (3,512) |                   1,194 |
| Applicable income taxes            |                        308                 |                      356 |                 (1,286) |                      413 |
| Net income                         | $                  1,052                                            | $                1,014 | $              (2,226) | $                   781 |
| Earnings per share, basic          | $                     .31                                 | $                    ..29 | $                 (.65) | $                   .23 |
|                                    |                                                                                                                                                               |  |  |  |
|                                  |                                                                                                                                                                      |
|----------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  | 2003                                                                                                                                                                 |
|                                  |                                                                                                                                                                      |
|                                  | First                                                                                                                                                                | Second | Third | Fourth |
|                                  | Quarter                                                                                                                                                              | Quarter | Quarter | Quarter |
| Interest income                  | $                  5,313                                                   | $                5,028 | $                4,703 | $                4,751 |
| Interest expense                 |                     1,717                                        |                    1,650 |                    1,562 |                   1,596 |
|   Net interest income       |                     3,596                                        |                   3,378 |                   3,141 |                   3,155 |
| Provision for loan losses        |                             - |                          - |                           - |                        39 |
|                                  |                                                                                                                                                                      |  |  |  |
|   Net interest income after |                                                                                                                                                                      |  |  |  |
|   provision for loan losses |                     3,596                                        |                   3,378 |                   3,141 |                   3,116 |
|                                  |                                                                                                                                                                      |  |  |  |
| Net securities gains             |                           -        |                          - |                          -                   |                          9 |
| Other income                     |                        906                        |                   1,070 |                      982 |                      972 |
| Other expenses                   |                     3,037                                        |                    3,068 |                   3,107 |                   3,560 |
|                                  |                                                                                                                                                                      |  |  |  |
| Income before income taxes       |                     1,465                                        |                   1,380 |                   1,016 |                      537 |
| Applicable income taxes          |                        322                        |                      275 |                      146 |                        94 |
| Net income                       | $                  1,143                                                   | $                1,105 | $                   870 | $                   443 |
| Earnings per share, basic        | $                   .33                                                    | $                    ..32 | $                   .25 | $                   .13 |
|                                  |                                                                                                                                                                      |  |  |  |

 

Common Stock Information

The following table sets forth the high and low sales prices forthe common stock, as reported by The Nasdaq Stock Market, Inc., andthe cash dividends declared per share on the common stock for theperiods indicated.
|                |   |                                                  |   |                                                              |   | Cash Dividend                                                                                  |
|----------------|---|--------------------------------------------------|---|--------------------------------------------------------------|---|------------------------------------------------------------------------------------------------|
| 2004           |   | High                                             |   | Low                                                          |   | Per Share                                                                                      |
| First Quarter  | $ |         28.40 | $ |           25.75 | $ |                ..25 |
| Second Quarter |   |         26.43 |   |           21.50 |   |                ..25 |
| Third Quarter  |   |         26.00 |   |           21.00 |   |                ..25 |
| Fourth Quarter |   |         24.24 |   |           22.00 |   |                ..25 |
|                |   |                                                  |   |                                                              |   |                                                                                                |
| 2003           |   |                                                  |   |                                                              |   |                                                                                                |
| First Quarter  | $ |         27.00 | $ |           21.31 | $ |                ..25 |
| Second Quarter |   |         34.19 |   |           25.25 |   |                ..25 |
| Third Quarter  |   |         26.18 |   |           23.01 |   |                ..25 |
| Fourth Quarter |   |         26.51 |   |           23.10 |   |                ..25 |
|                |   |                                                  |   |                                                              |   |                                                                                                |

Commercial National Financial Corporation common stock is tradedon The Nasdaq National Market under the trading symbol“CNAF” with an additional descriptive listing of“CmclNat.”

Selected Financial Data

The following financial information is not covered by theauditor's report and must be read in conjunction with theconsolidated financial statements and related notes along withmanagement's discussion and analysis of financial condition andresults of operations.

 
| Years Ended December 31,

(Dollars in thousands, except per share data) |
|-------------------------------------------------------------------------|
|                                                                         |  |  |  |  |  |
|                                                                         | 2004 | 2003 | 2002 | 2001 | 2000 |
|                                                                         |  |  |  |  |  |
| Total interest income                                                   |          $18,242 |          $19,795 |          $22,943 |          $24,399 |          $26,056 |
|                                                                         |  |  |  |  |  |
|   Total interest expense                                           |             5,951 |             6,525 |             7,575 |             9,716 |           11,705 |
|                                                                         |  |  |  |  |  |
| Net interest income                                                     |           12,291 |           13,270 |           15,368 |           14,683 |           14,351 |
| Provision/(credit) for loan losses                                      |              (436) |                  39 |                298 |                540 |             1,176 |
|                                                                         |  |  |  |  |  |
| Net interest income after                                               |  |  |  |  |  |
|     provision for loan losses                            |           12,727 |           13,231 |           15,070 |           14,143 |           13,175 |
|                                                                         |  |  |  |  |  |
| Other operating income                                                  |             4,591 |             3,939 |             3,290 |             2,555 |             2,305 |
| Other operating expenses                                                |           16,906 |           12,772 |           11,143 |           10,094 |             9,429 |
|                                                                         |  |  |  |  |  |
| Income before taxes                                                     |                412 |             4,398 |             7,217 |             6,604 |             6,051 |
| Income taxes expense/(benefit)                                          |              (209) |                837 |             1,873 |             1,699 |             1,419 |
|                                                                    |  |  |  |  |  |
| Net income                                                              |        $      621 |          $ 3,561 |          $ 5,344 |          $ 4,905 |          $ 4,632 |
|                                                                         |  |  |  |  |  |
| Per share data                                                          |  |  |  |  |  |
| Net income                                                              |   $          ..18 |   $         1.03 |   $          1.56 |   $         1.43 |   $         1.32 |
| Dividends declared                                                      |    $        1.00 |   $         1.00 |   $         1.00 |  $           ..76 |  $           ..68 |
| Average shares outstanding                                              |       3,422,881 |       3,441,556 |       3,425,858 |       3,432,389 |       3,511,603 |
|                                                                         |  |  |  |  |  |
| **At end of period**                                                    |  |  |  |  |  |
|     Total assets                                         |        $320,372 |        $385,028 |        $380,338 |        $343,029 |        $329,865 |
|     Securities                                           |          101,261 |          168,685 |          148,344 |          119,396 |          104,703 |
|     Loans, net of unearned income                        |          192,255 |          187,382 |          169,030 |          202,335 |          207,022 |
|     Allowance for loan losses                            |             1,855 |             2,462 |             2,707 |             2,814 |             2,737 |
|     Deposits                                             |          265,818 |          259,216 |          270,025 |          254,986 |          266,611 |
|     Long-term borrowings                                 |                    - |           55,000 |           55,000 |           35,000 |           10,000 |
|     Shareholders' equity                                 |           44,660 |           49,537 |           51,205 |           45,970 |           43,137 |
|                                                                         |  |  |  |  |  |
| **Key ratios (expressed as %)**                                         |  |  |  |  |  |
|     Return on average assets                             |                ..17% |              0.95% |              1.46% |              1.43% |            1.32% |
|     Return on average equity                             |               1.36 |               6.99 |            11.02 |            10.90 |            11.21 |
|     Net loans-to-deposit ratio                           |            71.63 |            71.34 |            61.59 |            78.25 |            78.00 |
|     Dividend payout ratio (dividends                     |  |  |  |  |  |
|       declared divided by netincome)           |          551.21 |            96.63 |            64.07 |            53.16 |            51.46 |
|     Equity-to-assets ratio (average                      |  |  |  |  |  |
|     equity divided by average total assets)              |            12.47 |            13.63 |            13.27 |            13.12 |            11.82 |

**Management’s Discussion andAnalysis**

**of**

**Financial Condition and Results ofOperations**

**Safe Harbor Statement**

****

*Forward-looking statements (statements which are nothistorical facts) in this Annual Report on Form 10-K are madepursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. For this purpose, any statementscontained herein that are not statements of historical fact may bedeemed to be forward-looking statements. Without limiting thegenerality of the foregoing, words such as “may,”“will,” “to,” “expect,”“believe,” “anticipate,”“intend,” “could,” “would,”“estimate,” or “continue” or the negativeor other variations thereof or comparable terminology are intendedto identify forward-looking statements. These statements are basedon information currently available to Commercial National FinancialCorporation (the Corporation), and the Corporation assumes noobligation to update these statements as circumstances change.Investors are cautioned that all forward-looking statements involverisk and uncertainties, including changes in general economic andfinancial market conditions, unforeseen credit problems, and theCorporation’s ability to execute its business plans. Theactual results of future events could differ materially from thosestated in any forward-looking statements herein.*

****

**Critical Accounting Policies:**

Disclosure of the Corporation's significant accounting policiesis included in Note 1 to the consolidated financialstatements. Certain of these policies are particularly sensitiverequiring significant judgments, estimates and assumptions to bemade by management. Additional information is contained inmanagement's discussion and analysis for the most sensitive ofthese issues, including the provision and allowance for loanlosses.

In determining the allowance for loan losses, management makessignificant estimates. Consideration is given to a variety offactors in establishing this estimate. In estimating the allowancefor loan losses, management considers current economic conditions,diversification of the loan portfolio, delinquency statistics, results of internalloan reviews, its borrowers' perceived financial and managerialstrengths, the adequacy of the underlying collateral, if collateraldependent, or present value of future cash flows and other relevantfactors.

**Overview**

The purpose of this discussion and the accompanying financialdata is to provide aid in understanding and evaluating thefinancial condition and results of operations of the Corporationfor the years ended December 31, 2004, 2003 and 2002. Thisinformation should be read in conjunction with the consolidatedfinancial statements and related footnotes for the years underreview.

The Corporation is a financial holding company, withwholly-owned subsidiaries Commercial Bank & Trust of PA (theBank), and Commercial National Insurance Services, Inc. (CNIS). InJune 2004, CNIS sold all of its assets and is now inactive. SeeNote 2 to the consolidated financial statements for additionalinformation.

The Corporation reported net income of $621,000 or $0.18 pershare for the year ended 2004 compared to $3.6 million or $1.03 pershare for the year ended 2003. The Corporation’s return onaverage assets for 2004 and 2003 were 0.17% and 0.95%,respectively. Return on average equity for the same two periodswere 1.36% and 6.99%, respectively.

In accordance with the strategic direction of concentrating oncore banking business of loans and deposits and trust and assetmanagement services taken by the Board of Directors in January2004, many undertakings were accomplished.

The Corporation completed the sale of the insurance agencyassets relating to the Gooder Agency, Inc mid-year 2004. Prior to its asset sale, the insurance affiliate recorded anoperating loss of approximately $100,000 during 2004.

 

In September 2004, the company restructured its balance sheetthrough the prepayment of $55.0 million in borrowings from theFederal Home Loan Bank. The Corporation incurred prepaymentpenalties in conjunction with its prepayment of the borrowings,which resulted in a one-time charge of approximately $4.4 million.Funding from cash equivalents and securities were utilized to paythe advances and the penalties. This action caused earnings to bematerially reduced for the year. As a result of this restructuring,interest expense has been reduced and net interest margin andfuture core earnings should be enhanced.

At year-end 2004, the Corporation’s whollyowned trust company subsidiary, Highview TrustCompany, merged into a department of the Bank. With thismerger, the Bank adopted a new name, Commercial Bank & Trust ofPA, to reflect the Corporation’s primary lines ofbusiness.

In addition to these items, earnings were positively influencedby $1.2 million in net securities gains and a credit from theallowance for loan losses in the amount of $436,000. Securitieswere sold to reposition the investment portfolio to reduce theCorporation’s alternative minimum tax position, to offset a$233,000 executive severance related to the departure of theCorporation’s previous President and Chief Executive Officerand to reduce potential extension, market and interest rateexposures. The reduction in the allowance consisted of specificallocations for several classified loans, totaling $3.2 million,which paid off in the first half of 2004.

The Corporation’s largest segment of operating results isdependent upon net interest income. Net interest income iscalculated by what is earned on interest-earning assets lessinterest paid on interest-bearing liabilities. For the years ended2004 and 2003, net interest income was $12.3 and $13.3 million,respectively. The related tax-equivalent net interest margin forthese two years was 3.82% and 4.19%, respectively. The decline inthe margin is mostly due to the decrease in yield earned oninterest-earning assets. Other factors that can affect theCorporation’s operating results are activity in the loan lossprovision and components of non-interest income and non-interestexpense.

With these changes, the Corporation has now completed theadministrative process of streamlining its business focus. Thebusiness strategy for 2005 is to continue asset growth throughtraditional loans and deposits supplemented by trust productsofferings to customers in its marketplace. Management anticipatescontinued pressure on net interest income. Loans and deposits willcontinue to be competitively priced by the Corporation with theintention of acquiring profitable market share. Operating expenseswill continue to be scrutinized for the purpose of offsetting apotential decline in net interest income.

**Financial Condition**

Total assets of the Corporation were $320.4 million on December31, 2004 compared to $385.0 million on December 31, 2003. Decreasesin investments and cash equivalents were minimally offset by anincrease in loans. The decline in Total Liabilities was mostlyattributed to a decline in short and long-term borrowings offset bya nominal increase in total deposits. 

The loan portfolio is comprised mostly of residential andcommercial real-estate secured loans. These loans consist ofresidential mortgages, commercial mortgages and home equity termand lines of credit. Additionally, the loan portfolio includescommercial, tax-free and other consumer loans.

The total loan portfolio increased $4.9 million in 2004 over thetotal of $187.4 million at the end of 2003. This increase was duelargely to increases in commercial and commercial real-estateloans.  Competition remains strong for these loans due to weakdemand as businesses in our market place seem to be more fiscallyprudent in their capital needs to grow their business.

Total investment securities decreased $67.4 million during 2004due mostly to the redemption of borrowings. All of theCorporation’s securities are held as available for sale.These securities consist of mortgage-backed securities, tax-freemunicipal bonds, U.S. government agency securities and Federal HomeLoan Bank stock. Depending upon market fluctuations or othercircumstances that may arise, such as changes in prepayment rates,the Corporation may sell securities for asset/liability managementand liquidity purposes.

At December 31, 2004, total deposits increased $6.6 million fromDecember 31, 2003 to $265.8 million. This increase is due to aneffort to offer more competitive pricing in certificate of depositaccounts. During December 2004, a transfer of $5.7 million flowedfrom interest bearing deposits to non-interest bearing deposits.This transfer was attributed to one customer of the Bank. InJanuary 2005, the same customer transferred all non-interestbearing deposits out of the Bank.

Total short-term borrowings decreased $9.5 million in 2004.These borrowings were reduced by monthly cashflows from securitiesand loans.

In 2004, long-term borrowings decreased $55.0 million fromyear-end 2003. This reduction was due to the previously mentionedbalance sheet restructuring during the third quarter.

Shareholders’ equity was $44.7 million on December 31,2004 compared to $49.5 million on December 31, 2003, a decrease of$4.8 million. The change in shareholders’ equity consists ofnet income of $621,000 being offset by unrealized losses onsecurities of $1.7 million, dividends declared of $3.4 million andtreasury stock purchases of $421,000.  Book value per commonshare at year-end 2004 decreased by 10.10% to $13.08 from $14.55 atyear-end 2003.

**Results of Operations**

Net income decreased $2.9 million, or 83%, to $621,000 for theyear ended December 31, 2004 from $3.6 million for the year endedDecember 31, 2003. The decrease was primarily due to a $4.4 millioncharge relating to the prepayment of the Corporation’slong-term FHLB borrowings in the principal amount of $55.0 million.Included in operating income is a gain of $1.2 million on the saleof investment securities. These securities were sold to offset a$233,000 executive severance expense, alleviate theCorporation’s alternative minimum tax position and to reduceextension, market and interest rate risks. Also included inoperating income is a reduction of $436,000 in the loan lossallowance due to specified problem loans that paid off during 2004.These loans had allocated loss allowances while they were includedin the Corporation’s balance sheet. Since they are no longercarried on the balance sheet, the Corporation deemed it unnecessaryto carry this excess in the allowance.

