<PAGE>

                                   EXHIBIT 13

                  PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS
                     FOR FISCAL YEAR ENDED DECEMBER 31, 2004

                                       57

<PAGE>

COMM BANCORP, INC.
CONTENTS

INTRODUCTION

 59  President's Message to Stockholders
 61  Consolidated Selected Financial Data

MANAGEMENT'S DISCUSSION AND ANALYSIS

 62  Forward-Looking Discussion
 63  Critical Accounting Policies
 65  Operating Environment
 69  Review of Financial Position
108  Review of Financial Performance

CONSOLIDATED FINANCIAL STATEMENTS

120  Report of Management
122  Report of Independent Registered Public Accounting Firm
123  Consolidated Statements of Income and Comprehensive Income
124  Consolidated Balance Sheets
125  Consolidated Statements of Changes in Stockholders' Equity
126  Consolidated Statements of Cash Flows

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

127  Summary of significant accounting policies
145  Cash and due from banks
146  Investment securities
149  Loans, nonperforming assets and allowance for loan losses
151  Commitments, concentrations and contingent liabilities
153  Premises and equipment, net
154  Other assets
155  Deposits
156  Short-term borrowings
157  Fair value of financial instruments
158  Employee benefit plan
158  Income taxes
161  Parent Company financial statements
162  Regulatory matters
167  Summary of quarterly financial information (unaudited)

MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002

168  Operating Environment
169  Review of Financial Position
178  Review of Financial Performance

DIRECTORS AND OFFICERS

181  Boards of Directors and Corporate Officers

OTHER INFORMATION

185  Locations
186  Stockholder Information

                                       58
<PAGE>

COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS

We reported 2004 earnings of $4,725 thousand or $2.50 per share, a slight
increase from $4,700 thousand or $2.45 per share in 2003. Despite this nominal
gain, we are still very pleased with our Company's performance as we had to
counteract many factors which impacted our profitability. Moreover, fourth
quarter earnings improved 14.5 percent over the comparable period last year,
which we believe is an indication that stronger earnings are on the horizon.

During 2004, we experienced a downturn in demand for mortgage-related products,
specifically in the number of mortgages refinanced, which declined by 55.1
percent. This decline in demand directly led to an 11.6 percent reduction in our
noninterest revenue, by lowering the gains realized on the sale of residential
mortgages. Low interest rates continued to weigh heavily on profitability
through net interest margin compression. Our net interest margin compressed 4
basis points in 2004. However, the compression was not as severe as the 29 basis
points experienced in 2003. In anticipation of changes in monetary policy, we
have been strategically positioning our balance sheet to benefit from rising
interest rates for quite some time now. These efforts appear to be working as
planned, as we experienced a stabilization in our net interest margin beginning
in the second quarter of 2004. Finally, we had to absorb the added expenses of
an infrastructure expansion which occurred late in the fourth quarter of 2003.
During 2004, we relocated our Loan Operations to a new facility and opened our
Tannersville, Monroe County Branch which factored into a nearly 10.0 percent
increase in occupancy and equipment expenses.

We recorded strong balance sheet growth in 2004. Our total assets grew $18.9
million or 3.7 percent to $528.3 million in 2004 from $509.4 million in 2003.
Our ongoing focus to develop strong relationships with area businesses directly
impacted the structure of our balance sheet. As a result of a 14.9 percent
increase in business loans, our total loan portfolio grew $23.8 million or 6.6
percent in 2004. We do not cater to just the credit needs of our business
customers, but pride ourselves in being able to offer them a comprehensive line
of financial products and services, as well as the superior customer service
they expect from a member of their community. As a result, our deposits grew
$19.0 million, caused primarily from a 19.1 percent increase in commercial
accounts.

Our philosophy of establishing relationships with our customers, whether they
are individuals or businesses, is more important than simply putting another
account on the books. This has made us a respected member of the communities we
serve. We have made a positive impact by providing seminars on issues relevant
to local entrepreneurs and offering loans to start-up businesses through the
MetroAction program. In addition, The Federal Home Loan Bank recently honored us
with a "Pillars of the Community Award" for our exemplary efforts in utilizing
their Community Investment Program and for the many other ways we reach out to
those in need in our neighborhoods.

                                       59
<PAGE>

COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS (CONTINUED)

We realize that everyone is human and we sometimes make mistakes. That is why
early in 2005, we began offering our individual and sole proprietor customers
new overdraft protection alternatives. Customers have the option of
automatically transferring funds from a linked savings account, taking part in
our overdraft privilege program or establishing a Ready Reserve line of credit.
We believe these initiatives will add value for our customers and strengthen
relationships.

The Check Clearing for the 21st Century Act, ("Check 21") signed by President
Bush last year, became effective on October 28, 2004. Check 21 requires
financial institutions to recognize substitute paper checks constructed from
digital images as negotiable instruments, thereby making it easier for banks to
electronically transfer check images instead of the physical checks. We realized
that Check 21 would have implications for our customers and that good lines of
communication assure smooth transitions. That is why we began educating our
customers as to how they would be affected and to their rights under Check 21 as
soon as the guidelines were established.

At the end of 2004, we began a significant undertaking throughout our Company in
order to implement Section 404 of the Sarbanes-Oxley Act. Section 404 offers a
means to measure the adequacy and effectiveness of our internal control over
financial reporting. Although as a non-accelerated filer, we were not yet
required to comply with Section 404 in 2004, we hired an outside consultant to
begin the process. This process involves documenting procedures and then testing
and evaluating the control processes. Section 404 also requires management to
report on the effectiveness of our internal control over financial reporting and
our independent auditor to attest to these reports as part of their audit. We
anticipate the cost of compliance with Section 404 will add approximately
$300,000 to our audit expense in 2005.

As we move into 2005, we are optimistic about the outlook for our Company. We
will continue our on-going commitment to partner with the individuals and
businesses within our communities. We believe that our efforts will prove
successful in meeting both the opportunities and challenges that lie ahead.

I would like to thank our management team and our employees for their constant
hard work and dedication, our Board of Directors for their guidance and
especially, you, our stockholders, for your continued confidence and support.

Sincerely,

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

                                       60
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                              2004         2003         2002         2001         2000
------------------------------------------------------------     ----------   ----------   ----------   ----------   ----------
<S>                                                              <C>          <C>          <C>          <C>          <C>
CONDENSED STATEMENTS OF FINANCIAL PERFORMANCE:
Interest income.............................................     $   26,333   $   26,808   $   29,284   $   31,012   $   29,583
Interest expense............................................          9,233        9,972       12,216       15,131       15,212
                                                                 ----------   ----------   ----------   ----------   ----------
  Net interest income.......................................         17,100       16,836       17,068       15,881       14,371
Provision for loan losses...................................            600          480        1,100          720          420
                                                                 ----------   ----------   ----------   ----------   ----------
  Net interest income after provision for loan losses.......         16,500       16,356       15,968       15,161       13,951
Noninterest income..........................................          3,566        4,034        4,145        2,835        2,457
Noninterest expense.........................................         14,662       14,484       13,530       11,870       11,069
                                                                 ----------   ----------   ----------   ----------   ----------
  Income before income taxes................................          5,404        5,906        6,583        6,126        5,339
Provision for income tax expense............................            679        1,206        1,383        1,426        1,139
                                                                 ----------   ----------   ----------   ----------   ----------
  Net income................................................     $    4,725   $    4,700   $    5,200   $    4,700   $    4,200
                                                                 ==========   ==========   ==========   ==========   ==========

CONDENSED STATEMENTS OF FINANCIAL POSITION:
Investment securities.......................................     $  118,756   $  105,248   $  124,203   $  120,357   $   71,246
Net loans...................................................        377,864      354,356      319,830      307,102      294,245
Other assets................................................         31,702       49,848       42,385       32,899       54,249
                                                                 ----------   ----------   ----------   ----------   ----------
  Total assets..............................................     $  528,322   $  509,452   $  486,418   $  460,358   $  419,740
                                                                 ==========   ==========   ==========   ==========   ==========

Deposits....................................................     $  478,484   $  459,466   $  437,213   $  416,205   $  378,721
Long-term debt..............................................                                                                 36
Other liabilities...........................................          2,520        3,445        3,872        3,305        3,365
Stockholders' equity........................................         47,318       46,541       45,333       40,848       37,618
                                                                 ----------   ----------   ----------   ----------   ----------
  Total liabilities and stockholders' equity................     $  528,322   $  509,452   $  486,418   $  460,358   $  419,740
                                                                 ==========   ==========   ==========   ==========   ==========

PER SHARE DATA:
Net income..................................................     $     2.50   $     2.45   $     2.65   $     2.37   $     2.11
Cash dividends declared.....................................           0.88         0.88         0.82         0.74         0.70
Stockholders' equity........................................     $    25.38   $    24.41   $    23.31   $    20.67   $    18.95
Cash dividends declared as a percentage of net income.......          35.09%       35.89%       30.83%       31.23%       33.21%
Average common shares outstanding...........................      1,890,960    1,921,063    1,960,140    1,984,180    1,995,834

SELECTED RATIOS (BASED ON AVERAGE BALANCES):
Net income as a percentage of total assets..................           0.92%        0.93%        1.10%        1.07%        1.03%
Net income as a percentage of stockholders' equity..........           9.97        10.23        11.99        11.82        11.72
Stockholders' equity as a percentage of total assets........           9.19         9.14         9.13         9.02         8.81
Tier I capital as a percentage of adjusted total assets.....           8.75         8.66         8.77         8.82         8.71
Net interest income as a percentage of earning assets.......           3.76         3.80         4.09         4.08         4.04
Loans, net, as a percentage of deposits.....................          80.34%       76.43%       74.33%       75.41%       79.17%

SELECTED RATIOS AND DATA (BASED ON PERIOD END BALANCES):
Tier I capital as a percentage of risk-weighted assets......          11.36%       11.92%       12.93%       12.80%       12.85%
Total capital as a percentage of risk-weighted assets.......          12.33        12.90        14.10        13.86        14.04
Allowance for loan losses as a percentage of loans, net.....           1.01%        1.00%        1.16%        1.04%        1.10%
Full-time equivalent employees..............................            205          203          196          182          169
Locations...................................................             17           17           16           14           14
</TABLE>

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

                                       61
<PAGE>

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

Management's Discussion and Analysis appearing on the following pages should be
read in conjunction with the Consolidated Financial Statements beginning on page
120 and Management's Discussion and Analysis 2003 versus 2002 beginning on page
168.

FORWARD-LOOKING DISCUSSION:

Certain statements in this Form 10-K are forward-looking statements that involve
numerous risks and uncertainties. The following factors, among others, may cause
actual results to differ materially from projected results:

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

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

To a certain extent, our success depends upon the general economic conditions in
the geographic market area that we serve. Although we expect economic conditions
in our market area to improve, assurance cannot be given that this improvement
will occur. Adverse changes to economic conditions would likely impair loan
collections and may have a materially adverse effect on the consolidated results
of operations and financial position.

                                       62
<PAGE>

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

The banking industry is highly competitive, with rapid changes in product
delivery systems and consolidation of service providers. We compete with many
larger institutions in terms of asset size. These competitors also have
substantially greater technical, marketing and financial resources. The larger
size of these companies affords them the opportunity to offer some specialized
products and services not offered by us. We are constantly striving to meet the
convenience and needs of our customers and to enlarge our customer base,
however, we cannot assure that these efforts will be successful.

CRITICAL ACCOUNTING POLICIES:

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

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

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

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

                                       63
<PAGE>

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

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

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

Real estate acquired in connection with foreclosures or in satisfaction of loans
is written-down to the lower of the related loan balance or 80.0 percent of fair
market value for residential properties or 75.0 percent of fair market value for
commercial properties based upon estimates derived through independent
appraisals. However, proceeds realized from sales may ultimately be higher or
lower than those estimates.