Net income decreased $1.8 million, or 33%, to $3.6 million forthe year ended December 31, 2003 from $5.3 million for the yearended December 31, 2002. The decrease reflects a decline in netinterest income of $2.1 million, higher operating expenses of $1.3million and an impairment writedown of $375,000 of the goodwill ofits insurance agency subsidiary. Partially offsetting these factorswas an increase in other operating income of $656,000, a lowerprovision for loan losses of $259,000 and a decline in income taxexpense of $1.0 million. This decline is due to lower pre-taxincome a greater proportion of tax-free income in relation totaxable income.

**Net Interest Income**

In 2004, interest income was $18.2 million compared to $19.8million in 2003, a decrease of $1.6 million. A $972,000 decline ininvestment income was the primary reason for the overall drop ininterest income. This was attributed to lower security holdings in2004 as proceeds from sales of securities were used to repaylong-term FHLB borrowings. Also contributing to the decline ininterest income was the Corporation’s inability to increaseloan interest even though total loans grew by more than $4.9million in 2004. The reason for this decline is due to lower rateson new loans.

For 2004, total deposits increased by $6.6 million to $265.8million from $259.2 million at the end of 2003. This increase,resulted in a $99,000 increase in interest expense on deposits.Interest on borrowings was $673,000 less in 2004. This reduction isdirectly related to the prepayment of FHLB Advances that occurredin September.

As a result of these factors, net interest income in 2004 was$12.3 million compared to $13.3 million in 2003, a decrease of $1.0million.

In 2003, interest income was $19.8 million compared to $22.9million in 2002, a decrease of $3.1 million.  Part of thisdecrease was due to the Corporation’s inability to increaseinterest income from loans even though total loans grew by morethan 10% in 2003. This was the direct result of lower interestrates at which the new loans were added to the balance sheet.

The following table displays the Corporation’s averagebalance sheet, annual interest earned and paid, and annual yieldson interest earning assets and interest-bearing liabilities for2004, 2003 and 2002.
| COMMERCIAL NATIONAL FINANCIAL CORPORATION                            |
|----------------------------------------------------------------------|
|                                                                      |
| Financial Comparisons                                                |
| Consolidated Average Balance Sheet, InterestIncome/Expense and Rates |
| **(Dollars in Thousands)**                                           |
|                                                       |                  2004                                                                                 | 2003                                                                                                                                     | 2002                                                    |                                                                                                                                   |
|------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                                            | Average                                                                                                                                                                               | Interest                                                                                                                                 | Yield or                                                | Average                                                                                                                                | Interest | Yield or | Average | Interest | Yield or |
|                                                            | Balance                                                                                                                                                                               | Income/                                                                                                                                  | Rate(a)                                                 | Balance                                                                                                                                | Income/ | Rate(a) | Balance | Income/ | Rate (a) |   |
|                                                            |                                                                                                                                                                                       | Expense                                                                                                                                  |                                                         |                                                                                                                                        | Expense |  |  | Expense |  |   |
|   Interest-earning assets                             |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Loans net of unearned

  income (b) (c)        |                    

     $187,918                                 |                  

     $11,086 |     5.90%                                |                

$183,628                                   |                  

     $11,674 |     6.36% |                  

   $187,428 |                

   $13,839 |     7.38% |   |
|   Taxable securities                                  |        126,135                                                                                                                                          |          6,914                                                                                   |      5.48                                |    108,162                                                                                                                   |          6,835 |      6.32 |      111,966 |        8,130 |      7.26 |   |
|   Non-taxable securities                              |          10,502                                                                                                                               |            598                                                                    |     5.70                                 |      34,611                                                                                                        |          2,121 |     6.13 |        21,063 |        1,602 |     7.61 |   |
|   Interest-bearing deposits with banks                |                    

          4,998 |              63                                                         |      

    1.26 |                

       2,172 |              41 |      

    1.89 |                  

         5,278 |                

           49 |      

    0.93 |   |
|   Federal funds sold                                  |           5,210                                                                                                                     |              61                                                         |     1.17                                 |      12,330                                                                                                        |            129 |     1.05 |        11,147 |          173 |     1.55 |   |
|   Total earning assets                                |        334,763                                                                                                                                          |        18,722                                                                                              |     5.59                                 |    340,903                                                                                                                   |        20,800 |     6.10 |      336,882 |      23,793 |     7.06 |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|    Non-interest-earning assets                   |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Cash                                                |           8,596                                                                                                                     |                                                                                                                                          |                                                         |        7,879                                                                                             |  |  |          8,007 |  |  |   |
|   Allowance for loan losses                           |          (2,165)                                                                                                                              |                                                                                                                                          |                                                         |       (2,685)                                                                                                 |  |  |        (2,879) |  |  |   |
|   Other assets                                        |         24,881                                                                                                                                |                                                                                                                                          |                                                         |      27,399                                                                                                        |  |  |        23,394 |  |  |   |
| Total non-interest-earning assets                          |         31,312                                                                                                                                     |                                                                                                                                          |                                                         |      32,593                                                                                                        |  |  |        28,522 |  |  |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|     Total assets                            |      $366,075                                                                                                                                                     |                                                                                                                                          |                                                         | $373,496                                                                                                                               |  |  |    $365,404 |  |  |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Liabilities and Shareholders’ Equity          |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Interest-bearing deposits                           |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   NOW accounts                                        |      $  23,881                                                                                                                                               |              36                                                         |     0.15                                 | $  24,151                                                                                                                         |              35 |     0.14 |    $  22,952 |            99 |     0.43 |   |
|   Money Market accounts                               |          39,835                                                                                                                               |            253                                                                    |     0.64                                 |      43,948                                                                                                        |            327 |     0.74 |        46,793 |           717 |     1.53 |   |
|    Savings deposits                              |          52,695                                                                                                                               |            317                                                                    |     0.60                                 |      56,200                                                                                                        |            412 |     0.73 |        55,369 |           801 |     1.45 |   |
|   Time deposits                                       |          92,210                                                                                                                               |          3,056                                                                                   |     3.31                                 |      86,059                                                                                                        |          2,789 |     3.24 |        89,490 |        3,381 |     3.78 |   |
|   Short-term borrowings                               |          10,505                                                                                                                               |            161                                                                    |     1.52                                 |        3,977                                                                                             |              49 |     1.23 |          1,496 |            30 |     1.98 |   |
|   Long-term borrowings                                |         40,123                                                                                                                                |         2,128                                                                                    |     5.29                                 |      55,000                                                                                                        |         2,913 |     5.29 |        48,602 |        2,547 |     5.24 |   |
|                                                       |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Total interest-bearing liabilities                  |                    

       259,249                      |         5,951                                                                                    |     2.29                                 |                

   269,335                       |         6,525 |     2.42 |                  

     264,702 |        7,575 |      

    2.86 |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Non-interest-bearing deposits                       |          57,904                                                                                                                               |                                                                                                                                          |                                                         |      49,583                                                                                                        |  |  |        48,579 |  |  |   |
|   Other liabilities                                   |           2,271                                                                                                                     |                                                                                                                                          |                                                         |        3,656                                                                                             |  |  |          3,647 |  |  |   |
|   Shareholders' equity                                |         45,651                                                                                                                                |                                                                                                                                          |                                                         |      50,922                                                                                                        |  |  |        48,476 |  |  |   |
|       Total non-interest-bearing  |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|       Funding sources             |        105,826                                                                                                                                          |                                                                                                                                          |                                                         |    104,161                                                                                                                   |  |  |      100,702 |  |  |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|       Total liabilities and       |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|         shareholders' equity |      $365,075                                                                                                                                                     |                                                                                                                                          |                                                         | $373,496                                                                                                                               |  |  |   $365,404                                       $342,807,943 |  |  |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Net interest income and net                         |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |
|   Yield on interest earning assets                    |                                                                                                                                                                                       |      $12,771                                                                                                         |     3.82%                                |                                                                                                                                        |      $14,275 |     4.19% |  |    $16,218 |     4.81% |   |
|                                                            |                                                                                                                                                                                       |                                                                                                                                          |                                                         |                                                                                                                                        |  |  |  |  |  |   |

       (a) Yields on interestearning assets have been computed on a tax-equivalent basis usingthe

           34% federalincome tax statutory rate.

       (b) Income on non-accrualloans is accounted for on the cash basis, and the

           loan balances are included in interest earning assets.

(c) Loan income includes net loan fees/costs.

The following table illustrates the impacta               Thefollowing table illustrates the impact and interaction of rate andvolume changes for the years under review:
|                                                         |
|---------------------------------------------------------|
| Analysis of Year-to-Year Changes in Net Interest Income |
| **(Dollars in Thousands)**                              |

                               
|                                                                              | 2004 Change from 2003                                                                                                 | 2003 Change from 2002                                                                                                |
|------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                                                              | Total                                                                                                                 | Change Due                                                                                                           | Change Due | Total | Change Due | Change Due |
|                                                                              | Change                                                                                                                | To Volume                                                                                                            | To Rate | Change | To Volume | To Rate |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Interest-earning assets                                                      |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Loans net of unearned income                                                 |           $   (581)                                       |              $  266                            |            $(847) |         $  (2,143) |            $  (274) |         $ (1,869) |
| Securities                                                                   |                                                                                                                       |                                                                                                                      |  |  |  |  |
|   Taxable                                                               |                     79 |               1,136                            |           (1,057) |              (1,295) |                (276) |           (1,019) |
|   Non-taxable                                                           |             (1,005)                                       |                (975)                      |                (30) |                  342 |                  681 |              (339) |
| Interest-bearing deposits with banks                                         |                    22  |                    53 |                (31) |                    (8) |                  (29) |                  21 |
| Federal funds sold                                                           |                   (68)           |                  (74)           |                    6 |                   (44) |                    18 |                (62) |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
|           Totalinterest income  |             (1,553)                                       |                  406            |           (1,959) |             (3,148) |                  120 |           (3,268) |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Interest-bearing liabilities                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Deposits                                                                     |                    99  |                  (29)           |                128 |             (1,435) |                  (99) |           (1,336) |
| Short-term borrowings                                                        |                  112             |                    80 |                  32 |                    19 |                    50 |                (31) |
| Long-term borrowings                                                         |                (785)                       |                (788)                      |                    3 |                  366 |                  341 |                  25 |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
|           Totalinterest expense |                (574)                       |                (737)                      |                163 |             (1,050) |                  292 |           (1,342) |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Net interest income                                                          |           $   (979)                                       |           $  1,143                                            |        $  (2,122) |         $  (2,098) |           $   (172) |        $  (1,926) |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |
|                                                                              |                                                                                                                       |                                                                                                                      |  |  |  |  |

**Other Operating Income and Expense**

Total other operating income for 2004 was $4.6 million, anincrease of $700,000 from $3.9 million in 2003. The reason for thisincrease was the previously mentioned gains on the sale ofinvestment securities. Excluding this item, non-interest incomewould have decreased $500,000. Negatively affecting other incomewas a decrease in commission income from insurance sales due to thesale of Gooder, a loss on the sale Gooder assets, a change indeposit fee pricing and the introduction of free businesschecking.

Total other operating income for 2003 was $3.9 million, anincrease of $600,000 from $3.3 million in 2002. Of this increase,$841,000 is attributable to gross revenue generated by theCorporation’s wholly owned insurance agency subsidiary,Gooder Agency, which the Corporation acquired at the end of 2002.In 2003, trust income increased $169,000 over 2002 due to higherestate fees and income from third party management fees. Incomefrom service charges on deposit accounts increased $148,000 in2003, due mostly to fees generated from overdrafts. Other incomeincreased $38,000 in 2003, of which $55,000 was realized from alife insurance policy. Other service charges and fees decreased$99,000 in 2003. This decrease is the result of lower feescollected by the Bank on customer product and service offerings. In2002, the Corporation realized a gain of $470,000 on the sale of abranch office.

Non-interest expense for 2004 reached $16.9 million, an increaseof $4.1 million or 32% from non-interest expense for 2003. $4.4million of this increase is due to prepayment charges relating tothe repayment of the Corporation’s long-term FHLB borrowings.Personnel costs rose by $162,000 from 2004 to 2003. This increasewas attributed to higher insurance costs as an increase in salarieswas offset by a decrease in other benefits. A $62,000 increase infurniture and equipment expense was due to depreciation expense onequipment which was purchased in the fourth quarter of 2003. Legaland professional expenses were lower by $71,000. Reflected in 2003operating expenses is a $375,000 impairment charge related to thewritedown of goodwill on the Corporation’s insurance agencysubsidiary.

Total other operating expense increased $1.6 million to $12.8million for 2003 compared to $11.2 million in 2002. Personnelexpense increased $561,000 or 10% in 2003. Factors contributing tothis increase were the Gooder Agency acquisition, wage increases,higher health insurance premiums and payroll taxes. Net occupancyexpense increased by $90,000 in 2003 due to increased depreciationof check imaging equipment and rental expense from the addition ofthe Norwin and Gooder Agency offices for full year 2003. A $375,000goodwill impairment charge was taken on the insurance agencysubsidiary. All other expenses increased $603,000 in 2003 to $5.6million. Amortization of intangible assets and expenses associatedwith the acquisition and operation of Gooder Agency were theprimary reasons for this increase

Income tax expense/(benefit) was ($209,000) in 2004, $837,000 in2003 and $1,873,000 in 2002. The income tax benefit for 2004 is dueto higher tax-free income in relation to lower pre-tax income in2004. Due to this, the Corporation is now in an alternative minimumtax position and anticipates exiting this position in 2005.

**Liquidity and Capital Resources**

Liquidity measurements evaluate the Corporation’s abilityto meet the cash-flow needs of its depositors and borrowers. Themost desirable source of liquidity is deposit growth. Additionalliquidity is provided by the maturity of investments in loans andsecurities and the principal and interest received from thoseearning assets. Another source of liquidity is represented by theCorporation’s ability to sell both loans andavailable-for-sale securities. The Bank is a member of the FHLBsystem. The FHLB provides an additional source for liquidity forlong- and short-term funding. Additional sources of funding fromfinancial institutions have been established for short-term fundingneeds.

As of December 31, 2004, the Corporation had available fundingof approximately $195.4 million at the FHLB with an additional$30.0 million of short-term funding available through federal fundslines of credit.

The Corporation has outstanding commitments to fund loans thatare made in the normal course of business. At December 31, 2004,the commitments stood at $38.4 million. Since many of thecommitments are expected to expire without being drawn upon, thetotal commitment amounts do not necessarily represent future cashrequirements.

Cash flows from operating activities in 2004 decreased by $5.6million to ($2.2) million, from $3.4 million in 2003.

The decrease is due to the decline in net income and changes inother assets and liabilities in 2004 when compared to 2003.

Cash flows used for investing activities totaled $62.1 millionin 2004 compared to cash used in 2003 of $27.3 million. Net inflowsfrom investment activity comprise mostly for this activity. Cash used for new loans was $5.0 million.

Cash used from financing activities decreased $59.2 million in2004 due mostly to the repayment of long-term debt. A decrease inshort-term borrowings offset by an increase in total deposits forthe remaining difference in financing activity.