Intangible assets include goodwill and a core deposit intangible. We evaluate
goodwill for impairment at least annually and we evaluate the useful life of the
core deposit in each reporting period in order to determine if it should be
adjusted.

For a further discussion of our critical account policies, refer to the note
entitled, "Summary of significant accounting policies," in the Notes to
Consolidated Financial Statements to this Annual Report. This note lists the
significant accounting policies used by us in the development and presentation
of our financial statements. This Management's Discussion and Analysis, the
Notes to the Consolidated Financial Statements and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for the understanding and valuation of
our financial position, results of operations and cash flows.

                                       64
<PAGE>

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

OPERATING ENVIRONMENT:

The United States economy expanded at its fastest pace in five years, as the
gross domestic product ("GDP"), the value of all goods and services produced in
the Nation rose, 4.4 percent in 2004. Accommodative monetary and fiscal policy,
coupled with higher corporate earnings and an improved labor market, led to
solid gains in both business and consumer spending. At the beginning of 2004,
economic data suggested that the expansion had taken a firm hold and the risk of
disinflation had disappeared. With this positive news, the Federal Open Market
Committee ("FOMC") modified their monetary stance to suggest that policy
tightening may be imminent. By mid-year, employment conditions improved and
consumer price inflation moved higher. As a result, at their meeting on June 29,
2004, the FOMC began to reduce the level of monetary accommodation with a 25
basis point increase in the target rate for federal funds. In addition, the FOMC
suggested that further tightening would occur in measured increments throughout
the remainder of 2004 and continue into 2005. By year-end 2004, the federal
funds target rate had risen, in 25 basis point increments a total of five times,
to 2.25 percent.

Consumer spending, which had been the mainstay of economic growth in recent
years, grew substantially in 2004. Improved employment conditions bolstered
consumer confidence. In addition, higher disposable personal income ("DPI") and
wealth appreciation impacted the level at which consumers spent. DPI gained 3.9
percent in 2004. Fiscal stimulus enacted in 2003 resulted in larger tax refunds
and lower payments at the beginning of the year. At the end of the year, income
surged as consumers received an early holiday present when Microsoft paid a
special dividend of $32.0 billion. Household wealth was also an important force
that influenced spending. Higher equity values, coupled with growing home
prices, led to a sharp increase in the ratio of household net worth to
disposable income. All of these factors combined led to a 3.8 percent increase
in consumer spending.

Fueled by higher sales numbers, stronger corporate profits and fiscal stimulus,
business investment rose for the second consecutive year. Tax incentives, which
allowed for the partial expensing of new equipment and software installed by the
end of 2004, influenced the 13.5 percent increase in business spending for
equipment and software. Nonresidential construction spending moved up 1.3
percent in 2004, after declining 5.6 percent and 17.8 percent in 2003 and 2002.
In total, business spending rose 10.6 percent in 2004, following a 3.3 percent
increase in 2003. Moreover, businesses increased their inventories for the first
time since 2001. This factor alone contributed 25 basis points to GDP.

With corporate profits growing, businesses began adding to their payrolls. The
creation of new jobs led to a decrease in the National unemployment

                                       65
<PAGE>

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

rate to 5.4 percent in 2004 from 5.7 percent in 2003, as the labor force
participation rate remained constant at 66.0 percent. Jobs were added in all
major industry groups, including the manufacturing sector, which added 13,000
jobs. Employment in this sector had been steadily declining since 2000. The
largest job gains were in the service producing industries. Professional and
business services added 491,000 new jobs, while employment additions in
education and health services and leisure and hospitality industries were
421,000 and 387,000. Both productivity and labor costs increased in 2004. The
2.5 percent increase in productivity, slightly under the average of 4.0 percent
experienced over the past three years, was largely due to the effective use of
earlier acquired capital equipment. Past productivity gains were due mostly to
technological improvements. A 6.9 percent increase in annual benefit costs in
2004 was the major factor leading to a 3.7 percent rise in total compensation
costs, while wages and salaries increased at a moderate 2.4 percent pace.

National, Pennsylvania and our market area's seasonally adjusted unemployment
rates at December 31, 2004 and 2003, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                                 2004       2003
----------------------------------------------------------------------     ------     ------
<S>                                                                        <C>        <C>
National..............................................................      5.4%       5.7%
Pennsylvania..........................................................      5.6        5.2
Lackawanna County.....................................................      5.9        5.1
Monroe County.........................................................      7.7        6.8
Susquehanna County....................................................      7.3        6.3
Wayne County..........................................................      6.7        4.9
Wyoming County........................................................      6.8%       5.1%
</TABLE>

Contrary to the Nation, employment conditions in the Commonwealth of
Pennsylvania and all counties in our market area deteriorated in 2004 compared
to last year. In addition, the seasonally adjusted unemployment rate in the
Scranton/Wilkes-Barre metro area of 6.7 percent ranked as one of the highest in
Pennsylvania, just under the Johnstown and Williamsport areas. Furthermore, the
civilian labor force in this area declined by 9,800 people or 3.2 percent, while
the number of jobs available declined by 5,600.

In comparison to other states, Pennsylvania is ranked as one of the least
business-friendly states with regard to taxes, litigation, healthcare and labor
laws. In addition, the Commonwealth has severely fallen behind other states in
actively pursuing new business and job growth. Recently, in order to reverse
this alarming trend, the Pennsylvania Chamber of Business and Industry unveiled
a broad-reaching jobs creation plan, which calls for reform in regard to the
areas mentioned above. The plan recognizes that jobs creation does not
specifically come from state government, but from a

                                       66
<PAGE>

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

free market and competitive business climate. In cooperation with this plan,
Pennsylvania Governor Edward G. Rendell, in his recent budget address, called
for a reduction in the corporate net income tax and a continuation of the
phase-out of the capital stock tax and franchise tax in order to make
Pennsylvania's business tax system more competitive.

Despite the downturn in employment conditions, we anticipate an overall
improvement in the business climate within our market area in 2005. According to
Penn Northeast, an economic development group overseeing five area counties,
there was a 30.0 percent increase in activity for businesses seeking to relocate
to Northeastern Pennsylvania. The increase in activity, which is attributed to
collaboration of marketing efforts between area chambers of commerce, is
expected to continue into 2005 and 2006. In addition, Governor Rendell has made
city revitalization a cornerstone of his agenda and has backed it up with
monetary resources. Scranton Mayor Chris Doherty has, in turn, focused on
revitalizing downtown Scranton, particularly Lackawanna Avenue. A $20.0 million
project is designed to renovate existing buildings with ground level retail
stores, galleries and restaurants, loft housing and a pedestrian park. Southern
Union Co., a utility company, is also scheduled to open its new corporate
headquarters on Lackawanna Avenue in the Spring of 2005.

The banking industry again reported improved net income in 2004. However, the
increase in earnings was significantly less than that reported for the previous
two years. Net income for all Federal Deposit Insurance Corporation
("FDIC")-insured commercial banks rose 2.2 percent in 2004, compared to 14.1
percent in 2003. Profits of larger institutions were hindered by merger-related
costs. However, earnings of smaller community banks, which were stifled last
year by interest margin compression, rose 5.1 percent in 2004. Commercial banks
experienced strong balance sheet growth. Total assets for all FDIC-insured
commercial banks grew 10.7 percent in 2004. Much of the growth was concentrated
in large banks with assets greater than $10.0 billion. This group recorded asset
growth of 13.6 percent. However, smaller community banks also recorded solid
balance sheet growth of 4.8 percent. Earning assets for all FDIC-insured
institutions grew 11.4 percent. Deposit growth kept pace with an 11.2 percent
increase. Interest-bearing deposits grew 11.5 percent, while noninterest-bearing
deposits rose 9.9 percent. Asset quality for the banking industry improved for
the second consecutive year. All major loan categories, including consumer
credit, showed improvement which led to a 20.4 percent reduction in
nonperforming loans. In addition, total nonperforming assets, as a percentage of
total assets, for all FDIC-insured commercial banks improved to 0.55 percent at
December 31, 2004, from 0.77 percent at the end of 2003. Although equity capital
increased 22.9 percent, these institutions reported lower risk-based capital
ratios due to growth in assets with a higher risk rating. The Tier I and Total
risk-based capital ratios were

                                       67
<PAGE>

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

10.0 percent and 12.6 percent at December 31, 2004, compared to 10.1 percent and
12.7 percent at the end of 2003. In addition, the Leverage ratio for these banks
decreased from 7.9 percent at year-end 2003 to 7.8 percent at the close of 2004.

As previously mentioned, earnings growth for all FDIC-insured commercial banks,
although increasing 2.2 percent in 2004, was slower than that experienced in the
previous two years. Net income for these banks increased $2.3 billion to $104.7
billion in 2004, compared to $102.4 billion in 2003. Higher net interest income
and reduced loan loss provisions were almost entirely offset by increased
noninterest expense and lower noninterest income and gains on the sale of
securities. Strong earning asset growth was able to offset a 21 basis point
decline in the net interest margin and resulted in a 4.1 percent increase in net
interest income. Asset quality improvement led to a 23.1 percent reduction in
net charge-offs, which correspondingly caused these banks to reduce provisions
by 24.8 percent. Hindering these positive impacts was a 4.7 percent increase in
noninterest expense, resulting from recent large bank mergers, a 1.3 percent
reduction in noninterest income and a 34.5 percent decrease in gains realized on
investment security sales. In addition, earnings growth did not keep pace with
balance sheet growth. As a result, return on average assets ("ROAA") and return
on average equity ("ROAE") for these institutions weakened. These banks reported
ROAA of 1.31 percent and ROAE of 13.82 percent in 2004 compared to 1.40 percent
and 15.31 percent in 2003.

Contrary to the results for the overall banking industry, FDIC-insured
commercial banks located in Pennsylvania recorded a reduction in earnings for
the fourth consecutive year. For these banks, net income declined $160.0 million
or 6.5 percent in 2004, after decreasing $157.0 million or 6.0 percent in 2003.
Higher levels of noninterest expense outweighed increased net interest income
and noninterest income, and lower provisions. ROAA and ROAE for insured
Pennsylvania banks decreased to 1.22 percent and 14.28 percent in 2004 from 1.38
percent and 15.69 percent in 2003. For Pennsylvania banks, net interest income
grew 6.6 percent in 2004. Similar to all FDIC-insured commercial banks, the
increase was due to earning asset growth not margin improvement. Earning assets
for Pennsylvania banks grew 13.5 percent, which was able to offset a 21 basis
point decrease in the net interest margin. Fee income rose $298.3 million or 6.3
percent in 2004. However, as a percentage of earning assets, fee income declined
to 2.93 percent in 2004 from 3.13 percent in 2003. Asset quality for
Pennsylvania banks improved, and as a result, these banks lowered their
provisions by 52.1 percent. However, these positive impacts to earnings were not
enough to offset an 11.6 percent increase in noninterest expense in 2004, as
Pennsylvania banks were not successful with cost containment initiatives.

                                       68
<PAGE>

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

For the most part, equity markets advanced in 2004. However, the gain was not to
the extent of 2003. The Dow Jones Industrial Average and the Standard & Poor's
("S&P") 500, posted more subdued total return gains of 3.2 percent and 9.0
percent in 2004, compared to 25.3 percent and 26.4 percent in 2003. In addition,
The NASDAQ Stock Market(R) Composite rose 8.6 percent in 2004 compared to 50.0
percent in 2003, which indicated growth in technology stock values had
moderated. Bank stocks outperformed the S&P 500 for the fifth consecutive year,
as evidenced by an increase in The NASDAQ Bank Index Composite of 11.0 percent
in 2004. Higher corporate profits and equity values, coupled with greater
confidence in the economy led to a more than 50.0 percent increase in the volume
of merger and acquisition deals announced in the United States and 41.0 percent
increase in global transactions. Several of the largest deals announced were in
the financial services industry including Wachovia-South Trust with a deal value
of $14.2 billion and Citizens Financial-Charter One Financial with a deal value
of $10.5 billion. With regard to the entire banking industry, the number of
mergers and acquisitions announced increased 12.2 percent. Deal values also
increased, as both the median price-to-earnings and the median price-to-tangible
book value rose. Merger and acquisition activity is expected to remain strong in
2005 as businesses gain confidence in this arena once again.

Economic expansion is expected to continue throughout 2005, fueled by solid
consumer and business spending. Although core consumer prices have edged up
recently, overall inflation appears to be in check. Employment conditions are
expected to remain stable. Due to the stability of economic conditions, the FOMC
has indicated that short-term interest rates will continue to rise at a measured
pace over the course of 2005. Subsequent to year-end 2004, the FOMC has
increased the federal funds target rate a total of 50 basis points through two
separate 25 basis point steps.

REVIEW OF FINANCIAL POSITION:

We are located in Northeastern Pennsylvania and offer traditional bank products
and services, including loans, deposits and trust services, through our primary
subsidiary, Community Bank and Trust Company ("Community Bank"). Our other
subsidiary, Comm Realty Corporation ("Comm Realty"), holds, manages and sells
foreclosed or distressed assets on behalf of Community Bank. Community Bank
operates 17 full-service branch banking offices located within a five-county
market area and primarily services individuals and small- and medium-sized
businesses. Community Bank has two subsidiaries, Community Leasing Corporation
("Community Leasing") and Comm Financial Services Corporation ("Comm Financial
Services"). Community Leasing provides direct lease financing to commercial
customers and Comm Financial Services offers various types of insurance products
and asset management services to both individuals and businesses.

                                       69
<PAGE>

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

We consider Community Bank's 17 branch banking offices to be a single operating
segment. Community Leasing, Comm Financial Services and Comm Realty did not meet
the quantitative thresholds for required segment disclosure. For a further
discussion of the requirements for segment disclosure, refer to the note
entitled, "Summary of significant accounting policies-Segment disclosure," in
the Notes to Consolidated Financial Statements to this Annual Report.

On January 20, 2005, we received authorization from the Commonwealth of
Pennsylvania Department of Banking to close and transfer the assets and
liabilities from our Factoryville, Pennsylvania branch to other closely located
branches. In 1997, we acquired this branch from a significantly larger financial
institution in our market area. At the time, we believed that we would be able
to build market share because of the close proximity of our other branches and
our knowledge of the local community. Since that time, regardless of significant
marketing efforts, we have been unable to increase the volume of loans and
deposits at this branch. We attribute our inability to grow this branch to a
20.0 percent decline in the population and lack of business activity within this
market area. As a result of the deficient growth, this branch continues to be
unprofitable and adversely influences our overall profitability. We performed an
extensive analysis, which included hiring an independent consultant, and
concluded that closing this branch would improve our annual pre-tax net income
by an estimated $170. The closure and transfer of the assets and liabilities of
this branch will be effective April 1, 2005.

For a discussion on the recent SFAS issued by the FASB related to exit or
disposal activities refer, to the note entitled, "Summary of significant
accounting policies-Disposal activities," in the Notes to Consolidated Financial
Statements to this Annual Report.

In recent years, our profitability has not grown to the same extent as our
balance sheet. In 2001, we decided to grow the bank by initiating a plan to open
a series of new community banking offices located in more populated urban areas
with a higher concentration of commercial activity. The addition of these
offices successfully added approximately $88.2 million in loans, net of unearned
income, and $61.1 million in deposits over the past three years. This action
also effected noninterest expense as the new locations required us to recognize
greater costs associated with staffing and operating these new facilities. All
of the offices became profitable in 2004 and we expect them to make a greater
contribution to our net income as they continue to grow. However, this growth
had an adverse effect on our ROAA and ROAE. During 2004, we began forging
intermediate- and long-term strategic actions to reverse this declining trend.
As a result of these actions we will:

                                       70
<PAGE>

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

      -     Increase net income through the previously mentioned closure of our
            Factoryville branch.

      -     Generate additional noninterest revenue by offering new overdraft
            protection alternatives to our customers. These new alternatives
            include an automatic transfer from a savings account for a daily fee
            and implementing an overdraft privilege program for certain
            individual and sole proprietor customers. The automatic transfer
            from a savings account became available on January 1, 2005, and the
            overdraft privilege program became effective March 2, 2005. We are
            estimating a 3.0 percent increase in after-tax net profit from these
            new offerings.

      -     Sell our merchant services portfolio as part of an asset purchase
            and revenue sharing agreement with a third party. As part of this
            alliance, in addition to a one-time gain on the sale of the
            portfolio, we would receive on-going referral fees and residual
            payments on net revenue for each merchant contract. This sale was
            completed on March 1, 2005. We anticipate a 3.5 percent increase in
            after-tax net profit in the first year resulting from the sale.

      -     Expand abstract services offered to customers to include title
            insurance on commercial mortgages. This service will become
            available on April 1, 2005.

      -     Intensify our efforts directed toward commercial entities,
            especially those located in our newly developed market areas,
            through an expansion of our commercial relationship officer network.

      -     Expand our branch network into the Greater Wilkes-Barre area of
            Luzerne County. Wilkes-Barre and the surrounding area is the second
            largest urban market in Northeastern Pennsylvania.

In addition to these initiatives mentioned above, we will continue our on-going
strategic focus, which involves growing our commercial loan and deposit
portfolios, as well as maintaining a strong individual customer base, while
providing both types of customers with superior, personalized and comprehensive
financial services. We believe these initiatives will improve our long-term
profitability.

As a commercial bank, many factors impacted our operations in 2004. These
factors included a shift in monetary policy, rising market interest rates,
stronger equity markets, intensifying competition within our market area, and
weaker employment conditions in our five-county radius. As a result of these
factors, recent trends of strong deposit growth and falling earning asset yields
and fund costs began changing, as the year progressed.

                                       71
<PAGE>

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

Despite these influences, we continued to record strong balance sheet growth, as
total assets grew $18.9 million or 3.7 percent to $528.3 million at December 31,
2004, from $509.4 million at the end of 2003. Loan growth, primarily funded by
deposit gathering activities, remained strong and mainly accounted for the
increase in total assets. Total assets averaged $515.9 million in 2004, an
increase of $13.0 million or 2.6 percent compared to 2003. As a percentage of
average total assets, average earning assets equaled 94.7 percent in 2004 and
94.5 percent in 2003. Although the yield on earning assets declined 24 basis
points to 5.65 percent, the decline was not to the same magnitude as exhibited
in the past two years, which was nearly four times this amount.

Loans, net of unearned income, grew $23.8 million or 6.6 percent to $381.7
million at December 31, 2004, from $357.9 million at year-end 2003. Loans
averaged $374.1 million in 2004, and represented 76.6 percent of average earning
assets. In comparison, loans averaged $346.6 million in 2003 and represented
72.9 percent of earning assets. Our focus on developing commercial business
relationships continued to influence the composition of our loan portfolio.
Commercial business development directly led to a 14.9 percent increase in
business loans, including commercial loans, commercial mortgages and commercial
lease financing. The commercial portfolio represented 67.4 percent of our total
loan portfolio at December 31, 2004, compared to 62.6 percent at the end of
2003. Despite the continued strength of the housing market, the refinancing boom
experienced in 2003 and 2002 ended. This significantly reduced activity in our
secondary mortgage division. Although the FOMC began tightening monetary policy
mid-year, interest rates remained relatively low throughout 2004. As a result,
the tax-equivalent yield on our loan portfolio decreased 63 basis points to 6.12
percent in 2004 from 6.75 percent in 2003.

Total deposits grew $19.0 million or 4.1 percent from the previous year-end.
Deposit growth, although still strong, subsided slightly in 2004 as compared to
recent years. Stronger equity markets and rising interest rates lead depositors
to begin seeking other investment alternatives. As a result, we experienced a
slight decrease in personal deposit accounts. However, business development in
the commercial sector proved successful as nonpersonal accounts rose 19.1
percent. In addition, the shift in direction of monetary policy affected the
cost of our deposits. Although our deposit costs declined 21 basis points in
2004, this decrease was not as great as that experienced in recent years.

Stockholders' equity improved $0.8 million to $47.3 million or $25.38 per share
at December 31, 2004, compared to $46.5 million or $24.41 per share at December
31, 2003. Net income of $4.7 million was the primary factor contributing to the
improvement.

                                       72
<PAGE>

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

For a discussion of the recent Interpretation issued by the FASB related to the
consolidation of variable interest entities, refer to the note entitled,
"Summary of significant accounting policies-Variable interest entities," in the
Notes to Consolidated Financial Statements to this Annual Report.

INVESTMENT PORTFOLIO:

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

There are certain risks inherent in the portfolio that may negatively impact our
liquidity and profitability. Two of the major risks affecting our portfolio are
market or IRR and timing risk. Understanding these and other inherent risks and
their potential effects are essential in effectively managing the investment
portfolio.

Market or IRR, the greatest risk to our portfolio, relates to the inverse
relationship between bond prices and market yields. It is defined as the risk
that increases in general market interest rates will result in market value
depreciation. Since our entire investment portfolio is designated as
available-for-sale and carried at estimated fair value, with net unrealized
gains and losses reported as a separate component of stockholders' equity,
market value depreciation could negatively impact our capital position. In
addition to affecting the market value of the investment portfolio, interest
rate changes can have a significant impact on the amount and timing of cash flow
receipts, which are an important source of funding for our loan portfolio. As
interest rates increase, prepayments on underlying mortgages generally decline,
which could materially reduce the cash flows available from these investments.
Conversely, should interest rates decline, cash flows from CMOs generally
increase, which could lead to a surplus of liquidity that must be reinvested at
lower rates.

As previously mentioned, at the beginning of 2004, the FOMC changed their
monetary policy stance and by mid-year began steadily increasing the target
federal funds rate over the remainder of the year. Over the first half of 2004,
U.S. Treasury yields started moving upward in anticipation of the first 25 basis
point movement on June 29, 2004. During the remainder of the year, short-term
U.S. Treasury yields continued to rise correspondingly

                                       73
<PAGE>

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

with actual and expected policy tightening. However, longer-term U.S. Treasury
yields reacted conversely with policy changes and fell during the second half of
2004. Since our investment portfolio primarily consists of fixed-rate bonds,
changes in market interest rates have a substantial influence on the fair value
of the portfolio. Specifically, the parts of the yield curve most closely
related to our investments include the two-year and ten-year U.S. Treasuries,
which affect the values of our U.S. Government-sponsored agency securities,
mortgage-backed securities, including CMOs, and other short-term investments,
and tax-exempt state and municipal obligations. The yield on the two-year U.S.
Treasury, which started the year at 1.84 percent, rose 86 basis points to 2.70
percent on June 30, 2004. The yield on the ten-year U.S. Treasury increased as
well, by 35 basis points from 4.27 percent at year-end 2003 to 4.62 percent at
the close of the first half of 2004. Over the second half of the year, the yield
on the two-year U.S Treasury rose another 38 basis points and closed 2004 at
3.08 percent, 124 basis points higher than the previous year-end. The yield on
the ten-year U.S. Treasury reacted differently. This yield fell 38 basis points
by December 31, 2004, 3 basis points lower than the end of 2003. As previously
mentioned, bond prices react inversely to yields. As a result, we experienced a
decline of $878 in the aggregate market value of our investment portfolio, as
the majority of our holdings are short-term. Consequently, 73.3 percent of the
decline in value was due to decreases of $288 in the market value of U.S.
Government agency securities and $356 in that of mortgage-backed securities. In
addition, the market values of our taxable and tax-exempt state and municipal
obligations decreased by $88 and $170, despite the 3 basis point decrease in the
yield on the ten-year U.S. Treasury. The depreciation in value of our tax-exempt
municipal portfolio can be explained by an increase in the differential that
existed between supply and demand in the municipal market at the end of 2004
compared to one year earlier. As a result, municipal securities were priced
lower at December 31, 2004.