**Aggregate Contractual Obligations**

The following table presents contractual obligation payments dueby specific time periods:
|                             | (Dollars in thousands)                                                                                                |
|-----------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                             | < 1 year                                                                                                           | 1 – 3 years | 3 – 5 years | > 5 years | Total |
|                             |                                                                                                                       |  |  |  |  |
|                             |                                                                                                                       |  |  |  |  |
|                             |                                                                                                                       |  |  |  |  |
| Capital lease obligations   |                    $49 |                    $12 |                               - |                                   -       |                          $61 |
|                             |                                                                                                                       |  |  |  |  |
| Operating lease obligations |                    $87 |                    $81 |                          $58 |                            $192 |                        $418 |

 

Time deposits of $100,000 or more at December 31, 2004 are asfollows:
|                                                                                                                                                                                                                                                                                                                                                              |                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|
|                                                            | (in                                                               |
|                                                                                                                                                                                                                                                                                                                                                              | Amount                                                            | Percent |
|                                                                                                                                                                                                                                                                                                                                                              | (in thousands)                                                    |
| Remaining maturity:                                                                                                                                                                                                                                                                                                                                          |                                                                   |  |
|                                                                                                                                                                                                                                                                                                                                                              |                                                                   |  |
| 3 months or less                                                                                                                                                                                                                                                                                                                                             |         $ 3,625                |         16% |
| Over 3 through 6 months                                                                                                                                                                                                                                                                                                                                      |           3,535 |         16 |
| Over 6 months through 12 months                                                                                                                                                                                                                                                                                                                              |          10,801           |         48 |
| Over 12 months                                                                                                                                                                                                                                                                                                                                               |           4,436      |         20 |
|                                                                                                                                                                                                                                                                                                                                                              |                                                                   |  |
|                                                                                                                                                                                                                                                                                                                                                              |                                                                   |  |
|         Total                                                                                                                                                                                                                                                                                                             |       $ 22,397                           |       100% |
|                                                                                                                                                                                                                                                                                                                                                              |                                                                   |  |

The following table shows final loan maturities excludingconsumer installment, mortgage and nonaccrual loans and beforeunearned income at December 31, 2004:  (in thousands)
|                                                   | Within                                                                                                    | One-Five | After                                                                                                                                 |                                                                                                                                             |                                                                                           |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                                   | One Year                                                                                                  | Years    | Five Years                                                                                                                            | Total                                                                                                                                       |                                                                                           |
|                                                   |                                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                           |
| Commercial and industrial                         |           $  4,403                                 |          |          $ 10,485                                                                        |           $       911                                       |         $ 15,799                                            |
| Real estate-construction                          |                  258 |          |                       - |                        - |                 258 |
| Other                                             |               1,637                 | *        |                  317                             |                9,627                                             |            11,581                            |
|                                                   |                                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                                |
|         Totals |            $ 6,298                                 |          |          $  10,802                                                                  |           $  10,538                                                                  |         $ 27,638                                            |
|                                                   |                                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                                |
|                                                   |                                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                                |
| Loans at fixed interest rates                     |                                                                                            |          |            $  6,115                                                       |           $  10,461                                                                  |                                                                                                |
| Loans at variable interest rates                  |                                                                                                           |          |               4,687                                             |                     77                  |                                                                                                |
|                                                   |                                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                                |
|                                                   |                                                                                                           |          |           $ 10,802                                                                  |           $  10,538                                                                  |                                                                                                |

*Includes $532,000 Pennsylvania Higher Education AssistanceAgency loans with no fixed maturity date

The following tables present a five-year summary of loanclassifications and the maturity distribution of securities atDecember 31 of each such year:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Loans by Classification at December 31,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 2004 |  | 2003 |  | 2002 |  | 2001 |  | 2000 |  |
|                                                                                       Cent                                           Amount                                           Cent                                           Amount                                           Cent                                           Amount                                           Cent                                           Amount                                           Cent |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| Commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |        $15,933 |       8% |        $14,802 |       8% |        $12,725 |       7% |        $17,251 |       9% |         $ 25,802 |    12% |
| Real estate – commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |          55,555 |     29 |          51,006 |     27 |          54,618 |     32 |          71,699 |     35 |           66,052 |     32 |
| Real estate - construction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |             258 |       - |           1,108 |      1 |             976 |      1 |           1,629 |      1 |            2,381 |      1 |
| Real estate – other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        107,819 |     56 |        106,121 |     57 |          86,048 |     51 |          95,796 |     47 |          100,347 |     48 |
| Consumer - installment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |            886 |       1 |          1,405 |       1 |          1,922 |       1 |          2,486 |       1 |           3,434 |       2 |
| Municipal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |          10,002 |       5 |          10,622 |       5 |          10,078 |       6 |          10,990 |       6 |             7,114 |       4 |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |           1,579 |       1 |           2,179 |       1 |           2,635 |       2 |           2,555 |       1 |             2,892 |       1 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| Total loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        192,032 | 100% |        187,243 | 100% |        169,002 | 100% |        202,406 | 100% |          208,022 | 100% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| Net unamortized                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| costs/(fees)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |              223 |  |              139 |  |                28 |  |              (71) |  |                (65) |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| Total loans, net of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |  |  |  |  |  |  |  |
|   costs/(fees)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |      $192,255 |  |      $187,382 |  |      $169,030 |  |      $202,335 |  |        $207,957 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |

               
|                                                                                                                                                                                                                                                                                                  | Maturity Distribution of Securities at December31, 2004 |                                                  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|--------------------------------------------------|
|                                                                                                                                                                                                                                                                                                  | (in thousands)                                          |                                                  |
|                                                                                                                                                                                                                                                                                                  |                                                         |                                                  |  |
|                                                                                                                                                                                                                                                                                                  | U.S. Treasury                                           | State &                                      | Total | Weighted |
|                                                                                                                                                                                                                                                                                                  | & other U.S. Govt.                                  | Political                                        | Amortized | Average |
|                                                                                                                                                                                                                                                                                                  | Agencies & Corp.                                    | Subdivisions (1)                                 | Cost | Yield |
|                                                  |                                                         |                                                  |  |  |
| Within 1 year                                                                                                                                                                                                                                                                                    | $       6,331             | $       1,330 | $     7,661 | 2.62 |
| After 1 but within 5 years                                                                                                                                                                                                                                                                       | 2,055                                                   |    500                                 | 2,555 | 2.46 |
| After 5 but within 10 years                                                                                                                                                                                                                                                                      | -                                                       | 1,832                                            | 1,832 | 6.52 |
| After 10 years                                                                                                                                                                                                                                                                                   | 83,723                                                  | 515                                              |   84,238 | 5.98 |
|                                                                                                                                                                                                                                                                                                  |                                                    |                                                  |  |  |
|                                                                                                                                                                                                                                                                                                  |                                                         |                                                  |  |  |
|                                                                                                                                                                                                                                                                                                  | $     92,109                        | $       4,177      | $96,286 | 5.63% |
|                                                                                                                                                                                                                                                                                                  |                                                         |                                                  |  |  |

(1) Yield on tax-exempt obligations has been computed on afully

              tax-equivalent basis (using statutory federal income tax rate of34%)

Included in U.S. Treasury & other U.S. Government Agenciesare mortgage-backed securities. These securities carry an amortizedcost of $83.7 million and mature based upon their estimatedcontractual maturities. Expected maturities will differ fromcontractual maturities because borrowers may have the right toprepay with or without prepayment penalties.

**Interest Sensitivity and Market Risk**

The Corporation’s market risk is primarily interest raterisk. Interest rate risk arises due to timing differences betweeninterest sensitive assets and liabilities. Management monitors itsinterest sensitivity position with the intent on structuring thebalance sheet so that movements of interest rates on assets andliabilities produce a relatively constant net interest margin. TheCorporation’s interest rate risk management is theresponsibility of the Asset/Liability Management Committee, whichreports to the Board of Directors. This Committee establishespolicies for monitoring and coordinating the Corporation’ssources, uses and pricing of funds.

The following table lists the amounts and ratio of assets andliabilities subject to change as of December 31, 2004.
|                               | Interest Sensitivity Analysis (In Thousands) |
|------------------------------------|----------------------------------------------|
|                               |                                              |
|                               |                                              |
|                                    |                                              | 0-30 Days |  | 31-90 Days |  | 91-180 Days |  | 181-365 Days |  | 1-5 Years |  | Over 5 Years |   |
| Interest-earning assets:           |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Securities                         | $                                            |          2,687 | $ |           6,026 | $ |           5,775 | $ |          12,347 | $ |         46,570 | $ |     22,881 |
| Federal funds sold &           |                                              |  |  |  |  |  |  |  |  |  |  |  |
|   other deposits with banks   |                                              |            101 |  |                - |  |                 - |  |                  - |  |                  - |  | - |
| Loans                              |                                              |         22,676 |  |          2,718 |  |          6,695 |  |          13,062 |  |         84,480 |  |     60,580 |
| Total interest-sensitive           |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Assets                             |                                              |        25,464 |  |          8,744 |  |         12,470 |  |          25,409 |  |       131,050 |  |     83,461 |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Interest-bearing liabilities:      |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Certificates of deposit            |                                              |          4,149 |  |          8,014 |  |        11,633 |  |          11,799 |  |         61,665 |  |          220 |
| Other interest-bearing liabilities |                                              |                 - |  |          4,581 |  |          4,581 |  |           6,613 |  |         40,977 |  |     49,302 |
| Short-term borrowings              |                                              |          7,950 | - |                  |  |                - |  |                 - |  |                 - |  |              - |
| Total interest-sensitive           |                                              |  |  |  |  |  |  |  |  |  |  |  |
|   Liabilities                 |                                              |        12,099 |  |         12,595 |  |         16,214 |  |          18,412 |  |       102,642 |  |     49,522 |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Interest sensitivity gap           | $                                            |        13,365 | $ |         (3,851) | $ |         (3,744) | $ |            6,997 | $ |          28,408 | $ |     33,939 |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Cumulative gap                     | $                                            |        13,365 | $ |          9,514 | $ |          5,770 | $ |         12,767 | $ |          41,175 | $ |     75,114 |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |
| Ratio of cumulative gap to         |                                              |  |  |  |  |  |  |  |  |  |  |  |
| earning assets                     |                                              |         4.58% |  |          3.26% |  |          1.98% |  |          4.38% |  |          14.12% |  |      25.76% |
|                                    |                                              |  |  |  |  |  |  |  |  |  |  |  |

Loan and security assumptions are based upon contractualmaturity and prepayment estimates. Included in interest-bearingliabilities are savings, money market and interest-bearingtransaction accounts. These accounts are subject to immediatewithdrawal. However, based upon historical performance, managementconsiders a certain portion of the accounts to be stable coredeposits.

Although useful, there are certain deficiencies in this staticgap model. Assets and liabilities are subject to competitivepressures throughout the Corporation’s market area.Additionally, the timing and degree of repricing on assets andliabilities may vary significantly as interest rates change.

The Corporation also monitors interest rate risk throughcomputer simulations that project the impact of changing interestrates on earnings. This process projects a baseline net interestincome (assuming no changes in interest rate levels) and estimateschanges to that baseline net interest income resulting from changesin interest rate levels. The Corporation utilizes the results ofthis model in evaluating its interest rate risk. This modelincorporates a number of additional factors. These factors include:(1) the expected exercise of call features on various assets andliabilities; (2) the expected rates at which various rate sensitiveassets and liabilities will reprice; (3) the expected relativemovements in different interest rate indexes that are used as thebasis for pricing or repricing various assets and liabilities; (4)expected changes in administered rates on interest-bearingtransaction, savings, money market and time deposit accounts andthe expected impact of competition on the pricing or repricing ofsuch accounts; and (5) other factors. Inclusion of these factors inthe model is intended to more accurately project theCorporation’s changes in net interest income resulting froman immediate and sustained parallel shift in interest rates of up100 basis points (bps), up 200 bps, down 100 bps and down 200 bps.While the Corporation believes this model provides a usefulprojection of its interest rate risk, the model includes a numberof assumptions and predictions that are subject to continualrefinement. These assumptions and predictions include inputs tocompute baseline net interest income, growth rates, competition anda variety of other factors that are difficult to accuratelypredict.

The Corporation has established the following guidelines asacceptable ranges for interest rate risk:

During a +/- 200 basis point parallel shift in interest rates,net interest income may not change by more than 20% for a twelvemonth period.

During a +/- 200 basis point change in interest rates, balancesheet impact on economic value of capital may not change by morethan 20% for a twelve month period.

The following table presents the simulation model's projectedimpact of an immediate and sustained parallel shift in interestrates on the projected baseline net interest income for atwelve-month period commencing January 1, 2005.
|                        | **% Change in projected** | **% Change in projected** |
|------------------------|---------------------------|---------------------------|
| **Change in interest** | **Baseline**              | **economic**              |
| **rates**              | **net interest income**   | **value of capital**      |
|                        |                           |                           |
|                        |                           |                           |
| +200 basis points      | 0.1%                      |   (5.4%)             |
| +100 basis points      |   0.5%               |   (0.9%)             |
|                        |                           |                           |
| -100 basis points      | (3.1%)                    | (5.7%)                    |
| -200 basis points      | (7.2%)                    | (11.7%)                   |

In the event of a shift in interest rates, management may takecertain actions intended to mitigate the negative impact to netinterest income or to maximize the positive impact to net interestincome. These actions may include, but are not limited to,restructuring of earning assets and interest-bearing liabilities,seeking alternative funding sources or investment opportunities andmodifying the pricing or terms of loans and deposits.

**Allowance for Loan Losses and Credit Review**

Maintaining a high quality loan portfolio is of great importanceto the Corporation. The Corporation manages the riskcharacteristics of the loan portfolio through the use of prudentlending policies and procedures and monitors risk through aperiodic review process provided by internal auditors, regulatoryauthorities and internal loan review procedures. These reviewsinclude an analysis of credit quality, diversification of industry,compliance with policies and procedures, and current economicconditions. In addition to these reviews, the Corporation annuallyhas commercial loan reviews performed by a third party specializingin this area.

The Corporation’s credit culture fosters and activelysupports the extension of credit on sound, fundamental lendingpolicies. Each credit is to be logical, legal, constructive andacceptable within policy guidelines.

The allowance for loan losses is a valuation reserve that isintended to account for credit losses which may be expected in theCorporation’s loan portfolio as a result of the credit riskinvolved in the normal granting of credit. Adequate management ofthe allowance is an integral part of the credit risk managementprocess. The Corporation will maintain an adequate allowance inanticipation of losses reflected as of the evaluation date.Management is cognizant of the subjective nature of decisionsregarding loan portfolio factors and the variability over time ofinternal and external factors affecting portfolio quality, andrealizes that an effective asset review system is essential toestablishing the basis for an adequate allowance. To improve theaccuracy of determining the allowance, management will continuouslymonitor all factors and current conditions that may affect lossrecognition.

The amount of the provision/(credit) for loan losses was($436,000) in 2004, $39,000 in 2003 and $298,000 in 2002. Thecredit for loan losses was the result of several classified loans,totaling $3.2 million, that paid off during 2004. For each of thesame years, the net charge-off against the allowance for loanlosses was $171,000, $284,000 and $405,000, respectively. Theallowance for loan losses is maintained at a level that representsmanagement’s best estimates of losses in the loan portfolioat the balance sheet date. However, there can be no assurance thatthe allowance for loan losses will be adequate to cover losseswhich may be realized in the future, or that additional provisionsfor losses on loans will not be required.

The table below provides an analysis of the allowance for loanlosses for each of the five years ended December 31:
|                                                                                                                    Years Ended December 31,

                                                     (Dollars in thousands) |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 2004 | 2003 | 2002 | 2001 | 2000 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Loans outstanding at beginning of year,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |  |  |
|         net of unearnedincome                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        $187,382 |        $169,030 |        $202,335 |        $207,957 |       $204,839 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
|   Average loans outstanding                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        $187,918 |        $183,628 |        $187,428 |        $206,681 |       $207,343 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Allowance for loan losses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |  |  |
| Balance, beginning of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |          $ 2,462 |          $ 2,707 |          $ 2,814 |          $ 2,737 |          $1,919 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Loans charged off:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  |  |  |
| Commercial and tax free                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                251 |                  29 |                180 |                  90 |                 70 |
| Consumer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                  41 |                  32 |                  31 |                  55 |               233 |
| Real estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                  69 |                 272 |                 238 |                 355 |                 92 |
| Total loans charged off                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                361 |                333 |                449 |                500 |               395 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Recoveries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  |  |  |
| Commercial and tax free                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                136 |                  21 |                  17 |                    3 |                   2 |
| Consumer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                  10 |                  13 |                  24 |                  29 |                 34 |
| Real estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                  44 |                  15 |                    3 |                     5 |                   1 |
| Total recoveries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                190 |                  49 |                  44 |                  37 |                 37 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Net loans charged off                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                171 |                284 |                405 |                463 |               358 |
| Provision charged/(credited) to expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |               (436) |                  39 |                298 |                540 |            1,176 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Balance, end of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |         $  1,855 |         $  2,462 |         $  2,707 |         $  2,814 |          $2,737 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Ratios:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |  |  |
| Net charge-offs as a percentage                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
|         of average loansoutstanding                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |              ..09% |              ..15% |              ..22% |              ..22% |             ..17% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |
| Allowance for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  |  |  |
|         as a percentage ofaverage loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |  |  |
|         outstanding                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |               .99% |            1.34% |            1.44% |            1.36% |           1.32% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |  |  |

                                

Management’s review and evaluation of loan loss experienceand loan loss potential on outstanding loans occurs on a quarterlybasis and includes a review of such factors as charge-off history,delinquent loans, loan collateral value, the borrower’sfinancial condition, current economic conditions and the currentrequirements of the appropriate regulatory agencies. As a result ofthis on-going study, management believes that the allowance amountshown for December 31, 2004 is adequate to offset the losses whichmay exist as a result of under collateralization oruncollectibility.

The following table summarizes the allocation of the allowancefor loan losses for the past five years.

|                                            | 2004                                               | 2003                                              | 2002                                               | 2001                                              | 2000                                        |
|--------------------------------------------|----------------------------------------------------|---------------------------------------------------|----------------------------------------------------|---------------------------------------------------|---------------------------------------------|
| (Dollars in thousands)                     |
|                                            |                                                    | Percent                                           |                                                    | Percent                                           |                                             | Percent |  | Percent |  | Percent |
|                                            | Amount                                             | Of Loan                                           | Amount                                             | Of Loan                                           | Amount                                      | Of Loan | Amount | Of Loan | Amount | Of Loan |
|                                            |                                                    | Type                                              |                                                    | Type                                              |                                             | Type |  | Type |  | Type |
| Commercial                                 | $1,771                                             |       42                 | $2,371                                             |       40                 | $2,617                                      |       45 |     $2,564 |       50 | $1,894 |        48 |
| Residential                                | 58                                                 |       56                 | 69                                                 |       58                 | 63                                          |       52 | 63 |       48 | 195 |        49 |
| Consumer                                   | 26                                                 |         2           | 22                                                 |         2           | 27                                          |         3 | 31 |         2 | 235 |          3 |
| Unallocated                                |          - |           |          - |           |        - |            | 156 |           | 413 |            |
|                                            |                                                    |                                                   |                                                    |                                                   |                                             |  |  |  |  |  |
|        Total | $1,855                                             |                                                   | $2,462                                             |                                                   | $2,707                                      |  | $2,814 |  | $2,737 |  |

The following table details, for each of the most recent fiveyears, the year end loan amounts which were accounted for on anon-accrual basis or were past due 90 days or more:
| Dec. 31, 2004                                                                              |                                                          |
|--------------------------------------------------------------------------------------------|----------------------------------------------------------|
|           Loans on non-accrual basis     | $ 1,667                                                  |
|           Loans past due 90 days or more | 12                                                       |
|           Renegotiated loans             |    3,083                                       |
|           Total                          | $ 4,762                                                  |
|                                                                                            |                                                          |
| Dec. 31, 2003                                                                              |                                                          |
|           Loans on non-accrual basis     | $ 2,331                                                  |
|           Loans past due 90 days or more | 5                                                        |
|           Renegotiated loans             |           - |
|           Total                          | $ 2,336                                                  |
|                                                                                            |                                                          |
| Dec. 31, 2002                                                                              |                                                          |
|           Loans on non-accrual basis     | $ 2,679                                                  |
|           Loans past due 90 days or more | 3                                                        |
|           Renegotiated loans             |           - |
|           Total                          | $ 2,682                                                  |
|                                                                                            |                                                          |
| Dec. 31, 2001                                                                              |                                                          |
|           Loans on non-accrual basis     | $ 2,492                                                  |
|           Loans past due 90 days or more | 123                                                      |
|           Renegotiated loans             |      60                              |
|           Total                          | $ 2,675                                                  |
|                                                                                            |                                                          |
| Dec. 31, 2000                                                                              |                                                          |
|           Loans on non-accrual basis     | $   358                                        |
|           Loans past due 90 days or more | 208                                                      |
|           Renegotiated loans             |     171                                   |
|           Total                          | $   737                                        |
|                                                                                            |                                                          |

Loans that were past due 90 days or more, or were on non-accrualrepresented .87% of total loans on December 31, 2004, which wasdown from 1.25% on December 31, 2003 and 1.59% on December 31,2002. The Corporation’s policy is to place a loan onnon-accrual basis when it becomes 90 days past due provided thatthe loan is well collateralized and evidence indicates a reasonablelikelihood for collection. Also, a loan is placed on non-accrual inthe event of a material decline in business activity that mayhinder the borrower’s ability to repay the loan.

As of December 31, 2004**,** $1.0 million of non-accrualloans were paying principal or principal and interest with paymentsrecognized on a cash basis. Renegotiated loans increased to $3.1million. Of this amount, $2.5 million relates to a single borrowerthat requested a modification of interest and a period of interestonly payments. The request was due to the seasonality of thecustomers’ business. At present, the Corporation has noknowledge of other outstanding loans that present a serious doubtin regard to the borrower's ability to comply with the current loanrepayment terms. As of December 31, 2004 the Corporation had$682,000 in foreclosed real estate compared to $1.0 million at theend of 2003.

In 2004, the gross amount of interest that would have beenrecorded on non-accrual loans would have been $154,000. The actualinterest reflected in income on these loans was $23,000.

**Capital**

The shareholders’ equity or the capital base representsthe investment by the Corporation’s owners either initiallyor through retention of earnings (net after income tax lessdividend payments). This investment acts as a safeguard againstfuture uncertainties. The amount of capital which is deemedappropriate is dependent upon an assessment of theCorporation’s total assets, the quality of its loans andsecurities, its historical earnings record, its business prospectsfor the near and long term, the management and information systemsin place and the general competence and abilities of theCorporation’s management.

The Federal Reserve Board’s risk-based capital adequacystandards are designed principally as a measure of credit risk.These standards require that (1) at least 50% of total capital mustbe common and certain other “core” equity capital(“Tier I Capital”); (2) assets and off-balance sheetitems must be weighted according to risk; (3) the total capital torisk-weighted asset ratio must be at least 8%; and (4) a minimum 4%leverage ratio of Tier I Capital to average total assets must bemaintained.

As of December 31, 2004, the Corporation had Tier I and totalequity capital to risk adjusted asset ratios of 22.7% and 23.7%,respectively. In 2004 the leverage ratio was 13.0%. At December 31,2003, the Corporation had Tier I and total equity capital to riskadjusted assets ratios of 23.3% and 24.6%, respectively. Theleverage ratio was 11.9%.

The table below presents the Corporation’s capitalposition at December 31, 2004.

(dollar amounts in thousands)
|                                                                                                                      |                                                                                                                   | **Percent**                                                                                         |
|----------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                      |                                                                                                                   | **of Adjusted**                                                                                     |
|                                                                                                                      | **Amount**                                                                                                        | **Assets**                                                                                          |
|                                                                                                                      |                                                                                                                   |                                                                                                     |
|                Tier I Capital             |             $  41,836                            |               22.7%           |
|                Tier I Capital Requirement |                   7,367 |                 4.0 |
|                                                                                                                      |                                                                                                                   |                                                                                                     |
|                Total Equity Capital       |             $  43,692                            |               23.7%           |
|                Risk-Based Requirement     |                 14,733            |                 8.0 |
|                                                                                                                      |                                                                                                                   |                                                                                                     |
|                                                                                                                      |                                                                                                                   |                                                                                                     |
|                Leverage Capital           |             $  41,836                            |               13.0%           |
|                Leverage Requirement       |                 12,899            |                 4.0 |

**Inflation and Changing Prices**

Inflation can be significant to a banking institution because ofits implication for the interest rate environment and its influenceon personnel expenses and the costs of supplies and materialsneeded for daily operations. However, such a large portion of theCorporation’s assets and liabilities are represented bymonetary investments, inflationary impact tends to be dampenedexcept for the differences caused by maturity variances. Managementefforts to gauge and control these variances have been discussedearlier under rate sensitivity. Inflation can have a more directimpact on non-interest expenses. Expenses are closely monitored bymanagement and consistent attention is given to controlling thesecost areas in an attempt to limit their increase to manageablelevels.

Interest rate movements will continue to influence ongoingearnings levels. Even though the exact impact of these factorscannot be predicted, the Corporation believes that given itsfinancial strength and stability, it will be able to meet thesesituations in a positive manner.

**Market Makers**

****

The following firms have committed to make a market in the stockof Commercial National Financial Corporation. Inquiries concerningtheir services should be directed to:
| Ferris Baker Watts Inc      | Knight Equity Markets, LLP |
|-----------------------------|----------------------------|
| 100 Light Street            | 525 Washington Boulevard   |
| Baltimore, MD 21202         | Jersey City, NJ 07310      |
| 800-638-7411                | 201-222-9400               |
|                             |                            |
|                             |                            |
| F.J. Morrisey & Co.     | Ryan, Beck & Co.       |
| 200 Barr Harbor Drive       | 80 Main Street             |
| West Conshohocken, PA 19428 | West Orange, NJ 07052      |
| 800-842-8928                | 973-597-6020               |
|                             |                            |
|                             |                            |

**Transfer Agent**

****

Should you need assistance regarding changes in the registrationof certificates or in reporting lost certificates pleasecontact:

Commercial National Financial Corporation

Stock Transfer Department

P.O. Box 429

Latrobe, PA 15650

(724)537-9923

(724)539-1137 (fax)

**Form 10-K**

The Corporation will provide without charge to any shareholder acopy of its 2004 Annual Report on Form 10-K as required to be filedwith the Securities and Exchange Commission. Requests should bemade in writing to:

Commercial National Financial Corporation

P.O. Box 429

Latrobe, PA 15650

Report of IndependentRegistered Public Accounting Firm

To the Board of Directors and ShareholdersCommercial National Financial Corporation and Subsidiaries Latrobe, Pennsylvania

We have audited the accompanying consolidated statements offinancial condition of Commercial National Financial Corporationand its wholly-owned subsidiaries as of December 31, 2004 and2003, and the related consolidated statements of income,shareholders’ equity and cash flows for each of the threeyears in the period ended December 31, 2004.  Theseconsolidated financial statements are the responsibility of theCorporation's management.  Our responsibility is to express anopinion on these consolidated financial statements based on ouraudits. 

We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statementsare free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements.  An audit alsoincludes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the consolidatedfinancial position of Commercial National Financial Corporation andits wholly-owned subsidiaries as of December 31, 2004 and2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004in conformity with accounting principles generally accepted in theUnited States of America.

                                                                                   /s/ BEARD MILLER COMPANY LLP

Pittsburgh, PennsylvaniaJanuary 25, 2005

Consolidated Statements of FinancialCondition
|  | December 31,                                  |
|--|-----------------------------------------------|
|  | 2004                                          |  | 2003 |
|  | (Dollars in Thousands, Except per Share Data) |

Assets
| Cash and due from banks              | $    7,685 |  | $    8,877 |
|--------------------------------------|---------------------------|--|---------------------------|
| Interest bearing deposits with banks | 101                       |  | 764                       |
|                                      |                           |  |                           |
| Cash and Cash Equivalents            | 7,786                     |  | 9,641                     |
| Securities available for sale        | 99,455                    |  | 164,340                   |
| Restricted investments in bank stock | 1,806                     |  | 4,345                     |
|                                      |                           |  |                           |
| Loans                                | 192,255                   |  | 187,382                   |
| Allowance for loan losses            | (1,855)                   |  | (2,462)                   |
|                                      |                           |  |                           |
| Net Loans                            | 190,400                   |  | 184,920                   |
|                                      |                           |  |                           |
| Premises and equipment               | 4,644                     |  | 5,005                     |
| Accrued interest receivable          | 968                       |  | 1,573                     |
| Investment in life insurance         | 12,443                    |  | 11,936                    |
| Other assets                         | 2,870                     |  | 3,268                     |
| Total Assets | $320,372 |  | $385,028 |
|--------------|----------|--|----------|

Liabilities and Shareholders’ Equity

Liabilities
| Deposits:                                                                        |                |  |                |
|----------------------------------------------------------------------------------|----------------|--|----------------|
|           Non-interest bearing | $  62,284 |  | $  51,344 |
|           Interest bearing     | 203,534        |  | 207,872        |
|                                                                                  |                |  |                |
| Total Deposits                                                                   | 265,818        |  | 259,216        |
| Short-term borrowings                                                            | 7,950          |  | 17,450         |
| Other liabilities                                                                | 1,944          |  | 3,825          |
| Long-term borrowings                                                             | -              |  | 55,000         |
| Total Liabilities | 275,712 |  | 335,491 |
|-------------------|---------|--|---------|

Shareholders’ Equity
| Common stock, par value $2 per share; authorized 10,000,000shares; issued 3,600,000 shares; outstanding 3,413,426 and3,430,376 shares in 2004 and 2003 | 7,200   |  | 7,200   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|---------|--|---------|
| Retained earnings                                                                                                                                      | 38,946  |  | 41,748  |
| Accumulated other comprehensive income                                                                                                                 | 2,092   |  | 3,746   |
| Treasury stock, at cost, 186,574 and 169,624 shares in 2004 and2003                                                                                    | (3,578) |  | (3,157) |
| Total Shareholders’ Equity | 44,660 |  | 49,537 |
|----------------------------------|--------|--|--------|
| Total Liabilities and Shareholders’ Equity | $320,372 |  | $385,028 |
|--------------------------------------------------|----------|--|----------|

Consolidated Statements of Income
|  | Years Ended December 31,                 |
|--|------------------------------------------|
|  | 2004                                     |  | 2003 |  | 2002 |
|  | (In Thousands, Except per Share Amounts) |

Interest Income
| Interest and fees on loans                                                                                           | $10,809 |  | $11,390 |  | $13,533 |
|----------------------------------------------------------------------------------------------------------------------|---------|--|---------|--|---------|
| Interest and dividends on securities:                                                                                |         |  |         |  |         |
|               Taxable                          | 6,914   |  | 6,835   |  | 8,130   |
|               Exempt from federal income taxes | 395     |  | 1,400   |  | 1,058   |
| Other                                                                                                                | 124     |  | 170     |  | 222     |
| Total Interest Income | 18,242 |  | 19,795 |  | 22,943 |
|-----------------------|--------|--|--------|--|--------|

Interest Expense
| Deposits              | 3,662 |  | 3,563 |  | 4,998 |
|-----------------------|-------|--|-------|--|-------|
| Short-term borrowings | 161   |  | 49    |  | 30    |
| Long-term borrowings  | 2,128 |  | 2,913 |  | 2,547 |
| Total Interest Expense | 5,951 |  | 6,525 |  | 7,575 |
|------------------------|-------|--|-------|--|-------|
| Net Interest Income | 12,291 |  | 13,270 |  | 15,368 |
|---------------------|--------|--|--------|--|--------|
| Provision (Credit) for Loan Losses | (436) |  | 39 |  | 298 |
|------------------------------------|-------|--|----|--|-----|
| Net Interest Income after Provision (Credit) for Loan Losses | 12,727 |  | 13,231 |  | 15,070 |
|--------------------------------------------------------------|--------|--|--------|--|--------|

Other Operating Income
| Service charges on deposit accounts       | 644   |  | 859 |  | 737 |
|-------------------------------------------|-------|--|-----|--|-----|
| Other service charges and fees            | 726   |  | 618 |  | 691 |
| Net security gains                        | 1,195 |  | 9   |  | -   |
| Trust department income                   | 876   |  | 710 |  | 541 |
| Income from investment in life insurance  | 529   |  | 559 |  | 474 |
| Commissions and fees from insurance sales | 342   |  | 841 |  | 115 |
| Gain on sale of branch                    | -     |  | -   |  | 470 |
| Other income                              | 279   |  | 343 |  | 262 |
| Total Other Operating Income | 4,591 |  | 3,939 |  | 3,290 |
|------------------------------|-------|--|-------|--|-------|