We reported net unrealized holding gains, included as a separate component of
stockholders' equity, of $1,534, net of income taxes of $790, at December 31,
2004, and $2,113, net of income taxes of $1,089, at December 31, 2003. We
realize additional increases in interest rates could negatively impact the
market value of our investments and our capital position. In order to monitor
the potential effects a rise in interest rates could have on the value of our
investments, we perform stress test modeling on the portfolio. Stress tests
conducted on our portfolio at December 31, 2004, indicated that should general
market rates increase by 100, 200 and 300 basis points, we would anticipate
declines of 2.1 percent, 4.3 percent and 6.5 percent in the market value of our
portfolio. Our IRR exposure with regard to market value depreciation improved
slightly in comparison to the previous year-end. At December 31, 2003, we
anticipated market value depreciation of 2.7 percent, 5.7 percent and 8.7
percent given the same rate shocks.

                                       74
<PAGE>

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

In addition to monitoring the effects interest rate changes have on the value of
our investments, we measure how our cash receipts from principal repayments on
our mortgage-backed securities will change given rate fluctuations of plus or
minus 100 basis points. Based on our investment portfolio at December 31, 2004,
we expect to receive $8.3 million from repayments in 2005 if rates do not
change. If rates go up 100 basis points from their current level, we expect
repayments to decrease to $6.2 million. Conversely, if rates go down 100 basis
points from their current level, we expect repayments to increase to $10.5
million.

In order to limit the effects of IRR on market value, we restrict the duration
of individual securities and the portfolio as a whole. In order to mitigate
fluctuations in the timing of cash flows, we purchase and hold only classes of
mortgage-backed securities that possess the highest quality with respect to
their structure and composition. Furthermore, we monitor and evaluate the
performance of our investment portfolio with respect to total return and risk in
comparison to national and market area industry benchmarks.

Total return is a comprehensive industry-wide approach measuring investment
portfolio performance. This measure is superior to measuring performance
strictly on the basis of yield since it not only considers income earned similar
to the yield approach, but also includes the reinvestment income on repayments
and capital gains and losses, whether realized or unrealized. The total return
on our investment portfolio improved slightly to 3.5 percent in 2004, from 3.3
percent in 2003, which was comparable to the performance of the Lehman Brothers'
aggregate-bond index, a benchmark used by most investment managers. This index
scored a total return of 3.9 percent in 2004. However, our investment
portfolio's total return was lower than the average total return for the eight
community banks located in our market area of 4.3 percent. Based on a study from
an independent national investment performance ranking company, our investment
portfolio ranked in the upper half of all FDIC-insured bank holding companies
with respect to total return over the previous 12 months.

Similar to the approach taken in assessing our performance with respect to
return, we evaluate our risk in comparison to all other financial institutions.
Risk is assessed by quantifying the average life of the investment portfolio as
compared to U.S. Treasury securities. Average life is derived from the
volatility of our total return to that of U.S. Treasury securities over a
one-year time horizon. This risk measure weakened to 2.1 years in 2004 from 0.8
years in 2003, however, we continue to rank in the upper half of all
FDIC-insured bank holding companies with regard to low risk, according to the
same independent ranking company. In addition, the risk associated with our
portfolio was less than that of the same eight community banks, whose average
life for their portfolios was 3.4 years.

                                       75
<PAGE>

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

This longer comparable average life of the peer group's investment portfolio
explains why their total return exceeded our total return in 2004. In general,
the total return of an investment portfolio would be expected to increase as the
average life of the portfolio increases.

Loan demand subsided somewhat in the third and beginning of the fourth quarters
of 2004. However, deposit gathering remained strong during these periods. In
addition, we continued to draw liquidity through repayments of mortgage-backed
securities and the maturities of U.S. Government-sponsored agency securities.
The excess liquidity not used to fund loans was redirected back into the
investment portfolio. As a result, our holdings of investment securities
increased $13.6 million to $118.8 million at December 31, 2004, from $105.2
million at December 31, 2003. The composition of our investment portfolio
changed during 2004, as mortgage-backed securities comprised only 17.9 percent
of the portfolio at year-end compared to 33.4 percent at the end of 2003. The
majority of securities purchased in 2004 were bonds issued by U.S.
Government-sponsored agencies, which increased the percentage of these type of
instruments to 37.6 percent of our total portfolio at December 31, 2004,
compared to 15.6 percent at the end of the previous year. With the expected
increase in general market rates, we chose to invest in short-term bullet
securities rather than mortgage-backed securities due to their greater cash flow
stability.

The investment portfolio averaged $103.3 million and equaled 21.2 percent of
average earning assets in 2004, compared to $112.8 million and 23.7 percent in
2003. Due primarily to a 51 basis point increase in the yield on taxable
investments, the tax-equivalent yield on the investment portfolio rose 47 basis
points to 4.40 percent in 2004 from 3.93 percent in 2003.

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

DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE

<TABLE>
<CAPTION>
                                       2004             2003             2002             2001             2000
                                 ---------------  ---------------  ---------------  ---------------  --------------
DECEMBER 31                       AMOUNT    %      AMOUNT    %      AMOUNT    %      AMOUNT    %     AMOUNT    %
------------------------------   -------- ------  -------- ------  -------- ------  -------- ------  ------- ------
<S>                              <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>     <C>
U.S. Treasury securities......                                                                       $ 3,001   4.21%
U.S. Government agencies......   $ 44,645  37.59% $ 16,377  15.56% $ 10,350   8.33% $  1,067   0.89%   1,025   1.44
State and municipals:
  Taxable.....................     16,898  14.23    17,051  16.20
  Tax-exempt..................     34,605  29.14    34,788  33.05    35,003  28.18    41,790  34.72   20,075  28.18
Mortgage-backed securities....     21,281  17.92    35,099  33.35    77,579  62.46    75,558  62.78   45,269  63.54
Equity securities:
  Restricted..................      1,153   0.97     1,783   1.70     1,149   0.93     1,833   1.52    1,784   2.50
  Other.......................        174   0.15       150   0.14       122   0.10       109    .09       92   0.13
                                 -------- ------  -------- ------  -------- ------  -------- ------  ------- ------
    Total.....................   $118,756 100.00% $105,248 100.00% $124,203 100.00% $120,357 100.00% $71,246 100.00%
                                 ======== ======  ======== ======  ======== ======  ======== ======  ======= ======
</TABLE>

                                       76
<PAGE>

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

No securities were sold in 2004. We received proceeds from the sale of
available-for-sale investment securities of $19.0 million in 2003. Net gains
recognized on the sale of investment securities in 2003 totaled $13. The
securities sold were comprised entirely of short-term bonds of U.S.
Government-sponsored agencies. These securities were sold for liquidity purposes
in order to fund loans to tax-exempt local municipal authorities that offered
comparably higher yields. Repayments from investment securities totaled $18.2
million in 2004 and $60.0 million in 2003. The decrease in repayments resulted
from the lower volume of mortgage-backed securities.

We purchased a total of $33.5 million in investment securities in 2004. The
shift in the rate environment to one of rising rates posed potential IRR and
liquidity concerns for our investment portfolio, and influenced our investment
purchases in 2004. In order to minimize our exposure to potentially severe IRR
and cash flow timing risk in the future due to rising interest rates, we limited
our purchases primarily to short-term, single-maturity bonds of U.S.
Government-sponsored agencies. The short-term maturities reduce our exposure to
IRR, while single-maturity bonds ensure the certainty of cash flows compared to
mortgage-backed securities. Cash flows of mortgage-backed securities have a
tendency to extend into the future in a rising rate environment, thereby
creating possible liquidity strains as well as increasing IRR. The
weighted-average life of the U.S. Government-sponsored agency securities
purchased in 2004 was 0.8 years, with scheduled maturity dates occurring at
constant intervals over the next 24 months.

At December 31, 2004, investment securities with an amortized cost of $37.4
million were pledged to secure deposits, to qualify for fiduciary powers and for
other purposes required or permitted by law. At December 31, 2003, the amortized
cost of pledged securities equaled $36.3 million. The fair value of such
securities equaled $37.4 million at December 31, 2004, and $36.9 million at
December 31, 2003.

The maturity distribution of the amortized cost, fair value and weighted-average
tax-equivalent yield of the available-for-sale portfolio at December 31, 2004,
is summarized as follows. The weighted-average yield, based on amortized cost,
has been computed for tax-exempt state and municipals on a tax-equivalent basis
using the prevailing federal statutory tax rate of 34.0 percent. The
distributions are based on contractual maturity with the exception of
mortgage-backed securities, CMOs and equity securities. Mortgage-backed
securities and CMOs are presented based upon estimated cash flows, assuming no
change in the current interest rate environment. Equity securities with no
stated contractual maturities are included in the "After ten years" maturity
distribution. Expected maturities may differ from contractual maturities, or
estimated maturities

                                       77
<PAGE>

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

for mortgage-backed securities and CMOs, because borrowers have the right to
call or prepay obligations with or without call or prepayment penalties.

MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO

<TABLE>
<CAPTION>
                                                  AFTER ONE        AFTER FIVE
                                   WITHIN         BUT WITHIN       BUT WITHIN          AFTER
                                  ONE YEAR        FIVE YEARS        TEN YEARS        TEN YEARS           TOTAL
                               --------------   --------------   --------------   --------------   ---------------
     DECEMBER 31, 2004         AMOUNT   YIELD   AMOUNT   YIELD   AMOUNT   YIELD   AMOUNT   YIELD    AMOUNT   YIELD
-----------------------------  -------  -----   -------  -----   -------  -----   -------  -----   --------  -----
<S>                            <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>       <C>
Amortized cost:
U.S. Government agencies.....  $31,642   2.10%  $13,227   2.51%                                    $ 44,869   2.22%
State and municipals:
  Taxable....................    2,915   1.57    14,372   2.70                                       17,287   2.51
  Tax-exempt.................      660   2.22     1,708   6.33   $10,301   7.95%  $19,280   7.54%    31,949   7.50
Mortgage-backed securities...    8,276   4.35    12,362   4.55       487   4.88        11   6.36     21,136   4.48
Equity securities:
  Restricted.................                                                       1,153   2.21      1,153   2.21
  Other......................                                                          38   8.67         38   8.67
                               -------          -------          -------          -------          --------
    Total....................  $43,493   2.49%  $41,669   3.34%  $10,788   7.81%  $20,482   7.24%  $116,432   4.12%
                               =======          =======          =======          =======          ========
Fair value:
U.S. Government agencies.....  $31,534          $13,111                                            $ 44,645
State and municipals:
  Taxable....................    2,904           13,994                                              16,898
  Tax-exempt.................      660            1,827          $11,154          $20,964            34,605
Mortgage-backed securities...    8,296           12,482              492               11            21,281
Equity securities:
  Restricted.................                                                       1,153             1,153
  Other......................                                                         174               174
                               -------          -------          -------          -------          --------
    Total....................  $43,394          $41,414          $11,646          $22,302          $118,756
                               =======          =======          =======          =======          ========
</TABLE>

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

LOAN PORTFOLIO:

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

                                       78
<PAGE>

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

Many factors influenced loan demand in 2004. These factors include:

      -     Strong growth in corporate earnings;

      -     Favorable fiscal policy;

      -     Low interest rates;

      -     A strong housing market; and

      -     Improved employment conditions and higher disposable income.