Other Operating Expenses
| Salaries and employee benefits   | 6,236 |  | 6,074 |  | 5,513 |
|----------------------------------|-------|--|-------|--|-------|
| Net occupancy                    | 702   |  | 714   |  | 624   |
| Furniture and equipment          | 809   |  | 747   |  | 725   |
| Professional fees                | 670   |  | 741   |  | 683   |
| Pennsylvania shares tax          | 546   |  | 500   |  | 457   |
| Automated teller machine         | 300   |  | 297   |  | 322   |
| Director fees                    | 408   |  | 462   |  | 428   |
| Impairment writedown of goodwill | -     |  | 375   |  | -     |
| FHLB prepayment penalty          | 4,402 |  | -     |  | -     |
| Other expenses                   | 2,833 |  | 2,862 |  | 2,391 |
| Total Other Operating Expenses | 16,906 |  | 12,772 |  | 11,143 |
|--------------------------------|--------|--|--------|--|--------|
| Income before Income Taxes (Benefit) | 412 |  | 4,398 |  | 7,217 |
|--------------------------------------|-----|--|-------|--|-------|
| Income Tax Expense (Benefit) | (209) |  | 837 |  | 1,873 |
|------------------------------|-------|--|-----|--|-------|
| Net Income | $    621 |  | $   3,561 |  | $  5,344 |
|------------|-------------------------|--|----------------|--|---------------|
| Earnings per Share, Basic | $0.18 |  | $  1.03 |  | $    1.56 |
|---------------------------|-------|--|--------------|--|--------------------------|

ConsolidatedStatements of Shareholders’ Equity

**Years Ended December 31, 2004, 2003 and 2002**
|  |  | Common Stock                             |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Treasury Stock |  | Total Shareholders’ Equity |
|--|--|------------------------------------------|--|-------------------|--|----------------------------------------|--|----------------|--|----------------------------------|
|  |  | (In Thousands, Except per Share Amounts) |
| Balance - December 31, 2001                                                                                                                                                                                                                                                                           |  | $7,200 |  | $39,737 |  | $2,159  |  | $(3,125) |  | $45,971 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------|--|---------|--|---------|--|----------|--|---------|
|       Comprehensive income:                                                                                                                                                                                                                                                  |  |        |  |         |  |         |  |          |  |         |
|            Net income                                                                                                                                                                                                                          |  | -      |  | 5,344   |  | -       |  | -        |  | 5,344   |
|            Change in unrealized net gains on securities available forsale,                  net of deferred income taxes                                  |  | -      |  | -       |  | 2,722   |  | -        |  | 2,722   |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
|                  Total Comprehensive Income                                                                                                                                                                      |  |        |  |         |  |         |  |          |  | 8,066   |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
|            Cash dividends declared, $1.00 per share                                                                                                                                                                                            |  | -      |  | (3,424) |  | -       |  | -        |  | (3,424) |
|            Issuance of treasury stock                                                                                                                                                                                                          |  | -      |  | (29)    |  | -       |  | 786      |  | 757     |
|            Purchases of treasury stock                                                                                                                                                                                                         |  | -      |  | -       |  | -       |  | (165)    |  | (165)   |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
| Balance - December 31, 2002                                                                                                                                                                                                                                                                           |  | 7,200  |  | 41,628  |  | 4,881   |  | (2,504)  |  | 51,205  |
|       Comprehensive income:                                                                                                                                                                                                                                                  |  |        |  |         |  |         |  |          |  |         |
|            Net income                                                                                                                                                                                                                          |  | -      |  | 3,561   |  | -       |  | -        |  | 3,561   |
|            Change in unrealized net gains on securities available forsale,

                 net of reclassification adjustment and deferred income taxes |  | -      |  | -       |  | (1,135) |  | -        |  | (1,135) |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
|                  Total Comprehensive Income                                                                                                                                                                      |  |        |  |         |  |         |  |          |  | 2,426   |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
|            Cash dividends declared, $1.00 per share                                                                                                                                                                                            |  | -      |  | (3,441) |  | -       |  | -        |  | (3,441) |
|            Issuance of treasury stock                                                                                                                                                                                                          |  | -      |  | -       |  | -       |  | 4        |  | 4       |
|            Purchases of treasury stock                                                                                                                                                                                                         |  | -      |  | -       |  | -       |  | (657)    |  | (657)   |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
| Balance - December 31, 2003                                                                                                                                                                                                                                                                      |  | 7,200  |  | 41,748  |  | 3,746   |  | (3,157)  |  | 49,537  |
|       Comprehensive loss:                                                                                                                                                                                                                                                    |  |        |  |         |  |         |  |          |  |         |
|            Net income                                                                                                                                                                                                                          |  | -      |  | 621     |  | -       |  | -        |  | 621     |
|            Change in unrealized net gains on securities available forsale,

                 net of reclassification adjustment and deferred income taxes |  | -      |  | -       |  | (1,654) |  | -        |  | (1,654) |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
|                  Total Comprehensive Loss                                                                                                                                                                        |  |        |  |         |  |         |  |          |  | (1,033) |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
|            Cash dividends declared, $1.00 per share                                                                                                                                                                                            |  | -      |  | (3,423) |  | -       |  | -        |  | (3,423) |
|            Purchases of treasury stock                                                                                                                                                                                                         |  | -      |  | -       |  | -       |  | (421)    |  | (421)   |
|                                                                                                                                                                                                                                                                                                       |  |        |  |         |  |         |  |          |  |         |
| Balance - December 31, 2004                                                                                                                                                                                                                                                                           |  | $7,200 |  | $38,946 |  | $2,092  |  | $(3,578) |  | $44,660 |

Consolidated Statements of CashFlows
|  | Years Ended December 31, |
|--|--------------------------|
|  | 2004                     |  | 2003 |  | 2002 |
|  | (In Thousands)           |

Cash Flows from Operating Activities
| Net income                                                                                                                                                                                                                                                                                                                             | $     621 |  | $   3,561 |  | $   5,344 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|--|---------------------|--|---------------------|
| Adjustments to reconcile net income to net cash provided by

            (used in) operating activities:                                                                                                                                                                   |                               |  |                     |  |                     |
|                   Depreciation and amortization                                                                                                                                                                                              | 905                           |  | 885                 |  | 675                 |
|                   Provision (credit) for loan losses                                                                                                                                                                                         | (436)                         |  | 39                  |  | 298                 |
|                   Net accretion of securities and loan fees                                                                                                                                                                                  | (128)                         |  | (674)               |  | (813)               |
|                   Net security gains                                                                                                                                                                                                         | (1,195)                       |  | (9)                 |  | -                   |
|                   Impairment writedown of goodwill                                                                                                                                                                                           | -                             |  | 375                 |  | -                   |
|                   Gain on sale of branch                                                                                                                                                                                                     | -                             |  | -                   |  | (470)               |
|                   (Gain) loss on sale of foreclosed real estate                                                                                                                                                                              | 38                            |  | (4)                 |  | (29)                |
|                   Income from investment in life insurance                                                                                                                                                                                   | (529)                         |  | (559)               |  | (474)               |
|                   Deferred tax expense (benefit)                                                                                                                                                                                             | (439)                         |  | 285                 |  | 82                  |
|                   (Increase) decrease in accrued interest receivable and

                         other assets | (448)                         |  | (142)               |  | 401                 |
|                   Decrease in other liabilities                                                                                                                                                                                              | (589)                         |  | (281)               |  | (173)               |
| Net Cash Provided by (Used in) Operating Activities | (2,200) |  | 3,476 |  | 4,841 |
|-----------------------------------------------------|---------|--|-------|--|-------|

Cash Flows from Investing Activities
| (Increase) decrease in federal funds sold                                   | -         |  | 14,650   |  | (14,650) |
|-----------------------------------------------------------------------------|-----------|--|----------|--|----------|
| Purchases of securities available for sale                                  | (110,449) |  | (90,557) |  | (75,003) |
| Maturities, calls and principal repayments of securities available for sale | 40,096    |  | 69,753   |  | 52,153   |
| Proceeds from sales of securities available for sale                        | 133,969   |  | 43       |  | -        |
| Net cash used in acquisitions                                               | -         |  | (100)    |  | (1,141)  |
| Net (increase) decrease in restricted bank stock                            | 2,539     |  | (727)    |  | (1,260)  |
| Net (increase) decrease in loans                                            | (4,960)   |  | (19,248) |  | 32,485   |
| Net proceeds from sale of assets                                            | 1,291     |  | 44       |  | 1,811    |
| Purchases of premises and equipment                                         | (399)     |  | (1,164)  |  | (594)    |
| Purchase of bank owned life insurance                                       | -         |  | -        |  | (5,000)  |
| Net Cash Provided by (Used in) Investing Activities | 62,087 |  | (27,306) |  | (11,199) |
|-----------------------------------------------------|--------|--|----------|--|----------|

Cash Flows from Financing Activities
| Net increase (decrease) in deposits              | 6,602    |  | (10,809) |  | 15,038  |
|--------------------------------------------------|----------|--|----------|--|---------|
| Net increase (decrease) in short-term borrowings | (9,500)  |  | 17,450   |  | (4,275) |
| Proceeds from issuance of long-term borrowings   | -        |  | -        |  | 20,000  |
| Repayment of long-term borrowings                | (55,000) |  | -        |  | -       |
| Dividends paid                                   | (3,423)  |  | (3,441)  |  | (3,424) |
| Purchase of treasury stock                       | (421)    |  | (657)    |  | (165)   |
| Net Cash Provided by (Used in) Financing Activities | (61,742) |  | 2,543 |  | 27,174 |
|-----------------------------------------------------|----------|--|-------|--|--------|
| Net Increase (Decrease) in Cash and Cash Equivalents | (1,855) |  | (21,287) |  | 20,816 |
|------------------------------------------------------|---------|--|----------|--|--------|
| Cash and Cash Equivalents – Beginning | 9,641 |  | 30,928 |  | 10,112 |
|---------------------------------------------|-------|--|--------|--|--------|
| Cash and Cash Equivalents – Ending | $  7,786 |  | $   9,641 |  | $30,928 |
|------------------------------------------|---------------|--|---------------------|--|---------|

Notes to Consolidated FinancialStatements

Note 1 - Significant Accounting Policies

General

The accompanying consolidated financial statements include theaccounts of Commercial National Financial Corporation (theCorporation) and its wholly-owned subsidiaries, Commercial Bank& Trust of PA, formerly known as Commercial Bank ofPennsylvania, Commercial National Insurance Services, Inc. (CNIS)and Highview Trust Company.  In December 2002, CNIS acquiredThe Gooder Agency, Inc. (Gooder) which was subsequently sold in2004 (see Note 2).  In July 2003, the Bank’s applicationto convert to a Pennsylvania state chartered bank was approved bythe Pennsylvania Department of Banking, and the Bank changed itsname to Commercial Bank of Pennsylvania.  In October 2003, theCorporation’s application to form a trust company subsidiary,Highview Trust Company (HTC), was approved.  In December 2004,the Corporation received approval from the Pennsylvania Departmentof Banking and the Federal Deposit Insurance Corporation to mergeHTC into Commercial Bank of Pennsylvania.  The mergedinstitution resulted in a name change to Commercial Bank &Trust of PA (the Bank).  With this restructuring, the trustoperations of HTC have become part of the operations of theBank.  All material intercompany transactions have beeneliminated.

The Bank operates under a state bank charter and provides fullbanking services.  The Corporation is subject to regulation bythe Federal Reserve Board and the Bank is subject to regulation bythe Federal Deposit Insurance Corporation and the PennsylvaniaDepartment of Banking.  The Bank’s primary businessconsists of taking deposits and granting loans to customers whogenerally do business in the area of Westmoreland County,Pennsylvania.

As of December 31, 2004, the Corporation employed 124people in full-time and part-time positions.  Approximately 58employees are represented by the United Auto Workers, Local1799.  In 2004, the Corporation and bargaining unit employeesentered into a labor agreement that will expire in December2008.

The following summary of accounting and reporting policies ispresented to aid the reader in obtaining a better understanding ofthe consolidated financial statements and related financial data ofthe Corporation and its wholly-owned subsidiaries contained in thisreport.  Such policies conform to generally acceptedaccounting principles (GAAP) and to general practice within thebanking industry. 

Estimates

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues andexpenses during the reporting period.  Actual results coulddiffer from those estimates.

Material estimates that are particularly susceptible tosignificant change in the near term relate to the determination ofthe allowance for loan losses and the valuation of real estateacquired in connection with foreclosures or in satisfaction ofloans.

Note 1 - Significant Accounting Policies (Continued)

Significant Concentrations of Credit Risk

Most of the Corporation’s activities are with customerslocated within Westmoreland County of Pennsylvania. Note 4 discusses the types of securities that the Corporationinvests in.  Note 5 discusses the types of lending thatthe Corporation engages in.  The Corporation does not have anysignificant concentrations to any one industry or customer. Although the Corporation has a diversified loan portfolio, exposureto credit loss can be adversely impacted by downturns in localeconomic and employment conditions. 

Securities

Debt securities that the Corporation has the positive intent andability to hold to maturity are classified as “securitiesheld to maturity” and are reported at amortized cost. Debt and equity securities not classified as held to maturitysecurities are classified as “securities available forsale” and reported at fair value, with unrealized gains andlosses excluded from earnings and reported as a separate componentof shareholders’ equity, net of the related deferred incometax effect. 

Purchase premiums and discounts are recognized in interestincome using the interest method over the terms of thesecurities.  Declines in the fair value of available for salesecurities below their cost that are deemed to be other thantemporary are reflected in earnings as realized losses.  Inestimating other-than-temporary impairment losses, managementconsiders (1) the length of time and the extent to which the fairvalue has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and abilityof the Corporation to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery infair value.  Gains and losses on the sale of securities arerecorded on the trade date and are determined using the specificidentification method.

Restricted Investments in Bank Stock

Federal law requires the Bank, a member institution of theFederal Home Loan Bank system, to hold stock of its districtFederal Home Loan Bank according to a predetermined formula. This restricted stock is carried at cost. 

Loans

Loans receivable that management has the intent and ability tohold for the foreseeable future or until maturity or payoff arestated at their outstanding unpaid principal balances. Interestincome is accrued on the unpaid principal balance.  Loanorigination fees, net of associated direct costs, are deferred andrecognized as an adjustment of the yield (interest income) of therelated loans. The Corporation is generally amortizing theseamounts over the contractual life of the loan. 

The accrual of interest is generally discontinued when thecontractual payment of principal or interest has become 90 dayspast due or management has serious doubts about furthercollectibility of principal or interest, even though the loan iscurrently performing.  A loan may remain on accrual status ifit is in the process of collection and is either guaranteed or wellsecured.  When a loan is placed on nonaccrual status, unpaidinterest credited to income in the current year is reversed andunpaid interest accrued in prior years is charged against theallowance for loan losses.  Interest received on nonaccrualloans generally is either applied against principal or reported asinterest income, according to management’s judgment as to thecollectibility of principal.  Generally, loans are restored toaccrual status when the obligation is brought current, hasperformed in accordance with the contractual terms for a reasonableperiod of time and the ultimate collectibility of the totalcontractual principal and interest is no longer in doubt.

Note 1 - Significant Accounting Policies (Continued)

Allowance for Loan Losses

The allowance for loan losses is established through provisionsfor loan losses charged against income.  Loans deemed to beuncollectible are charged against the allowance for loan losses,and subsequent recoveries, if any, are credited to theallowance.

The allowance for loan losses is maintained at a levelconsidered adequate to provide for losses that can be reasonablyanticipated.  Management’s periodic evaluation of theadequacy of the allowance is based on the Corporation’s pastloan loss experience, known and inherent risks in the portfolio,adverse situations that may affect the borrower’s ability torepay, the estimated value of any underlying collateral,composition of the loan portfolio, current economic conditions andother relevant factors.  This evaluation is inherentlysubjective as it requires material estimates that may besusceptible to significant change, including the amounts and timingof future cash flows expected to be received on impaired loans.