Corporate profits, which began to rebound at the end of 2003, remained strong in
2004. The strong earnings, coupled with favorable fiscal and monetary policy,
led to a 10.6 percent increase in business investment and caused inventories to
grow. Tax incentives allowed businesses to partially expense new equipment and
software installed by the end of 2004, resulting in a 13.5 percent increase in
spending for these items. In addition, businesses began adding to inventories
for the first time in three years and as a result, commercial lending
strengthened in 2004. Commercial loans, including commercial real estate loans,
for all FDIC-insured commercial banks grew $102.7 billion or 7.0 percent to
$1,575.6 billion at December 31, 2004, from $1,472.9 billion at the end of the
previous year. According to the "January 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices," issued by the Board of Governors of the Federal
Reserve System, 45.0 percent of United States banks reported greater demand for
commercial and industrial loans and cited a greater need for inventory financing
as the predominant reason for the increased demand.

Mortgage lending in 2004 reflected the strong housing market, which influenced
the demand for traditional mortgages. The rate for a 30-year fixed-rate
mortgage, which fluctuated over the year, closed 13 basis points lower at 5.75
percent at year-end 2004, compared to 5.88 percent one year earlier. In
addition, home prices rose 11.7 percent over 2003. The low rates and strong home
price appreciation led to a 9.4 percent increase in the sales of existing homes
and an 8.9 percent increase in the sales of new homes. As a result, FDIC-insured
commercial banks recorded growth in one-to-four family residential mortgages of
$89.4 billion or 9.0 percent. Despite the growth, demand was tempered by a sharp
decrease in refinancing activity. This resulted from having a substantially
lower number of outstanding mortgages with interest rates that were above
current market rates.

                                       79
<PAGE>

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

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

DISTRIBUTION OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                            2004              2003               2002               2001               2000
                                     ----------------   ----------------   ----------------   ----------------   ----------------
           DECEMBER 31                AMOUNT     %       AMOUNT     %       AMOUNT     %       AMOUNT     %       AMOUNT      %
-----------------------------------  --------  ------   --------  ------   --------  ------   --------  ------   ----------------
<S>                                  <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
Commercial, financial and others...  $114,341   29.95%  $100,723   28.14%  $ 90,747   28.05%  $ 71,512   23.05%  $ 49,476   16.63%
Real estate:
  Construction.....................     6,704    1.76      2,983    0.83      5,398    1.67      5,285    1.70      3,546    1.19
  Mortgage.........................   230,555   60.40    222,621   62.20    193,012   59.65    195,915   63.13    205,771   69.16
Consumer, net......................    27,893    7.31     29,726    8.30     32,631   10.08     36,346   11.71     37,800   12.70
Lease financing, net...............     2,230    0.58      1,887    0.53      1,787    0.55      1,264    0.41        937    0.32
                                     --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
  Loans, net of unearned income....   381,723  100.00%   357,940  100.00%   323,575  100.00%   310,322  100.00%   297,530  100.00%
                                               ======             ======             ======             ======             ======
Less: allowance for loan losses....     3,859              3,584              3,745              3,220              3,285
                                     --------           --------           --------           --------           --------
    Net loans......................  $377,864           $354,356           $319,830           $307,102           $294,245
                                     ========           ========           ========           ========           ========
</TABLE>

As previously mentioned, an on-going strategic focus includes developing sound
relationships with commercial businesses within our market area. As a result, we
again experienced strong growth in business loans. However, the growth was not
as strong as the 34.0 percent experienced in the previous year, due to increased
competition and slower business growth in our market area. Business loans,
including commercial loans, commercial mortgages and lease financing, grew $33.3
million or 14.9 percent to $257.4 million at year-end 2004 from $224.1 million
at the end of 2003. Specifically, commercial real estate loans rose $19.3
million or 15.9 percent and commercial loans and leases grew $14.0 million or
13.6 percent. Residential mortgages, including construction loans, decreased
$7.6 million or 7.4 percent, while consumer loans declined $1.8 million or 6.2
percent from year-end 2003 to year-end 2004. Overall, our loan portfolio grew
$23.8 million or 6.6 percent to $381.7 million at December 31, 2004, from $357.9
million at December 31, 2003.

As previously mentioned, the 30-year mortgage rate fluctuated during 2004 and
closed the year at 5.75 percent, 13 basis points under the closing rate of 2003.
Mortgage activity, although still strong, was tempered due to the decrease in
refinancing activity. We experienced a 55.1 percent decrease in the number of
residential mortgages refinanced in 2004. Similarly, the volume of refinanced
residential mortgages decreased $12.3 million or 53.7 percent. The number of
mortgage refinancings totaled 131 with an aggregate dollar volume of $10.6
million in 2004, compared to 292, with an aggregate dollar volume of $22.9
million in 2003.

The decrease in refinancings significantly reduced the activity in our secondary
mortgage banking program. Mortgages originated and subsequently sold in the
secondary market decreased $33.2 million or 58.3 percent to $23.7 million in
2004, compared to $56.9 million in 2003. Net gains realized on the sale of these
loans, included in noninterest income, were $577 in 2004 and $1,212 in 2003.
Residential mortgage loans serviced for

                                       80
<PAGE>

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

the Federal National Mortgage Association totaled $97.8 million at December 31,
2004, an increase of $7.8 million or 8.7 percent from $90.0 million at the end
of 2003. Serviced loans increased $33.9 million or 60.4 percent in 2003.
Mortgage loans held for sale were $1.9 million at the end of 2004.

The loan portfolio averaged $374.1 million in 2004, an increase of $27.5 million
or 7.9 percent compared to $346.6 million in 2003. Taxable loans averaged $22.3
million or 6.9 percent higher, while average tax-exempt loans increased $5.2
million or 23.7 percent. As a result of the strong loan demand, average loans,
as a percentage of average earning assets, equaled 76.6 percent in 2004,
compared to 72.9 percent in 2003.

The prime rate remained at a historic low of 4.00 percent for the first half of
2004. However, with the shift in monetary policy in the second half of the year
the prime rate began increasing in 25 basis point increments corresponding with
that of the federal funds target rate. At December 31, 2004, the prime rate was
5.25 percent, still low in comparison to historical data, but 125 basis points
higher than at mid-year. The continued low rate environment caused a further
decline in the tax-equivalent yield on our loan portfolio from 6.75 percent in
2003 to 6.12 percent in 2004. The greatest impact on loan yields occurred in the
first quarter as the tax-equivalent yield declined 25 basis points to 6.12
percent from 6.37 percent in the fourth quarter of 2003. Loan yields remained
relatively stable over the rest of the year, fluctuating within a range of plus
or minus 12 basis points. The tax-equivalent yield on the loan portfolio was
6.17 percent in the second quarter, 6.05 percent in the third quarter and 6.13
percent in the fourth quarter. Interest rates are expected to steadily increase
over 2005, and as a result, we anticipate the yield on our loan portfolio to
rise as variable- and adjustable-rate loans reprice upward.

                                       81
<PAGE>

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

The maturity distribution and repricing information of the loan portfolio by
major classification at December 31, 2004, is summarized as follows:

MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                                      AFTER ONE
                                             WITHIN   BUT WITHIN   AFTER
            DECEMBER 31, 2004               ONE YEAR  FIVE YEARS FIVE YEARS   TOTAL
-----------------------------------------   --------  ---------- ----------  --------
<S>                                         <C>       <C>        <C>         <C>
Maturity schedule:
Commercial, financial and others ........   $ 49,924   $ 17,493   $ 46,924   $114,341
Real estate:
  Construction ..........................      6,704                            6,704
  Mortgage ..............................     16,945     51,800    161,810    230,555
Consumer, net ...........................     10,046     15,108      2,739     27,893
Lease financing, net ....................        811      1,419                 2,230
                                            --------   --------   --------   --------
    Total ...............................   $ 84,430   $ 85,820   $211,473   $381,723
                                            ========   ========   ========   ========
Repricing schedule:
Predetermined interest rates ............   $ 42,289   $ 69,771   $ 47,364   $159,424
Floating- or adjustable-interest rates       119,506    102,746         47    222,299
                                            --------   --------   --------   --------
    Total ...............................   $161,795   $172,517   $ 47,411   $381,723
                                            ========   ========   ========   ========
</TABLE>

As previously mentioned, there are numerous risks inherent in the loan
portfolio. We manage the portfolio by employing sound credit policies and
utilizing various modeling techniques in order to limit the effects of such
risks. In addition, we continuously monitor our liquidity position so that
adequate funds are available to meet loan demand. Based on our asset/liability
simulation model, we feel confident that loan demand can be facilitated through
payments and prepayments on investments and loans, and increases in core
deposits. We expect to receive approximately $127.9 million from repayments on
loans and investment securities during 2005. In the event an unforeseen increase
in loan demand arises, we could facilitate the demand by aggressively competing
for deposits, by selling available-for-sale securities or by utilizing various
credit products available through the Federal Home Loan Bank of Pittsburgh
("FHLB-Pgh").

In an attempt to limit IRR and liquidity strains, we continually examine the
maturity distribution and interest rate sensitivity of the loan portfolio. As
part of our asset/liability management strategy to reduce the amount of IRR in
the loan portfolio, we price loan products to increase our holdings of
adjustable-rate loans and reduce the average term of fixed-rate loans.
Approximately 42.4 percent of the loan portfolio is expected to reprice within
the next 12 months. Due to our continued focus on commercial lending activities,
our holdings of adjustable-rate loans increased $27.9 million or 14.4 percent in
2004. Adjustable-rate loans totaled $222.3 million and represented 58.2 percent
of the loan portfolio at December 31, 2004, compared to $194.4 million or 54.3
percent at the end of 2003. Fixed-rate loans decreased $4.1 million to $159.4
million at December 31, 2004, from $163.5 million at December 31, 2003.

                                       82
<PAGE>

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

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

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

In addition to the risks inherent in our loan portfolio, in the normal course of
business, we are also a party to financial instruments with off-balance sheet
risk to meet the financing needs of our customers. These instruments include
legally binding commitments to extend credit, unused portions of home equity and
credit card lines and commercial letters of credit, and involve, to varying
degrees, elements of credit risk and IRR in excess of the amount recognized in
the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Commercial letters of credit are conditional
commitments issued by us to support customers in the purchase of commercial
goods. These letters of credit are guarantees of funding and do not obligate us
to make payments to the guaranteed party. These letters of credit are
automatically renewable upon their anniversary date unless canceled by us prior
to that date.

Credit risk is the principal risk associated with these instruments. Our
involvement and exposure to credit loss in the event that the instruments are
fully drawn upon and the customer defaults is represented by the contractual
amounts of these instruments. In order to control credit risk associated with
entering into commitments and issuing letters of credit, we employ the same
credit quality and collateral policies in making commitments that we use in
other lending activities. We evaluate each customer's creditworthiness on a
case-by-case basis, and if deemed necessary, obtain collateral. The amount and
nature of the collateral obtained is based on our credit evaluation.