The allowance consists of specific, general and unallocatedcomponents.  The specific component relates to loans that areclassified as either doubtful, substandard or specialmention.  For such loans that are also classified as impaired,an allowance is established when the discounted cash flows (orcollateral value or observable market price) of the impaired loanis lower than the carrying value of that loan.  The generalcomponent covers non-classified loans and is based on historicalloss experience adjusted for qualitative factors.  Anunallocated component is maintained to cover uncertainties thatcould affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin ofimprecision inherent in the underlying assumptions used in themethodologies for estimating specific and general losses in theportfolio.

A loan is considered impaired when, based on current informationand events, it is probable that the Corporation will be unable tocollect the scheduled payments of principal or interest when dueaccording to the contractual terms of the loan agreement. Factors considered by management in determining impairment includepayment status, collateral value and the probability of collectingscheduled principal and interest payments when due.  Loansthat experience insignificant payment delays and payment shortfallsgenerally are not classified as impaired.  Managementdetermines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration allof the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, theborrower’s prior payment record and the amount of theshortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial andconstruction loans by either the present value of expected futurecash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price or the fair value of thecollateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans arecollectively evaluated for impairment.  Accordingly, theCorporation does not separately identify individual consumer andresidential loans for impairment disclosures, unless such loans arethe subject of a restructuring agreement.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Corporation has enteredinto off-balance sheet financial instruments consisting ofcommitments to extend credit and letters of credit.  Suchfinancial instruments are recorded in the balance sheet when theyare funded.

Note 1 - Significant Accounting Policies (Continued)

Foreclosed Real Estate

Foreclosed real estate is comprised of property acquired througha foreclosure proceeding or acceptance of a deed in lieu offoreclosure and loans classified as in-substance foreclosure. A loan is classified as in-substance foreclosure when the Bank hastaken possession of the collateral regardless of whether formalforeclosure proceedings take place.  Foreclosed assetsinitially are recorded at fair value, net of estimated sellingcosts, at the date of foreclosure establishing a new costbasis.  After foreclosure, valuations are periodicallyperformed by management and the assets are carried at the lower ofcost or fair value minus estimated costs to sell.  Revenuesand expenses from operations and changes in the valuation allowanceare included in other expenses.  Foreclosed real estate atDecember 31, 2004 and 2003 was $682,000 and $1,027,000,respectively, and is included in other assets.

Intangible Assets

The Corporation has amortizable intangible assets related tocore deposit intangibles acquired in 2002 through the acquisitionof a branch office.  These intangible assets are beingamortized on a straight-line basis over a period of tenyears.  The balance of these amortizable intangible assets atDecember 31, 2004 was $731,000, net of accumulatedamortization of $244,000, which are included in other assets. Amortization expense of $145,000, $202,000 and $39,000 was recordedfor the years ended December 31, 2004, 2003, and 2002,respectively.  Amortization expense is estimated to be $98,000per year for the next five years.  The Corporation sold assetsrelated to Gooder in 2004 and, therefore, eliminated theamortization related to customer lists.

Premises and Equipment

Premises and equipment are carried at cost less accumulateddepreciation and amortization.  For financial statementreporting and income tax purposes, depreciation is computed both onstraight-line and accelerated methods over the estimated usefullife of the premises and equipment.  Charges for maintenanceand repairs are expensed as incurred. Amortization is charged overthe term of the respective lease or the estimated useful life ofthe asset, whichever is shorter.

Bank Owned Life Insurance

The Corporation invests in bank owned life insurance (BOLI) as asource of funding for employee benefit expenses.  BOLIinvolves the purchasing of life insurance by the Corporation on achosen group of employees.  The Corporation is the owner andbeneficiary of the policies.  This life insurance investmentis carried at the cash surrender value of the underlyingpolicies.  Income from the investment in the policies isincluded in other income on the income statement. 

Advertising Costs

The Corporation follows the policy of charging the costs ofadvertising to expense as incurred.  Total advertising expensefor the years ended December 31, 2004, 2003 and 2002 was$192,000, $187,000 and $233,000, respectively.

Trust Operations

Trust income is recorded on the cash basis, which approximatesthe accrual basis.  Securities and other property held by theCorporation in a fiduciary or agency capacity for customers of theTrust Department are not assets of the Corporation and,accordingly, are not included in the accompanying consolidatedfinancial statements.

Note 1 - Significant Accounting Policies (Continued)

Income Taxes

Deferred income tax assets and liabilities are determined basedon the differences between financial statement carrying amounts andthe tax basis of existing assets and liabilities.  Thesedifferences are measured at the enacted tax rates that will be ineffect when these differences reverse.  Deferred tax assetsare reduced by a valuation allowance when, in the opinion ofmanagement, it is more likely than not that some portion of thedeferred tax assets will not be realized.  As changes in taxlaws or rates are enacted, deferred tax assets and liabilities areadjusted through the provision for income taxes.  TheCorporation and its subsidiaries file a consolidated federal incometax return.

Earnings per Share

Basic earnings per share have been calculated on the weightedaverage number of shares outstanding of 3,422,881 in 2004,3,441,556 in 2003 and 3,425,858 in 2002.  The Corporationcurrently maintains a simple capital structure, thus there are nodilutive effects on earnings per share.

Treasury Stock

The acquisition of treasury stock is recorded under the costmethod.  At the date of subsequent reissue, the treasury stockis reduced by the cost of such stock on the average cost basis,with any excess proceeds being credited to retained earnings.

Statements of Cash Flows

For purposes of reporting cash flows, the Corporation hasdefined cash and cash equivalents as those amounts included in thebalance sheet captions, “Cash and due from banks” and“Interest bearing deposits with banks.”
|  | Years Ended December 31, |
|--|--------------------------|
|  | 2004                     |  | 2003 |  | 2002 |
|  | (In Thousands)           |

Supplementary Cash Flows Information
| Interest paid | $  6,133 |  | $   6,679 |  | $  7,598 |
|---------------|---------------|--|---------------------|--|---------------|
| Income taxes paid | $     981 |  | $      608 |  | $  2,161 |
|-------------------|-------------------------------|--|-------------------------------------|--|---------------|

Supplementary Disclosures of Noncash Investing and        Financing Activities
| Loans transferred to foreclosed real estate | $       34 |  | $      723 |  | $     514 |
|---------------------------------------------|------------------------------------------|--|-------------------------------------|--|-------------------------------|

Segment Reporting

The Corporation acts as an independent community financialservices provider and offers traditional banking and relatedfinancial services to individual, business and governmentcustomers.  The Corporation offers a full array of commercialand retail financial services, including the taking of time,savings and demand deposits, the making of commercial, consumer andmortgage loans and the providing of other financial services.

Management does not separately allocate expenses, including thecost of funding loan demand, between the commercial and retailoperations of the Corporation.  As such, discrete informationis not available and segment reporting would not be meaningful.

Note 1 - Significant Accounting Policies (Continued)

Reclassifications

Certain amounts in the 2003 and 2002 financial statements havebeen reclassified to conform with the 2004 presentationformat.  These reclassifications had no effect on netincome.

New Accounting Standards

In March 2004, the SEC released Staff Accounting Bulletin (SAB)No. 105, “Application of Accounting Principles to LoanCommitments.”  SAB 105 provides guidance about themeasurements of loan commitments recognized at fair value underFASB Statement No. 133, “Accounting for DerivativeInstruments and Hedging Activities.”  SAB 105 alsorequires companies to disclose their accounting policy for thoseloan commitments including methods and assumptions used to estimatefair value and associated hedging strategies.  SAB 105 iseffective for all loan commitments accounted for as derivativesthat are entered into after March 31, 2004.  The adoptionof SAB 105 did not have a material effect on theCorporation’s consolidated financial statements.

Note 2 - Acquisitions And Divestitures

In June 2004, the Corporation sold all assets relating to itsinsurance agency subsidiary, Gooder.  In the transaction, theCorporation received $950,000.  A $39,000 loss was recognizedon the sale of such assets, which is included in otherexpenses.  The results of operations of Gooder prior to thesale were not material to the Corporation’s results ofoperations.

In performing its impairment assessment of the acquired customerlists of Gooder in the fourth quarter of 2003, managementdetermined that no impairment was present based on the carryingamount of these intangible assets.  However, the goodwillasset was fully impaired.  As a result, the 2003 consolidatedfinancial statements reflect a writedown of goodwill in the amountof $375,000 which is included in other operating expenses in theconsolidated statement of income.

On January 3, 2003, the Corporation acquired certaininsurance agency accounts from an employee of theCorporation’s insurance agency subsidiary, Gooder.  TheCorporation paid cash of $100,000 for the accounts.  Theacquisition has been accounted for as a purchase and the $100,000has been allocated to identifiable intangible assets representingthe fair value of the acquired customer list.  The results ofoperations are included in the consolidated financial statementssince the date of the acquisition.  The impact of theacquisition on the Corporation’s results of operations forthe year ended December 31, 2003 was not material. 

On December 10, 2002, the Corporation completed itsacquisition of Gooder, an independent insurance agency and Gooder& Mary, Inc. (G&M), a 50% partner in CNIS.  TheCorporation issued 35,208 shares of its common stock with a valueof $756,000 and paid cash of $235,000 in exchange for all of theshares of common stock of Gooder and G&M.  The acquisitionhas been accounted for as a purchase and the results of operationsof Gooder  and G&M since the date of acquisition areincluded in the consolidated financial statements.

The total purchase price of $991,000 has been allocated to theassets acquired and liabilities assumed based upon fair value atthe date of acquisition, including identifiable intangible assetsof $849,000 representing the fair value of the acquired customerlists.  Goodwill of $375,000 was recorded.  The value ofthe 35,208 common shares issued was determined based on the averagemarket price of the Corporation’s common shares over the tentrading days ending on the date prior to the acquisitiondate. 

Note 2 - Acquisitions And Divestitures (Continued)

On September 27, 2002, the Bank sold the bank premises,deposit liabilities, equipment and loans outstanding of theBank’s branch office and Redstone office in Murrysville,Pennsylvania (the Murrysville Branch).  In the transaction,the Bank sold deposit liabilities of $7,709,000, loans of$5,821,000 and equipment of $10,000 resulting in a gain of$470,000.

On June 29, 2002, the Bank acquired the depositliabilities, equipment and loans outstanding of a branch office inNorwin, Pennsylvania (the Norwin Branch).  The transaction wasaccounted for as a purchase.  In the transaction, the Bankassumed deposit liabilities of $11,514,000, acquired loans of$8,000,000 and equipment of $9,000.  The premium paid toacquire the Norwin Branch amounted to $975,000, was allocated to acore deposit intangible and is being amortized over a period of tenyears.

Note 3 - Cash and Due from Banks

Regulations of the Board of Governors of the Federal ReserveSystem impose uniform reserve requirements on all depositoryinstitutions with transaction accounts (checking accounts, NOWaccounts, etc.) and non-personal time deposits (deposits withoriginal maturities of 14 days or more).  Reserves aremaintained in the form of vault cash or a non-interest bearingbalance held with the Federal Reserve Bank.  The Bank alsomaintains deposits with the Federal Reserve Bank and other banksfor various services such as check clearing.  The requiredreserve at December 31, 2004 and 2003 was approximately$4,393,000 and $3,858,000, respectively.

Note 4 - Securities

The amortized cost and fair values of securities available forsale are as follows:
|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value |
|--|----------------|--|------------------------|--|-------------------------|--|------------|
|  | (In Thousands) |
| December 31, 2004:                                                                                                                                                                                                                                                                    |               |  |                                   |  |              |  |               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|--|-----------------------------------|--|--------------|--|---------------|
|                Obligations of U.S. Government

                       agencies          | $  8,386 |  | $      4 |  | $  (39) |  | $  8,351 |
|                Obligations of states and political

                       subdivisions | 4,177         |  | 94                                |  | (87)         |  | 4,184         |
|                Mortgage-backed securities                                                                                                                                                                  | 83,723        |  | 3,197                             |  | -            |  | 86,920        |
|  | $96,286 |  | $3,295 |  | $(126) |  | $99,455 |
|--|---------|--|--------|--|--------|--|---------|
| December 31, 2003:                                                                                                                                                                                                                                                                    |                |  |                   |  |              |  |                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|--|-------------------|--|--------------|--|----------------|
|                Obligations of U.S. Government

                       agencies          | $  11,626 |  | $   112 |  | $  (28) |  | $  11,710 |
|                Obligations of states and political

                       subdivisions | 44,270         |  | 1,275             |  | (462)        |  | 45,083         |
|                Mortgage-backed securities                                                                                                                                                                  | 101,970        |  | 4,732             |  | -            |  | 106,702        |
|                Equity securities                                                                                                                                                                           | 799            |  | 54                |  | (8)          |  | 845            |
|  | $158,665 |  | $6,173 |  | $(498) |  | $164,340 |
|--|----------|--|--------|--|--------|--|----------|

Note 4 - Securities (Continued)

The amortized cost and fair values of securities atDecember 31, 2004 by contractual maturity, are shownbelow.  Mortgage-backed securities maturities are based upontheir estimated contractual maturities.  Expected maturitieswill differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call orprepayment penalties.
|  |  | Amortized Cost |  | Fair Value |
|--|--|----------------|--|------------|
|  |  | (In Thousands) |
|  | Due within one year                    | $  7,661 |  | $  7,640 |
|--|----------------------------------------|---------------|--|---------------|
|  | Due after one year through five years  | 2,555         |  | 2,496         |
|  | Due after five years through ten years | 1,832         |  | 1,901         |
|  | Due after ten years                    | 84,238        |  | 87,418        |
|  |  | $96,286 |  | $99,455 |
|--|--|---------|--|---------|

Securities with amortized cost and fair values of $21,097,000and $21,592,000, respectively, at December 31, 2004 and$16,420,000 and $17,164,000, respectively, at December 31,2003 were pledged to secure public deposits and for other purposesrequired or permitted by law.

Gross gains of $2,377,000, $9,000 and $-0- and gross losses of$1,182,000, $-0- and $-0- were realized on sales and calls ofsecurities during 2004, 2003 and 2002, respectively.

The following table shows the Corporation’s grossunrealized losses and fair value, aggregated by investment categoryand length of time that individual securities have been in acontinuous unrealized loss position, at December 31, 2004:
|  | Less than 12 Months |  | 12 Months or More |  | Total      |
|--|---------------------|--|-------------------|--|------------|
|  | Fair Value          |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |
|  | (In Thousands)      |
| Obligations of U.S. Govern- ment agencies        | $2,036 |  | $(22) |  | $  987 |  | $(17) |  | $3,023 |  | $  (39) |
|--------------------------------------------------|--------|--|-------|--|-------------|--|-------|--|--------|--|--------------|
| Obligations of states and political subdivisions | 1,304  |  | (43)  |  | 1,786       |  | (44)  |  | 3,090  |  | (87)         |
|  | $3,340 |  | $(65) |  | $2,773 |  | $(61) |  | $6,113 |  | $(126) |
|--|--------|--|-------|--|--------|--|-------|--|--------|--|--------|

Unrealized losses in obligations of U.S. Government agencies andstate and political subdivisions are due to a change in interestrates subsequent to when the securities were purchased.  AtDecember 31, 2004, all debt securities with temporarilyimpaired losses have been rated by either Moody’s and/orS&P with an “A” or better debt rating. Management believes the unrealized losses are temporary and thatthe Corporation has the ability to hold the securities untilmaturity or market price recovery.