                                       83
<PAGE>

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

The contractual amounts of off-balance sheet commitments at year-end for the
past five years are summarized as follows:

DISTRIBUTION OF OFF-BALANCE SHEET COMMITMENTS

<TABLE>
<CAPTION>
                      DECEMBER 31                           2004      2003     2002     2001     2000
--------------------------------------------------------   -------  -------  -------  -------  -------
<S>                                                        <C>      <C>      <C>      <C>      <C>
Commitments to extend credit............................   $49,504  $44,025  $48,478  $28,726  $25,873
Unused portions of home equity and credit card lines....    12,776    9,806    6,892    5,464    3,904
Commercial letters of credit............................     9,062    2,255      986    1,007    1,278
                                                           -------  -------  -------  -------  -------
  Total.................................................   $71,342  $56,086  $56,356  $35,197  $31,055
                                                           =======  =======  =======  =======  =======
</TABLE>

These commitments are generally issued for one year or less and often expire
unused in whole or in part by the customer. We record an allowance for credit
losses, if deemed necessary, separately as a liability. No allowance was deemed
necessary at December 31, 2004 and 2003. We do not anticipate that losses, if
any, that may occur as a result of funding off-balance sheet commitments, would
have a material adverse effect on our operating results or financial position.

ASSET QUALITY:

The favorable interest rate environment was the main factor leading to a 3.8
percent decline in the number of bankruptcy cases filed in the United States in
2004. Low interest rates, coupled with less stringent lending standards, made
debt service requirements more manageable for businesses. In the consumer
sector, low mortgage rates enabled homeowners to use home equity to pay down
other household debt. As a result, according to data released by the
Administrative Office of the U.S. Courts, both the number of personal and
businesses filing for bankruptcy decreased in 2004. Personal bankruptcy cases
filed nationally for the 12 months ended December 31, 2004, dropped 3.8 percent
from the previous year, while the number of businesses filing for bankruptcy in
the United States declined by 2.1 percent. Similar to the National results, the
Commonwealth of Pennsylvania also experienced a decline in bankruptcy filings.
However, this was not the case in Northeastern Pennsylvania, according to the
Administrative Office of the U.S. Courts, the total number of bankruptcies filed
in our district increased by 1.3 percent in 2004. The number of non-business
filings in this district increased by 158 cases or 1.2 percent and the number of
business filings rose by 18 cases or 6.4 percent.

These favorable credit conditions led to a significant improvement in asset
quality for the banking industry. Asset quality for all FDIC-insured commercial
banks improved as evidenced by a $10.8 billion or 20.4 percent decrease in
nonperforming loans and leases to $42.1 billion at December 31, 2004, from $52.9
billion at year-end 2003. The majority of the improvement resulted from a 38.3
percent reduction in nonperforming commercial and industrial loans, coupled with
decreases of 14.1 percent in commercial mortgage loans and 6.4 percent in
consumer loans. For all commercial banks,

                                       84
<PAGE>

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

the ratio of nonperforming assets to total assets improved from 0.77 percent at
the end of 2003 to 0.55 percent at year-end 2004. In addition, net charge-offs,
as a percentage of loans outstanding, improved from 0.89 percent in 2003 to 0.63
percent in 2004. Asset quality also strengthened for Pennsylvania commercial
banks. The ratio of nonperforming assets to total assets improved to 0.34
percent at December 31, 2004, from 0.50 percent at December 31, 2003.

Despite the improvement in asset quality, the recent shift in monetary policy
and the inflation of real estate values could pose credit risk issues for the
banking industry. In an attempt to improve profitability and reduce their IRR
exposure, many financial institutions extended adjustable- rate loans to
marginal borrowers who met only the threshold debt service coverage ratios.
These borrowers may be unable to pay the additional costs as rates continue to
rise in the future. In addition, the rise in property values over the past few
years may have caused some institutions to extend credit based on inflated
collateral values. Upon default, the bank may not be able to realize a
liquidation value at or beyond the amount of debt owed in order to facilitate a
secondary source of repayment. These factors may subject the banking industry to
increased levels of nonperforming assets and net loans charged-off. As a result,
the profitability of financial institutions could be adversely effected as banks
are forced to increase their provision for loan losses.

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

Credit risk is also minimized by quarterly internal loan reviews of our
portfolio. These reviews aid us in identifying deteriorating financial

                                       85
<PAGE>

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

conditions of borrowers, allowing them to assist customers in remedying these
situations.

Nonperforming assets consist of nonperforming loans and foreclosed assets.
Nonperforming loans include nonaccrual loans, restructured loans and accruing
loans past due 90 days or more. For a discussion of our policy regarding
nonperforming assets, refer to the note entitled, "Summary of significant
accounting policies-Nonperforming assets," in the Notes to Consolidated
Financial Statements to this Annual Report.

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

DISTRIBUTION OF NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                  DECEMBER 31                         2004      2003      2002      2001      2000
--------------------------------------------------   ------    ------    ------    ------    ------
<S>                                                  <C>       <C>       <C>       <C>       <C>
Nonaccrual loans:
Commercial, financial and others .................   $  849    $  306    $  541    $  113    $  141
Real estate:
  Construction
  Mortgage .......................................    1,123     1,077     1,213     1,045     1,469
Consumer, net ....................................                 63       238       190        74
Lease financing, net
                                                     ------    ------    ------    ------    ------
    Total nonaccrual loans .......................    1,972     1,446     1,992     1,348     1,684
                                                     ------    ------    ------    ------    ------
Restructured loans ...............................                                             0124
                                                                                             ------
Accruing loans past due 90 days or more:
Commercial, financial and others .................       91       124        97       107        23
Real estate:
  Construction
  Mortgage .......................................      653       352       281       372       449
Consumer, net ....................................      169       151       132       225       353
Lease financing, net .............................                 73
                                                     ------    ------    ------    ------    ------
    Total accruing loans past due 90 days or more       913       700       510       704       825
                                                     ------    ------    ------    ------    ------
    Total nonperforming loans ....................    2,885     2,146     2,502     2,052     2,633
                                                     ------    ------    ------    ------    ------
Foreclosed assets ................................      399       261        40     1,818     1,391
                                                     ------    ------    ------    ------    ------
    Total nonperforming assets ...................   $3,284    $2,407    $2,542    $3,870    $4,024
                                                     ======    ======    ======    ======    ======
Ratios:
Nonperforming loans as a percentage of loans, net      0.76%     0.60%     0.77%     0.66%     0.88%
Nonperforming assets as a percentage of loans, net     0.86%     0.67%     0.79%     1.25%     1.35%
</TABLE>

Contrary to the banking industry, our asset quality deteriorated in 2004.
Nonperforming assets increased $877 or 36.4 percent to $3,284 at December 31,
2004, from $2,407 at December 31, 2003. As a percent of loans, net of unearned
income, nonperforming assets equaled 0.86 percent at December 31, 2004, compared
to 0.67 percent at the end of 2003. The majority of the deterioration was due to
a $526 increase in nonaccrual loans. In a proactive stance at the end of the
third quarter of 2004, we placed two commercial loans totaling $680 on
nonaccrual status due to the borrowers

                                       86
<PAGE>

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

deteriorating cash flow, highly leveraged position and collateral deficiency.
Despite continuing to perform, it is doubtful that we receive a portion of our
interest and principal on this credit. Nonperforming assets were also affected
by a $213 increase in loans past due 90 days or more and still accruing, and a
$138 increase in foreclosed assets.

We had five properties with an aggregate carrying value of $399 in foreclosed
assets at December 31, 2004, compared to four properties with an aggregate
carrying value of $261 at the end of 2003. During 2004, seven properties
totaling $452 were transferred into foreclosed assets. We sold six properties
for $280 and recognized a net loss on the sales of $15. We wrote down one
property with a $19 charge to noninterest expense in 2004. The carrying values
of all foreclosed properties at December 31, 2004, did not exceed 80.0 percent
of their collateral values in the case of residential properties and 75.0
percent of their collateral values in the case of commercial properties.

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

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

                                       87
<PAGE>

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

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

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

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

DISTRIBUTION OF IMPAIRED LOANS

<TABLE>
<CAPTION>
             DECEMBER 31                        2004      2003      2002      2001      2000
--------------------------------------------   ------    ------    ------    ------    ------
<S>                                            <C>       <C>       <C>       <C>       <C>
Nonaccrual loans:
Commercial, financial and others ...........   $  849    $  306    $  541    $  113    $  141
Real estate:
  Construction
  Mortgage .................................    1,123     1,077     1,213     1,045     1,469
Consumer, net ..............................                 63       238       190        74
Lease financing, net........................   ------    ------    ------    ------    ------
    Total nonaccrual loans .................    1,972     1,446     1,992     1,348     1,684
                                               ------    ------    ------    ------    ------
Restructured loans .........................                                              124
                                                                                       ------
Accruing loans:
Commercial, financial and others ...........    3,889                 889       407
Real estate:
  Construction
  Mortgage .................................    1,205       207       485        65
Consumer, net ..............................                  1       292       125
Lease financing, net
                                               ------    ------    ------    ------
    Total accruing loans ...................    5,094       208     1,666       597
                                               ------    ------    ------    ------    ------
    Total impaired loans ...................   $7,066    $1,654    $3,658    $1,945    $1,808
                                               ======    ======    ======    ======    ======
Ratio:
Impaired loans as a percentage of loans, net     1.85%     0.46%     1.13%     0.63%     0.61%
</TABLE>

At December 31, 2004 and 2003, we had a recorded investment in impaired loans of
$7,066 and $1,654. The recorded investment in impaired loans averaged $4,564 in
2004 and $2,510 in 2003. At December 31, 2004, the amount of recorded investment
in impaired loans for which there was a related allowance for loan losses and
the amount of the allowance was $2,930 and $1,179. Comparatively, the amount of
these loans and their related allowance was $747 and $377, at December 31, 2003.
The amount of

                                       88
<PAGE>

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

recorded investment for which there was no related allowance for loan losses was
$4,136 and $907 at December 31, 2004 and 2003. During 2004, activity in the
allowance for loan losses account related to impaired loans included a provision
charged to operations of $1,002, losses charged to the allowance of $212 and
recoveries of impaired loans previously charged-off of $12. The 2003 activity in
the allowance for loan losses account related to impaired loans included a
provision charged to operations of $83, losses charged to the allowance of $609
and recoveries of impaired loans previously charged-off of $26. Interest income
related to impaired loans would have been $279 in 2004 and $188 in 2003, had the
loans been current and the terms of the loans not been modified. Interest
recognized on impaired loans amounted to $246 in 2004 and $145 in 2003. Included
in these amounts was interest recognized on a cash basis of $246 and $145. Cash
received on impaired loans applied as a reduction of principal totaled $1,692 in
2004 and $754 in 2003. There were no commitments to extend additional funds to
customers with impaired loans at December 31, 2004 and 2003.

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

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                           2004                2003                2002                2001               2000
                                     -----------------   -----------------   -----------------   ----------------   ----------------
                                              CATEGORY            CATEGORY            CATEGORY            CATEGORY          CATEGORY
                                                AS A                AS A                AS A                AS A              AS A
                                                % OF                % OF                % OF                % OF              % OF
            DECEMBER 31              AMOUNT     LOANS    AMOUNT     LOANS    AMOUNT     LOANS    AMOUNT     LOANS   AMOUNT    LOANS
-----------------------------------  ------   --------   ------   --------   ------   --------   ------   --------  ------  --------
<S>                                  <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>       <C>     <C>
Allocated allowance:
Specific:
Commercial, financial and others...  $  728       1.24%  $  237       0.09%  $  597       0.44%  $  174       0.17% $   65     0.12%
Real estate:
  Construction ....................
  Mortgage ........................     451       0.61      124       0.36      173       0.53      135       0.36     312     0.87
Consumer, net .....................                          16       0.01      107       0.16       94       0.10     229     0.11
Lease financing, net ..............
                                     ------     ------   ------     ------   ------     ------   ------     ------  ------   ------
    Total specific ................   1,179       1.85      377       0.46      877       1.13      403       0.63     606     1.10
                                     ------     ------   ------     ------   ------     ------   ------     ------  ------   ------
Formula:
Commercial, financial and others...     149      28.71      237      28.05      367      27.61    1,433      22.88   1,011    16.51
Real estate:
  Construction ....................               1.76                0.83                1.67                1.70             1.19
  Mortgage ........................     878      59.79      974      61.84    2,071      59.12      800      62.77     848    68.29
Consumer, net .....................     288       7.31      316       8.29      419       9.92      452      11.61     472    12.59
Lease financing, net ..............       1       0.58        1       0.53                0.55                0.41             0.32
                                     ------     ------   ------     ------   ------     ------   ------     ------  ------   ------
    Total formula .................   1,316      98.15    1,528      99.54    2,857      98.87    2,685      99.37   2,331    98.90
                                     ------     ------   ------     ------   ------     ------   ------     ------  ------   ------
    Total allocated allowance .....   2,495     100.00%   1,905     100.00%   3,734     100.00%   3,088     100.00%  2,937   100.00%
                                                ======              ======              ======              ======           ======
Unallocated allowance .............   1,364               1,679                  11                 132                348
                                     ------              ------              ------              ------             ------
    Total..........................  $3,859              $3,584              $3,745              $3,220             $3,285
                                     ======              ======              ======              ======             ======
</TABLE>

The allocated element of the allowance for loan losses account was $2,495 at
December 31, 2004, compared to $1,905 at December 31, 2003. The change resulted
from an increase of $802 in the specific portion for the

                                       89
<PAGE>

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

impairment of loans individually evaluated under SFAS No. 114, partially offset
by a reduction of $212 in the formula portion for the impairment of loans
collectively evaluated under SFAS No. 5. The increase in the specific portion
primarily resulted from the greater volume of impaired loans. The majority of
these impaired loans were collateral deficient with recorded investments that
exceeded their respective collateral values. Specifically, the two commercial
loans that were pro-actively placed on nonaccrual status had a collateral
deficiency of $348, which accounted for 43.4 percent of the increase in the
specific portion of the allocated element. In total, impaired loans with a
recorded investment in excess of their fair value were $2,930 at year-end 2004
compared to $747 at the end of the previous year. For these loans, the amount by
which the recorded investment exceeded the fair market value was $1,179 at
December 31, 2004, compared to $377 at the end of 2003.

With regard to the formula portion of the allowance for loans collectively
evaluated for impairment under SFAS No. 5, the decrease resulted from a
significant reduction in the total loss factors for these loans. The reduction
in the total loss factors resulted from a dramatic improvement in the historical
loss factor, defined as the average of the ratio of net loans charged-off to
loans, net of unearned income, over the past eight quarters, for these types of
loans.

The unallocated element was $1,364 at December 31, 2004 and $1,679 at December
31, 2003. We believe the decrease in the unallocated element is substantiated
based on the continued improvement in our net charge-offs.

The coverage ratio, the allowance for loan losses account, as a percentage of
nonperforming loans, is an industry ratio used to test the ability of the
allowance account to absorb potential losses arising from nonperforming loans.
This ratio, weakened to 133.8 percent at December 31, 2004, from 167.0 percent
at December 31, 2003. Despite the weakening, our allowance account was more than
able to absorb all potential losses associated with nonperforming loans. With
regard to all nonperforming assets, our coverage ratio equaled 117.5 percent at
the end of 2004 and 148.9 percent at year-end 2003.

                                       90
<PAGE>

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

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

RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
                           DECEMBER 31                                2004      2003      2002      2001      2000
------------------------------------------------------------------   ------    ------    ------    ------    ------
<S>                                                                  <C>       <C>       <C>       <C>       <C>
Allowance for loan losses at beginning of period .................   $3,584    $3,745    $3,220    $3,285    $3,799
Loans charged-off:
Commercial, financial and others .................................       45        94       167        85       580
Real estate:
  Construction ...................................................
  Mortgage .......................................................      125       415       222       493       158
Consumer, net ....................................................      312       244       317       338       291
Lease financing, net .............................................                            3
                                                                     ------    ------    ------    ------    ------
    Total ........................................................      482       753       709       916     1,029
                                                                     ------    ------    ------    ------    ------
Loans recovered:
Commercial, financial and others .................................       27        29        31        25        29
Real estate:
  Construction ...................................................
  Mortgage .......................................................       19        19        11        26         4
Consumer, net ....................................................      111        64        92        80        62
Lease financing, net .............................................
                                                                     ------    ------    ------    ------    ------
    Total ........................................................      157       112       134       131        95
                                                                     ------    ------    ------    ------    ------
Net loans charged-off ............................................      325       641       575       785       934
                                                                     ------    ------    ------    ------    ------
Provision for loan losses ........................................      600       480     1,100       720       420
                                                                     ------    ------    ------    ------    ------
Allowance for loan losses at end of period .......................   $3,859    $3,584    $3,745    $3,220    $3,285
                                                                     ======    ======    ======    ======    ======
Ratios:
Net loans charged-off as a percentage of average loans outstanding     0.09%     0.18%     0.18%     0.26%     0.32%
Allowance for loan losses as a percentage of period end loans ....     1.01%     1.00%     1.16%     1.04%     1.10%
</TABLE>

The allowance for loan losses was $3.9 million and approximated 1.01 percent of
loans, net of unearned income, at December 31, 2004, compared to $3.6 million
and 1.00 percent at the end of the previous year. The increase resulted from a
higher provision for loan losses, coupled with a reduction in net charge-offs.

Past due loans not satisfied through repossession, foreclosure or related
actions, are evaluated individually to determine if all or part of the
outstanding balance should be charged against the allowance for loan losses
account. Any subsequent recoveries are credited to the allowance account. Net
loans charged-off amounted to $325 or 0.09 percent of average loans outstanding
in 2004, an improvement of 92.7 percent compared to $641 or 0.18 percent in
2003. For our peer group, a group of 353 bank holding companies located within
the Federal Reserve District of Philadelphia with consolidated assets between
$500.0 million and $1.0 billion, net charge-offs, as a percentage of average
loans outstanding, improved to 0.15 percent in 2004 from 0.25 percent in 2003.

                                       91
<PAGE>

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

DEPOSITS:

Growth in the household sector in 2004 was slightly more subdued as compared to
recent years. DPI increased 3.9 percent in 2004. However, this figure was
inflated due to a $32.0 billion special dividend payment by Microsoft in
December. Low interest rates and higher household wealth supported consumer
spending, which grew 3.8 percent in 2004. Consumers also saved 1.2 percent of
their DPI, in 2004. This figure was again inflated due to the Microsoft
dividend.

Despite the relatively low savings rate and stronger equity markets,
FDIC-insured commercial banks continued to exhibit strong deposit growth in
2004. Total deposits rose $563.8 billion or 11.2 percent in 2004.
Interest-bearing deposits grew $469.3 billion or 11.5 percent, and
noninterest-bearing deposits rose $94.5 billion or 9.9 percent. Total deposits
grew $339.1 billion or 7.2 percent in 2003. For FDIC-insured Pennsylvania banks,
deposits increased again by $13.2 billion or 10.0 percent in 2004 after growing
2.0 percent in 2003.

Our deposit base is a primary source of funds to support our operations. We
offer a variety of deposit products to meet the needs of our individual and
commercial customers. Our deposit growth moderated in comparison to last year
and although still strong was less than that experienced by the banking
industry. In addition, the growth reflected our continued focus on building
commercial business relationships within our market area, as nonpersonal
deposits accounted for the majority of the increase. Total deposits grew $19.0
million or 4.1 percent to $478.5 million at December 31, 2004, from $459.5
million at the end of 2003. Noninterest-bearing deposits rose $8.6 million or
14.6 percent from the end of 2003, while interest-bearing deposits increased
$10.4 million or 2.6 percent. With regard to noninterest-bearing deposits,
commercial checking accounts increased $5.2 million or 19.8 percent, while
personal checking accounts grew $3.4 million or 11.0 percent. Interest-bearing
commercial transaction accounts, which include money market accounts, NOW
accounts, and savings accounts, increased $9.8 million. However, a $2.8 million
increase in personal money market and NOW accounts was more than offset by a
$3.1 million reduction in personal savings accounts. Total time deposits
increased $0.9 million to $210.9 million at December 31, 2004, as a $6.6 million
increase in nonpersonal certificates was almost entirely offset by a $5.7
million decrease in personal certificates. As competition for time deposits in
our market area intensified and equity markets strengthened, individual
depositors withdrew funds to take advantage of higher-yielding alternatives.

                                       92
<PAGE>

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

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

DEPOSIT DISTRIBUTION

<TABLE>
<CAPTION>
                                        2004             2003              2002               2001              2000
                                  ----------------   ---------------   ---------------  ----------------  ----------------
                                  AVERAGE  AVERAGE   AVERAGE AVERAGE   AVERAGE AVERAGE  AVERAGE  AVERAGE  AVERAGE  AVERAGE
    YEAR ENDED DECEMBER 31        BALANCE    RATE    BALANCE   RATE    BALANCE   RATE   BALANCE    RATE   BALANCE    RATE
-------------------------------   -------  -------   ------- -------   ------- -------  -------  -------  -------  -------
<S>                               <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Interest-bearing:
Money market accounts..........   $ 20,098   1.06%  $ 16,494   1.03%  $ 19,073   1.92%  $ 29,390   3.76%  $ 20,710   3.55%
NOW accounts...................     42,480   1.00     38,600   0.90     38,125   1.37     29,099   1.75     25,569   2.37
Savings accounts...............    129,564   0.76    127,975   1.03    108,137   1.88     79,616   2.25     73,171   2.52
Time deposits less than $100...    180,044   3.68    185,873   3.88    185,508   4.44    185,015   5.47    175,522   5.66
Time deposits $100 or more.....     29,488   3.31     27,755   3.30     27,861   3.79     32,075   5.03     32,302   5.98
                                  --------          --------          --------          --------          --------
  Total interest-bearing.......    401,674   2.30%   396,697   2.51%   378,704   3.23%   355,195   4.26%   327,274   4.60%
Noninterest-bearing............     63,954            56,743            49,441            42,235            37,953
                                  --------          --------          --------          --------          --------
  Total deposits...............   $465,628          $453,440          $428,145          $397,430          $365,227
                                  ========          ========          ========          ========          ========
</TABLE>

Total deposits averaged $465.6 million in 2004, an increase of $12.2 million or
2.7 percent compared to $453.4 million in 2003. Noninterest-bearing deposits
averaged $7.2 million or 12.7 percent higher in 2004, while average
interest-bearing accounts grew $5.0 million or 1.3 percent. The growth in
interest-bearing transaction accounts reflected the growth in nonpersonal
accounts and customer preference for liquidity. Average money market accounts,
NOW accounts, and savings accounts grew $3.6 million, $3.9 million and $1.6
million. In addition, average time deposits $100 or more increased $1.7 million
due to several large certificates of deposit from a local school district and
municipal authority. Partially offsetting the growth in these deposit
categories, was a $5.8 million decline in time deposits less than $100, as
individuals withdrew funds at maturity and opted for higher yielding alternative
investment opportunities.

Although funding costs declined for the banking industry in 2004, the decrease
was not as sharp a drop as seen in recent years. For FDIC-insured commercial
banks, the cost of funds, as a percentage of earning assets, which fell 57 basis
points in 2003, decreased only 11 basis points in 2004. Funding costs for
Pennsylvania banks was unchanged at 1.57 percent during 2004 and 2003.