Note 5 - Loans

Loans are summarized as follows:
|  |  |  | December 31,   |
|--|--|--|----------------|
|  |  |  | 2004           |  | 2003 |
|  |  |  | (In Thousands) |
|  | Commercial loans                                                                                       |  | $  15,933 |  | $  14,802 |
|--|--------------------------------------------------------------------------------------------------------|--|----------------|--|----------------|
|  | Real estate loans:                                                                                     |  |                |  |                |
|  |                Commercial   |  | 55,555         |  | 51,006         |
|  |                Construction |  | 258            |  | 1,108          |
|  |                Residential  |  | 107,819        |  | 106,121        |
|  | Municipal loans                                                                                        |  | 10,002         |  | 10,622         |
|  | Consumer and other loans                                                                               |  | 2,465          |  | 3,584          |
|  | Net unamortized costs                                                                                  |  | 223            |  | 139            |
|  |  |  | $192,255 |  | $187,382 |
|--|--|--|----------|--|----------|

Note 6 - Allowance for Loan Losses

Transactions in the allowance for loan losses are summarized asfollows:
|  |  |  | Years Ended December 31, |
|--|--|--|--------------------------|
|  |  |  | 2004                     |  | 2003 |  | 2002 |
|  |  |  | (In Thousands)           |
|  | Balance, January 1                                                                               |  | $2,462 |  | $2,707 |  | $2,814 |
|--|--------------------------------------------------------------------------------------------------|--|--------|--|--------|--|--------|
|  |           Loanscharged off                          |  | (361)  |  | (333)  |  | (449)  |
|  |          Recoveries on previously charged off loans |  | 190    |  | 49     |  | 44     |
|  |           Provision(credit) for loan losses         |  | (436)  |  | 39     |  | 298    |
|  | Balance at December 31 |  | $1,855 |  | $2,462 |  | $2,707 |
|--|------------------------|--|--------|--|--------|--|--------|

During the Corporation’s second quarter 2004 evaluation,management considered the allowance for loan losses to be overallocated by $492,000.  Due to this overage, the Corporationreduced the allowance for loan losses by $492,000.  Thereduction in the allowance consisted of specific allocations forseveral classified loans, totaling $3.2 million, which paid offduring the first half of 2004.  The excess allocation wasrecorded as a credit in the provision for loan losses.

At December 31, 2004 and 2003, the total recordedinvestment in loans considered to be impaired was $3,421,000 and$8,669,000, respectively.  The average recorded investment inimpaired loans during 2004, 2003 and 2002 was $4,728,000,$12,271,000 and $12,323,000, respectively.  Impaired loanswith balances of $958,000 and $2,847,000 at December 31, 2004and 2003 had related allowance for loan losses of $503,000 and$1,541,000, respectively.  Interest income on impaired loansof $190,000, $723,000 and $749,000 was recognized for cash paymentsreceived in 2004, 2003 and 2002, respectively. 

Loans on which the accrual of interest has been discontinuedamounted to $1,667,000 and $2,331,000 at December 31, 2004 and2003, respectively.  Loan balances past due 90 days or moreand still accruing interest, but which management expects willeventually be paid in full, amounted to $12,000 and $5,000 atDecember 31, 2004 and 2003, respectively.

Note 7 - Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments withoff-balance-sheet risk in the normal course of business to meet thefinancing needs of its customers.  These financial instrumentsinclude commitments to extend credit, standby letters of credit andfinancial standby letters of credit.  Those instrumentsinvolve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the balance sheet. The contract or notional amount of those instruments reflect theextent of involvement the Corporation has in particular classes offinancial instruments.  The Corporation does not issue anyother instruments with significant off-balance-sheet risk.

The Corporation's exposure to credit loss in the event ofnonperformance by the other party to the financial instrument forcommitments to extend credit, standby letters of credit andfinancial standby letters of credit written is represented by thecontract or notional amount of those instruments.  TheCorporation uses the same credit policies in making suchcommitments and conditional obligations as it does foron-balance-sheet instruments.  The following table identifiesthe contract or notional amount of those instruments:
|  |  |  | December 31,   |   |
|--|--|--|----------------|--------|
|  |  |  | 2004           |        | 2003 |
|  |  |  | (In Thousands) |
|  | Financial instruments whose contract amounts represent creditrisk:                                                            |  |         |  |         |
|--|-------------------------------------------------------------------------------------------------------------------------------|--|---------|--|---------|
|  |                Commitments to extend credit        |  | $34,054 |  | $30,767 |
|  |                Standby letters of credit           |  | 379     |  | 427     |
|  |                Financial standby letters of credit |  | 4,050   |  | 3,000   |

Commitments to extend credit are agreements to lend to acustomer as long as there is no violation of any conditionestablished in the contract.  Commitments generally have fixedexpiration dates or other termination clauses and may requirepayment of a fee.  Since many of the commitments are expectedto expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.  TheCorporation evaluates each customer's credit worthiness on acase-by-case basis.  The amount of collateral obtained, ifdeemed necessary by the Corporation upon extension of credit, isbased on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable,inventory, property, plant and equipment and income-producingcommercial properties.

Outstanding letters of credit written are conditionalcommitments issued by the Corporation to secure the performance ofa customer to a third party.  The majority of these standbyletters of credit expire within the next twelve months.  Thecredit risk involved in issuing letters of credit is essentiallythe same as that involved in extending other loancommitments.  The Corporation requires collateral supportingthese letters of credit as deemed necessary.  The maximumundiscounted exposure related to these commitments atDecember 31, 2004 was $4,429,000 and the approximate value ofunderlying collateral upon liquidation that would be expected tocover this maximum potential exposure was $4,175,000.  Theamount of the liability as of December 31, 2004 and 2003 forguarantees under standby letters of credit issued is notmaterial. 

Note 8 - Premises and Equipment

The composition of premises and equipment at December 31,2004 and 2003 is as follows:
|  |  |  | 2004           |  | 2003 |
|--|--|--|----------------|--|------|
|  |  |  | (In Thousands) |
|  | Land                                      |  | $    437 |  | $   437 |
|--|-------------------------------------------|--|-------------------------|--|-------------------|
|  | Premises                                  |  | 5,789                   |  | 5,782             |
|  | Leasehold improvements                    |  | 229                     |  | 249               |
|  | Furniture and equipment                   |  | 6,488                   |  | 6,130             |
|  |                                           |  |                         |  |                   |
|  |                                           |  | 12,943                  |  | 12,598            |
|  | Accumulated depreciation and amortization |  | (8,299)                 |  | (7,593)           |
|  |  |  | $  4,644 |  | $5,005 |
|--|--|--|---------------|--|--------|

Depreciation and amortization expense was $760,000, $683,000 and$636,000 for the years ended December 31, 2004, 2003 and 2002,respectively.

Note 9 - Interest Bearing Deposits

Interest bearing deposits include time deposits issued indenominations of $100,000 or more which amounted to $22,397,000 and$21,108,000 at December 31, 2004 and 2003,respectively. 

Interest bearing deposits at December 31, 2004 and 2003 aredetailed as follows:
|  |  |  | 2004           |  | 2003 |
|--|--|--|----------------|--|------|
|  |  |  | (In Thousands) |
|  | Savings accounts      |  | $  50,840 |  | $  54,395 |
|--|-----------------------|--|----------------|--|----------------|
|  | NOW accounts          |  | 22,182         |  | 24,525         |
|  | Money market accounts |  | 32,901         |  | 40,479         |
|  | Time deposits         |  | 97,611         |  | 88,473         |
|  |  |  | $203,534 |  | $207,872 |
|--|--|--|----------|--|----------|

Note 9 - Interest Bearing Deposits (Continued)

Time deposits at December 31, 2004 had the followingscheduled maturities (in thousands):
|  | 2005 |  | $35,725 |
|--|------|--|---------|
|  | 2006 |  | 11,207  |
|  | 2007 |  | 21,147  |
|  | 2008 |  | 15,611  |
|  | 2009 |  | 13,921  |
|  |  |  | $97,611 |
|--|--|--|---------|

Note 10 - Short-Term Borrowings

Short-term borrowings at December 31, 2004 and 2003 were asfollows:
|  |  |  | December 31,   |   |
|--|--|--|----------------|--------|
|  |  |  | 2004           |        | 2003 |
|  |  |  | (In Thousands) |
|  | Federal funds purchased |  | $2,950 |  | $  2,450 |
|--|-------------------------|--|--------|--|---------------|
|  | FHLB borrowings         |  | 5,000  |  | 15,000        |
|  |                         |  |        |  |               |
|  |                         |  | $7,950 |  | $17,450       |

The outstanding balances and related information of short-termborrowings are summarized as follows:
|  |  |  | Years Ended December 31, |   |
|--|--|--|--------------------------|--------|
|  |  |  | 2004                     |        | 2003 |
|  |  |  | (Dollars in Thousands)   |
|  | Average balance during the year                   |  | $10,505 |  | $  3,977 |
|--|---------------------------------------------------|--|---------|--|---------------|
|  | Average interest rate during the year             |  | 1.52%   |  | 1.21%         |
|  | Maximum month-end balance                         |  | $48,650 |  | $19,750       |
|  | Weighted average interest rate at end of the year |  | 2.31%   |  | 1.23%         |

At December 31, 2004, the Corporation had approved butunused funding availability from lines of credit of$30,000,000.

Note 11 - Long-Term Borrowings

Long-term borrowings at December 31, 2003 consisted ofFederal Home Loan Bank (FHLB) advances which were collateralized bycertain mortgages and investment securities.  These advanceshad maturity dates from 2005 through 2016 and a weighted averageinterest rate of 5.22%.  In September 2004, the Corporationrepaid these advances with proceeds from sales of securities. The repayment of these advances resulted in a prepayment penalty of$4,402,000.

Advances from the FHLB of Pittsburgh are secured by theBank’s stock in the FHLB of Pittsburgh, qualifyingresidential mortgage loans, U.S. Government securities, U.S. agencysecurities and mortgage-backed securities.  The maximumremaining borrowing capacity from the FHLB at December 31,2004 is $195,397,000.

Note 12 - Employee Benefit Plans

The Corporation sponsors an employee profit sharing planavailable to all employees with at least one year of service. The Corporation contributes to the plan, as determined by the Boardof Directors, in an amount not to exceed 15% of compensation ofeligible participants.  The Corporation also has asupplemental retirement plan for certain retired employees. The expense for the employee benefit plans was $249,000, $628,000and $608,000 for the years ended December 31, 2004, 2003 and2002, respectively.  Expense in 2004 was lower due to a lesserallocation by the board of directors than what was allocated inprior years.

Note 13 - Comprehensive Income

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such asunrealized gains and losses on available for sale securities, arereported as a separate component of the equity section of thebalance sheet, such items, along with net income, are components ofcomprehensive income.

The components of other comprehensive income (loss) and relatedtax effects for the years ended December 31, 2004, 2003 and2002 are as follows:
|  |  |  | 2004           |  | 2003 |  | 2002 |
|--|--|--|----------------|--|------|--|------|
|  |  |  | (In Thousands) |
|  | Gross change in unrealized gains (losses)

        on securitiesavailable for sale |  | $(1,311) |  | $(1,710) |  | $4,124 |
|--|-----------------------------------------------------------------------------------------------------------------------|--|----------|--|----------|--|--------|
|  | Less reclassification adjustment for gains realized inincome                                                          |  | (1,195)  |  | (9)      |  | -      |
|  |                                                                                                                       |  |          |  |          |  |        |
|  | Net Unrealized Gains (Losses)                                                                                         |  | (2,506)  |  | (1,719)  |  | 4,124  |
|  |                                                                                                                       |  |          |  |          |  |        |
|  | Tax effect                                                                                                            |  | (852)    |  | (584)    |  | 1,402  |
|  |                                                                                                                       |  |          |  |          |  |        |
|  | Net of Tax Amount                                                                                                     |  | $(1,654) |  | $(1,135) |  | $2,722 |

Note 14 - Lease Commitments

The Corporation rents offices under operating leases that expirethrough 2016.  Lease expense amounted to $121,000, $116,000and $72,000 in fiscal years 2004, 2003, and 2002,respectively.  Maturities of operating lease obligations atDecember 31, 2004 are as follows (in thousands):
|  | 2005       | $  87 |  |  |
|--|------------|------------|--|--|
|  | 2006       | 52         |  |  |
|  | 2007       | 29         |  |  |
|  | 2008       | 29         |  |  |
|  | 2009       | 29         |  |  |
|  | Thereafter | 199        |  |  |

Note 15 - Income Taxes

The components of the net deferred tax liability atDecember 31, 2004 and 2003 are as follows:
|  |  |  | 2004           |  | 2003 |
|--|--|--|----------------|--|------|
|  |  |  | (In Thousands) |
|  | Allowance for loan losses                            |  | $357    |  | $    558 |
|--|------------------------------------------------------|--|---------|--|-------------------------|
|  | Accrued benefits                                     |  | 87      |  | 97                      |
|  | Other                                                |  | 66      |  | 2                       |
|  | Alternative minimum tax                              |  | 265     |  | 115                     |
|  |                                                      |  |         |  |                         |
|  | Total Deferred Tax Assets                            |  | 775     |  | 772                     |
|  |                                                      |  |         |  |                         |
|  | Deferred loan fees                                   |  | 76      |  | 47                      |
|  | Securities accretion                                 |  | 60      |  | 162                     |
|  | Unrealized net gain on securities available for sale |  | 1,077   |  | 1,930                   |
|  | Depreciation                                         |  | 156     |  | 144                     |
|  | Intangible assets                                    |  | -       |  | 375                     |
|  |                                                      |  |         |  |                         |
|  | Total Deferred Tax Liabilities                       |  | 1,369   |  | 2,658                   |
|  |                                                      |  |         |  |                         |
|  | Net Deferred Tax Liability                           |  | $ (594) |  | $(1,886)                |

The income tax provision for the years ended December 31,2004, 2003 and 2002 is summarized as follows:
|  |  |  | 2004           |  | 2003 |  | 2002 |
|--|--|--|----------------|--|------|--|------|
|  |  |  | (In Thousands) |
|  | Current  |  | $ 230  |  | $552 |  | $1,791 |
|--|----------|--|--------|--|------|--|--------|
|  | Deferred |  | (439)  |  | 285  |  | 82     |
|  |          |  |        |  |      |  |        |
|  |          |  | $(209) |  | $837 |  | $1,873 |

Note 15 - Income Taxes (Continued)

The tax provision for financial reporting purposes differs fromthe amount computed by applying the statutory federal income taxrate of 34% to income before income taxes.  The differencesfor the years ended December 31, 2004, 2003 and 2002 are asfollows:
|  |  |  | 2004           |  | 2003 |  | 2002 |
|--|--|--|----------------|--|------|--|------|
|  |  |  | (In Thousands) |
|  | Tax at statutory rates                                                                                                             |  | $140   |  | $1,495      |  | $2,454 |
|--|------------------------------------------------------------------------------------------------------------------------------------|--|--------|--|-------------|--|--------|
|  | Increase (decrease) resulting from:                                                                                                |  |        |  |             |  |        |
|  |                Tax-exempt income                        |  | (317)  |  | (663)       |  | (562)  |
|  |                Non-deductible interest expense          |  | 31     |  | 60          |  | 46     |
|  |                Increase in investment in life insurance |  | (156)  |  | (170)       |  | (147)  |
|  |                Writedown of non-deductible goodwill     |  | 47     |  | 128         |  | -      |
|  |                Other                                    |  | 46     |  | (13)        |  | 82     |
|  |                                                                                                                                    |  |        |  |             |  |        |
|  |                                                                                                                                    |  | $(209) |  | $  837 |  | $1,873 |

Note 16 - Fair Value of Financial Instruments

Below are various estimated fair values at December 31,2004 and 2003, as required by Statement of Financial AccountingStandards No. 107 (FAS 107).  Such information, which pertainsto the Corporation’s financial instruments, is based on therequirements set forth in FAS 107 and does not purport to representthe aggregate net fair value of the Corporation.  It is theCorporation’s general practice and intent to hold itsfinancial instruments to maturity, except for certain securitiesdesignated as securities available for sale, and not to engage intrading activities.  Many of the financial instruments lack anavailable trading market, as characterized by a willing buyer andseller engaging in an exchange transaction.  Therefore, theCorporation had to use significant estimations and present valuecalculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimatefair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonablecomparability between institutions due to the wide range ofpermitted assumptions and the methodologies in absence of activemarkets.  This lack of uniformity gives rise to a high degreeof subjectivity in estimating financial instrument fair values.

The following methods and assumptions were used by theCorporation in estimating financial instrument fair values:

Cash and Short-Term Investments

The carrying amounts for cash and short-term investmentsapproximate the estimated fair values of such assets.

Securities

Fair values for securities available for sale are based onquoted market prices, if available.  If quoted market pricesare not available, fair values are based on quoted market prices ofcomparable instruments.

Restricted Investments in Bank Stock

The carrying amounts of restricted investments in bank stockapproximate the estimated fair value of such assets.

Note 16 - Fair Value of Financial Instruments (Continued)

Loans Receivable

Fair values of variable rate loans subject to frequent repricingand which entail no significant credit risk are based on thecarrying values.  The estimated fair values of other loans areestimated by discounting the future cash flows using interest ratescurrently offered for loans with similar terms to borrowers ofsimilar credit quality. 

Deposits

For deposits which are payable on demand at the reporting date,representing all deposits other than time deposits, managementestimated that the carrying value of such deposits is a reasonableestimate of fair value.  Fair values of time deposits areestimated by discounting the future cash flows using interest ratescurrently being offered and a schedule of aggregate expectedmaturities.

Short-Term Borrowings

The carrying amounts for short-term borrowings approximate theestimated fair value of such liabilities.

Accrued Interest Receivable and Payable

The carrying amount of accrued interest receivable and payableis considered a reasonable estimate of fair value.

Long-Term Borrowings

Fair values of fixed rate borrowings are estimated bydiscounting the future cash flows using the Corporation’sestimated incremental borrowing rate for similar types of borrowingarrangements.

Off-Balance Sheet Instruments

The fair value of commitments to extend credit and foroutstanding letters of credit is estimated using the fees currentlycharged to enter into similar agreements, taking into accountmarket interest rates, the remaining terms and present creditworthiness of the counterparties.

The carrying amounts and fair values of the Corporation’sfinancial instruments as of December 31 are presented in thefollowing table:
|  | December 31, 2004 |  | December 31, 2003 |
|--|-------------------|--|-------------------|
|  | Carrying Amount   |  | Fair Value        |  | Carrying Amount |  | Fair Value |
|  | (In Thousands)    |
| Financial assets:                                                                                                              |                     |  |                     |  |                     |  |               |
|--------------------------------------------------------------------------------------------------------------------------------|---------------------|--|---------------------|--|---------------------|--|---------------|
|                Cash and short-term investments      | $   7,786 |  | $   7,786 |  | $   9,641 |  | $  9,641 |
|                Securities available for sale        | 99,455              |  | 99,455              |  | 164,340             |  | 164,340       |
|                Restricted investments in bank stock | 1,806               |  | 1,806               |  | 4,345               |  | 4,345         |
|                Net loans receivable                 | 190,400             |  | 190,557             |  | 184,920             |  | 186,761       |
|                Accrued interest receivable          | 968                 |  | 968                 |  | 1,573               |  | 1,573         |
|                                                                                                                                |                     |  |                     |  |                     |  |               |

Note 16 - Fair Value of Financial Instruments (Continued)
|  | December 31, 2004 |  | December 31, 2003 |
|--|-------------------|--|-------------------|
|  | Carrying Amount   |  | Fair Value        |  | Carrying Amount |  | Fair Value |
|  | (In Thousands)    |
| Financial liabilities:                                                                                             |          |  |          |  |          |  |          |
|--------------------------------------------------------------------------------------------------------------------|----------|--|----------|--|----------|--|----------|
|                Deposits                 | $265,818 |  | $264,852 |  | $259,216 |  | $262,801 |
|                Short-term borrowings    | 7,950    |  | 7,950    |  | 17,450   |  | 17,450   |
|                Accrued interest payable | 688      |  | 688      |  | 870      |  | 870      |
|                Long-term borrowings     | -        |  | -        |  | 55,000   |  | 57,996   |
|                                                                                                                    |          |  |          |  |          |  |          |
| Off-balance sheet financial instruments                                                                            | -        |  | -        |  | -        |  | -        |

Note 17 - Related Party Transactions

Some of the Corporation's or the Bank’s directors,principal officers, and their related interests had transactionswith the Bank in the ordinary course of business.  All loansand loan commitments in such transactions were made onsubstantially the same terms, including collateral and interestrates, as those prevailing at the time for comparable transactionswith others.  In the opinion of management, these transactionswith others do not involve more than normal risk of collectibilityor present other unfavorable features.  It is anticipated thatfurther such extensions of credit will be made in the future. The aggregate amount of credit extended to these directors andprincipal officers was approximately $902,000 and $1,381,000 atDecember 31, 2004 and 2003, respectively.

The following is an analysis of loans to those parties whoseloan balances exceeded $60,000 during the year endedDecember 31, 2004 (in thousands):
|  | Balances at January 1                                                                                |  |  |  | $1,126      |
|--|------------------------------------------------------------------------------------------------------|--|--|--|-------------|
|  |                Advances   |  |  |  | -           |
|  |                Repayments |  |  |  | (366)       |
|  |                                                                                                      |  |  |  |             |
|  | Balances at December 31                                                                              |  |  |  | $  760 |

Note 18 - Capital Requirements and Regulatory Restrictions

The Bank is subject to legal limitations on the amount ofdividends that can be paid to the Corporation.  ThePennsylvania Banking Code restricts the payment of dividends,generally to the extent of its retained earnings.

The Corporation and the Bank are subject to various regulatorycapital requirements administered by the federal bankingagencies.  Failure to meet minimum capital requirements caninitiate certain mandatory and possibly additional discretionaryactions by regulators that, if undertaken, could have a directmaterial effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Corporation and the Bank must meetspecific capital guidelines that involve quantitative measures ofthe assets, liabilities and certain off-balance-sheet items ascalculated under regulatory accounting practices.  The capitalamounts and classification are also subject to qualitativejudgments by the regulators about components, risk-weighting andother factors.

Note 18 - Capital Requirements and Regulatory Restrictions(Continued)

Quantitative measures established by regulation to ensurecapital adequacy require the maintenance of minimum amounts andratios (set forth in the tables below) of total and Tier 1 capital(as defined in the regulations) to risk-weighted assets (asdefined) and of Tier 1 Capital (as defined) to average assets (asdefined).  Management believes, as of December 31, 2004,that the Corporation and the Bank meet all capital adequacyrequirements to which they are subject.

As of December 31, 2004, the most recent notification fromthe regulatory agencies categorized the Bank as well capitalizedunder the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintainminimum total risk-based, Tier 1 risk-based and Tier 1 leverageratios as set forth in the table below.  There are noconditions or events since those notifications that managementbelieves have changed those categories.

The following table presents the risk-based and leverage capitalamounts and ratios at December 31, 2004 and 2003 for theCorporation and the Bank:
|  |  | Actual                 |  | For Capital Adequacy Purposes |  | To be Well Capitalized Under Prompt Corrective ActionProvisions |  |
|--|--|------------------------|--|-------------------------------|--|-----------------------------------------------------------------|--|
|  |  | Amount                 |  | Ratio                         |  | Amount                                                          |  | Ratio |  | Amount |  | Ratio |  |
|  |  | (Dollars in Thousands) |  |
| **As of December 31, 2004**                                                                      |  |         |  |      |   |                    |  |           |   |               |  |                          |   |
|-------------------------------------------------------------------------------------------------------|--|---------|--|------|---|--------------------|--|-----------|---|---------------|--|--------------------------|---|
|       Total capital (to risk-weightedassets):                                |  |         |  |      |   |                    |  |           |   |               |  |                          |   |
|            Commercial National Financial Corp. |  | $43,692 |  | 23.7 | % | $314,733      |  | 38.0 | % | N/A           |  |                          |   |
|            Commercial Bank                     |  | 43,678  |  | 23.7 |   | 314,740       |  | 38.0 |   | $318,425 |  | **3****10.0**       | % |
|       Tier 1 capital (to risk-weightedassets):                               |  |         |  |      |   |                    |  |           |   |               |  |                          |   |
|            Commercial National Financial Corp. |  | 41,836  |  | 22.7 |   | 3  7,367 |  | 34.0 |   | N/A           |  |                          |   |
|            Commercial Bank                     |  | 41,822  |  | 22.7 |   | 3  7,370 |  | 34.0 |   | 311,055  |  | **3****  6.0** |   |
|       Tier 1 capital (to averageassets):                                     |  |         |  |      |   |                    |  |           |   |               |  |                          |   |
|            Commercial National Financial Corp. |  | 41,836  |  | 13.0 |   | 312,899       |  | 34.0 |   | N/A           |  |                          |   |
|            Commercial Bank                     |  | 41,822  |  | 13.0 |   | 312,857       |  | 34.0 |   | 316,072  |  | **3****  5.0** |   |
| **As of December 31, 2003:**                                                                     |  |         |  |      |   |                    |  |           |   |               |  |                  |   |
|-------------------------------------------------------------------------------------------------------|--|---------|--|------|---|--------------------|--|-----------|---|---------------|--|------------------|---|
|       Total capital (to risk-weightedassets):                                |  |         |  |      |   |                    |  |           |   |               |  |                  |   |
|            Commercial National Financial Corp. |  | $46,526 |  | 24.6 | % | $315,140      |  | 38.0 | % | N/A           |  |                  |   |
|            Commercial Bank                     |  | 44,748  |  | 23.8 |   | 315,067       |  | 38.0 |   | $318,834 |  | 310.0       | % |
|       Tier 1 capital (to risk-weightedassets):                               |  |         |  |      |   |                    |  |           |   |               |  |                  |   |
|            Commercial National Financial Corp. |  | 44,138  |  | 23.3 |   | 3  7,570 |  | 34.0 |   | N/A           |  |                  |   |
|            Commercial Bank                     |  | 42,392  |  | 22.5 |   | 3  7,533 |  | 34.0 |   | 311,300  |  | 3  6.0 |   |
|       Tier 1 capital (to averageassets):                                     |  |         |  |      |   |                    |  |           |   |               |  |                  |   |
|            Commercial National Financial Corp. |  | 44,138  |  | 11.9 |   | 314,872       |  | 34.0 |   | N/A           |  |                  |   |
|            Commercial Bank                     |  | 42,392  |  | 11.4 |   | 314,816       |  | 34.0 |   | 318,520  |  | 3  5.0 |   |

Note 19 - Condensed Financial Information of Commercial NationalFinancial Corporation (Parent Only)

Statements of Financial Condition
|  |  |  | December 31,   |
|--|--|--|----------------|
|  |  |  | 2004           |  | 2003 |
|  |  |  | (In Thousands) |
|  | Assets                                           |  |                                                     |  |                                    |
|--|--------------------------------------------------|--|-----------------------------------------------------|--|------------------------------------|
|  | Cash and cash equivalents                        |  | $         - |  | $      54 |
|  | Securities available for sale                    |  | -                                                   |  | 845                                |
|  | Investment in bank subsidiary                    |  | 44,645                                              |  | 46,937                             |
|  | Investment in other subsidiaries                 |  | 32                                                  |  | 1,754                              |
|  | Other assets                                     |  | 10                                                  |  | -                                  |
|  |                                                  |  |                                                     |  |                                    |
|  | Total Assets                                     |  | $44,687                                             |  | $49,590                            |
|  |                                                  |  |                                                     |  |                                    |
|  | Liabilities and Shareholders’ Equity       |  |                                                     |  |                                    |
|  | Liabilities, accounts payable                    |  | $       27            |  | $      53 |
|  | Shareholders’ equity                       |  | 44,660                                              |  | 49,537                             |
|  |                                                  |  |                                                     |  |                                    |
|  | Total Liabilities and Shareholders’ Equity |  | $44,687                                             |  | $49,590                            |

Statements of Income
|  |  |  | Years Ended December 31, |
|--|--|--|--------------------------|
|  |  |  | 2004                     |  | 2003 |  | 2002 |
|  |  |  | (In Thousands)           |
|  | Dividends from subsidiaries                                  |  | $3,977            |  | $6,025  |  | $3,824 |
|--|--------------------------------------------------------------|--|-------------------|--|---------|--|--------|
|  | Other                                                        |  | 3                 |  | 5       |  | -      |
|  | Net securities gains                                         |  | 29                |  | 9       |  | -      |
|  | Fees from bank subsidiary                                    |  | 493               |  | 278     |  | 303    |
|  | Expenses                                                     |  | (501)             |  | (281)   |  | (303)  |
|  |                                                              |  |                   |  |         |  |        |
|  |                                                              |  | 4,001             |  | 6,036   |  | 3,824  |
|  | Income taxes                                                 |  | -                 |  | 3       |  | -      |
|  |                                                              |  |                   |  |         |  |        |
|  |                                                              |  | 4,001             |  | 6,033   |  | 3,824  |
|  | Equity in (excess of) undistributed earnings of subsidiaries |  | (3,380)           |  | (2,472) |  | 1,520  |
|  |                                                              |  |                   |  |         |  |        |
|  | Net Income                                                   |  | $   621 |  | $3,561  |  | $5,344 |

Note 19 - Condensed Financial Information of Commercial NationalFinancial Corporation (Parent Only) (Continued)

Statements of Cash Flows
|  |  |  | Years Ended December 31, |
|--|--|--|--------------------------|
|  |  |  | 2004                     |  | 2003 |  | 2002 |
|  |  |  | (In Thousands)           |
|  | **Cash Flows from Operating Activities**                                                                                                                                                                                                                                                                                        |  |                                   |  |                              |  |                                         |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-----------------------------------|--|------------------------------|--|-----------------------------------------|
|  |                Net income                                                                                                                                                                                                                            |  | $   621                 |  | $3,561                       |  | $5,344                                  |
|  |                Adjustments to reconcile net income to netcash                         provided by operating activities: |  |                                   |  |                              |  |                                         |
|  |                    Net security gains                                                                                                                                                                                            |  | (29)                              |  | (9)                          |  | -                                       |
|  |                    Equity in undistributed earnings of Subsidiaries                                                                                                                                                              |  | 3,380                             |  | 2,472                        |  | (1,520)                                 |
|  |                    Issuance of treasury stock for compensation                                                                                                                                                                   |  | -                                 |  | 4                            |  | 1                                       |
|  |                    Increase in other assets                                                                                                                                                                                      |  | (10)                              |  | -                            |  | -                                       |
|  |                    Increase (decrease) in accounts payable                                                                                                                                                                       |  | (10)                              |  | 23                           |  | (1)                                     |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | Net Cash Provided by Operating Activities                                                                                                                                                                                                                                                                                       |  | 3,952                             |  | 6,051                        |  | 3,824                                   |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | **Cash Flows from Investing Activities**                                                                                                                                                                                                                                                                                        |  |                                   |  |                              |  |                                         |
|  |                Purchase of investment securities                                                                                                                                                                                                     |  | -                                 |  | (833)                        |  | -                                       |
|  |                Net cash used in acquisition                                                                                                                                                                                                          |  | -                                 |  | (100)                        |  | (235)                                   |
|  |                Proceeds from sale of securities                                                                                                                                                                                                      |  | 829                               |  | 43                           |  | -                                       |
|  |                Investment in subsidiaries                                                                                                                                                                                                            |  | (991)                             |  | (1,014)                      |  | -                                       |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | Net Cash Used in Investing Activities                                                                                                                                                                                                                                                                                           |  | (162)                             |  | (1,904)                      |  | (235)                                   |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | **Cash Flows from Financing Activities**                                                                                                                                                                                                                                                                                        |  |                                   |  |                              |  |                                         |
|  |                Dividends paid                                                                                                                                                                                                                        |  | (3,423)                           |  | (3,441)                      |  | (3,424)                                 |
|  |                Purchase of treasury stock                                                                                                                                                                                                            |  | (421)                             |  | (657)                        |  | (165)                                   |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | Net Cash Used in Financing Activities                                                                                                                                                                                                                                                                                           |  | (3,844)                           |  | (4,098)                      |  | (3,589)                                 |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | Net Increase (Decrease) in Cash                                                                                                                                                                                                                                                                                                 |  | (54)                              |  | 49                           |  | -                                       |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | Cash - Beginning                                                                                                                                                                                                                                                                                                                |  | 54                                |  | 5                            |  | 5                                       |
|  |                                                                                                                                                                                                                                                                                                                                 |  |                                   |  |                              |  |                                         |
|  | Cash – Ending                                                                                                                                                                                                                                                                                                             |  | $      - |  | $     54 |  | $       5 |