We regularly monitor interest rates of local competitors and prevailing market
rates when establishing interest rates on our deposit products. Deposit rates
for banks within our market area continued to decline over the course of the
year. The average cost of a six-month, 12-month and 60-month certificate of
deposit for community banks in our market area was 1.17 percent, 1.42 percent
and 3.33 percent at January 1, 2004. By mid-year, banks started increasing their
certificate of deposit rates in response to the shift in the FOMC's monetary
policy stance and rising U.S. Treasury rates. At June 30, 2004, the average
rates for the six-month and 12-month certificates were for the most part
unchanged. However, the rate

                                       93
<PAGE>

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

on a 60-month certificate increased 26 basis points, as banks tried to entice
depositors to invest long-term. However, prudent depositors wanted liquidity due
to the certain rise in interest rates, and as a result longer-term certificates
fell out of favor. By year-end, the yield curve for U.S. Treasuries had
flattened and competition picked up for short-term certificates. The average
rate for a six-month certificate increased 63 basis points to 1.80 percent and
the rate for a 12-month certificate rose 70 basis points to 2.12 percent at
December 31, 2004. Banks continued to raise long-term rates, the average rate
for a 60-month certificate increased another 32 basis points to 3.91 percent at
year-end 2004. Due to excess liquidity in the second half of 2004, we chose not
to compete for short-term certificates. Our rates offered on certificates of
deposit remained unchanged over the course of 2004. As a result, the spreads
between our rates and the average for our competitors widened by year-end. The
spreads for the six-month and 12-month certificates, which were approximately 25
basis points at January 1, 2004, widened to 90 basis points at December 31,
2004. As a result, we experienced a decline in the volume of our time deposits
less than $100.

Similar to the banking industry, we experienced only a moderate decrease in our
fund costs. Our cost of deposits, which decreased 72 basis points in 2003,
declined 21 basis points to 2.30 percent in 2004. In addition, our deposit costs
remained relatively constant over the course of the year. Our cost of deposits,
which averaged 2.30 percent in the fourth quarter of 2003, fell 1 basis point in
the first quarter of 2004 and another 2 basis points in the second. With the
change in monetary policy and corresponding increase in U.S. Treasury rates, our
deposit costs edged up in the third and fourth quarters of the year. Our cost of
deposits averaged 2.34 percent in the fourth quarter. With the measured
increases in the federal funds rate expected in 2005, we anticipate our deposit
costs to increase. In addition, our deposit costs could be impacted further,
should deposit growth slow and competition for deposits in our market area
intensify.

Volatile deposits, time deposits $100 or more, increased $5.4 million to $34.5
million at December 31, 2004, from $29.1 million at the end of 2003. Large
denomination certificates of deposit of a local area school district and a
municipal authority accounted for the growth in this deposit category. Large
denomination time deposits averaged $29.5 million in 2004 and $27.8 million in
2003. Our average cost of these funds remained relatively constant, increasing
only 1 basis point to 3.31 percent in 2004, from 3.30 percent in 2003. This type
of funding is very volatile and therefore, is not considered to be a strong
source of liquidity. We continued to be less reliant on this type of funding as
compared to our peer group. Our ratio of average volatile deposits, as a
percentage of average total assets, equaled 5.7 percent in 2004, compared to
11.9 percent for our peer group.

                                       94
<PAGE>

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

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

MATURITY DISTRIBUTION OF TIME DEPOSITS $100 OR MORE

<TABLE>
<CAPTION>
                     DECEMBER 31                           2004       2003       2002       2001       2000
-----------------------------------------------------     -------    -------    -------    -------    -------
<S>                                                       <C>        <C>        <C>        <C>        <C>
Within three months..................................     $ 7,353    $ 4,414    $ 3,020    $10,720    $17,281
After three months but within six months.............       4,426      4,845      3,333      4,648      3,357
After six months but within twelve months............       6,198      3,861      8,230     11,619      5,761
After twelve months..................................      16,515     15,969      9,961      4,823      7,327
                                                          -------    -------    -------    -------    -------
  Total..............................................     $34,492    $29,089    $24,544    $31,810    $33,726
                                                          =======    =======    =======    =======    =======
</TABLE>

In addition to deposit gathering, we have in place a secondary source of
liquidity to fund operations through exercising existing credit arrangements
with the FHLB-Pgh. We had only minimal reliance on this type of funding in 2004
and 2003. For a further discussion of our borrowings and their terms, refer to
the note entitled, "Short-term borrowings," in the Notes to Consolidated
Financial Statements to this Annual Report.

MARKET RISK SENSITIVITY:

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

Short-term interest rates, which were at historically low levels for a
considerable period, began rising steadily during 2004. Due to these recent
changes in the interest rate environment, IRR and effectively managing it have
become very important to both bank management and regulators. Bank regulations
require us to develop and maintain an IRR management program,

                                       95
<PAGE>

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

overseen by the Board of Directors and senior management, that involves a
comprehensive risk management process in order to effectively identify, measure,
monitor and control risk. Should we have material weaknesses in our risk
management process or high exposure relative to capital, bank regulatory
agencies will take action to remedy these shortcomings. Moreover, the level of
IRR exposure and the quality of our risk management process is a determining
factor when evaluating capital adequacy.

The Asset/Liability Committee ("ALCO"), comprised of members of our Board of
Directors, senior management and other appropriate officers, oversees our IRR
management program. Specifically, ALCO analyzes economic data and market
interest rate trends, as well as competitive pressures, and utilizes several
computerized modeling techniques to reveal potential exposure to IRR. This
allows us to monitor and attempt to control the influence these factors may have
on our rate sensitive assets ("RSA") and rate sensitive liabilities ("RSL"), and
overall operating results and financial position.

We utilize the tabular presentation alternative in complying with quantitative
and qualitative disclosure rules. Information with respect to maturities and
fair values of our financial instruments at December 31, 2004, is summarized as
follows. For expected maturity distributions, the financial assets and
liabilities are presented based on their carrying values, except for investment
securities, which are based on amortized costs. Investment distributions and
their related weighted-average interest rates are based on contractual
maturities, with the exception of mortgage-backed securities and equity
securities. Mortgage-backed securities are presented based upon estimated
principal cash flows and related weighted-average interest rates, assuming no
change in the current interest rate environment. The amount of, and
weighted-average interest rate earned on equity securities, are included in the
"Thereafter" maturity category. Loans and their related weighted-average
interest rates are categorized based on payment due dates, assuming no change in
current interest rates. For noninterest-bearing deposits, money market, NOW and
savings accounts that have no contractual maturity, principal cash flows and
related weighted-average interest rates are presented based on our historical
experience, judgment and statistical analysis, as applicable, concerning their
most likely withdrawal behaviors. The table also presents distributions and
related weighted-average interest rates for time deposits based on contractual
maturities assuming no change in current interest rates. The weighted-average
yields of tax-exempt securities and loans have been computed on a tax-equivalent
basis using the prevailing federal statutory tax rate of 34.0 percent. For
additional information on the assumptions used to determine fair values, refer
to the note entitled, "Summary of significant accounting policies-Fair value of
financial instruments," in the Notes to Consolidated Financial Statements to
this Annual Report.

                                       96
<PAGE>

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

MARKET RISK DISCLOSURES

<TABLE>
<CAPTION>
                                                               EXPECTED MATURITY DATE
                                     --------------------------------------------------------------------------
                                                                                    THERE-              FAIR
                                       2005     2006     2007     2008     2009      AFTER     TOTAL    VALUE
                                     --------  -------  -------  -------  -------  --------  --------  --------
<S>                                  <C>       <C>      <C>      <C>      <C>      <C>       <C>       <C>
Financial assets:
Cash and due from banks...........   $ 11,802                                                $ 11,802  $ 11,802
Average interest rate.............
Federal funds sold................        900                                                     900       900
Average interest rate.............       2.25%                                                   2.25%
Investment securities:
U.S. Treasuries and agencies......     31,642  $13,227                                         44,869    44,645
Average interest rate.............       2.10%    2.51%                                          2.22%
State and municipals:
Taxable...........................      2,915    3,773  $ 5,324  $ 5,275                       17,287    16,898
Average interest rate.............       1.57%    2.54%    2.75%    2.77%                        2.51%
Tax-exempt........................        660      448       60           $ 1,200  $ 29,581    31,949    34,605
Average interest rate.............       2.22%    2.59%    5.38%             7.77%     7.68%     7.50%
Mortgage-backed securities........      8,276    6,481    4,479      844      558       498    21,136    21,281
Average interest rate.............       4.35%    5.12%    3.88%    3.96%    4.26%     4.91%     4.48%
Equity securities:
Restricted........................                                                    1,153     1,153     1,153
Average interest rate.............                                                     2.21%     2.21%
Other.............................                                                       38        38       174
Average interest rate.............                                                     8.67%     8.67%
                                     --------  -------  -------  -------  -------  --------  --------  --------
  Total...........................     43,493   23,929    9,863    6,119    1,758    31,270   116,432   118,756
  Average interest rate...........       2.49%    3.22%    3.28%    2.93%    6.66%     7.44%     4.12%
Loans held for sale, net..........      1,917                                                   1,917     1,937
Average interest rate.............       5.87%                                                   5.87%
Net loans:
Fixed-rate........................     41,860   22,756   19,187   15,270   11,853    46,886   157,812   158,562
Average interest rate.............       6.06%    6.80%    6.70%    6.69%    6.89%     7.14%     6.69%
Adjustable-rate...................     41,716    3,341    3,299    3,122    6,122   162,452   220,052   220,052
Average interest rate.............       6.05%    5.69%    5.58%    5.53%    5.91%     5.63%     5.72%
                                     --------  -------  -------  -------  -------  --------  --------  --------
  Total...........................     83,576   26,097   22,486   18,392   17,975   209,338   377,864   378,614
  Average interest rate...........       6.06%    6.66%    6.54%    6.49%    6.56%     5.97%     6.12%
Accrued interest receivable.......      2,319                                                   2,319     2,319
Average interest rate.............
                                     --------  -------  -------  -------  -------  --------  --------  --------
  Total...........................   $144,007  $50,026  $32,349  $24,511  $19,733  $240,608  $511,234  $514,328
                                     ========  =======  =======  =======  =======  ========  ========  ========
Financial liabilities:
Noninterest-bearing deposits......   $ 14,220  $12,866  $11,511  $10,157  $ 8,803  $ 10,157  $ 67,714  $ 67,714
Average interest rate.............
Interest-bearing liabilities:
Money market, NOW and savings.....     41,968   37,971   33,974   29,978   25,980    29,980   199,851   199,851
Average interest rate.............       1.00%    1.00%    1.00%    1.00%    1.00%     1.00%     1.00%
Time deposits.....................     95,530   30,550   37,681   17,170    5,196    24,792   210,919   215,546
Average interest rate.............       2.77%    4.01%    4.72%    4.04%    3.46%     4.58%     3.63%
                                     --------  -------  -------  -------  -------  --------  --------  --------
  Total...........................    137,498   68,521   71,655   47,148   31,176    54,772   410,770   415,397
  Average interest rate...........       2.23%    2.34%    2.96%    2.11%    1.41%     2.62%     2.35%
Accrued interest payable..........      1,075                                                   1,075     1,075
Average interest rate.............
                                     --------  -------  -------  -------  -------  --------  --------  --------
  Total...........................   $152,793  $81,387  $83,166  $57,305  $39,979  $ 64,929  $479,559  $484,186
                                     ========  =======  =======  =======  =======  ========  ========  ========
</TABLE>

At December 31, 2004, total interest-earning assets scheduled to mature within
one year totaled $129.9 million with a weighted-average tax-equivalent yield of
4.84 percent. Total interest-bearing liabilities scheduled to mature within one
year equaled $137.5 million with a weighted-average cost of 2.23 percent.
Interest-earning assets scheduled to mature

                                       97
<PAGE>

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

within one year were primarily comprised of investment securities having an
amortized cost of $43.5 million and a weighted-average tax-equivalent yield of
2.49 percent and net loans of $83.6 million with a weighted-average
tax-equivalent yield of 6.06 percent. With regard to interest-bearing
liabilities, based on historical withdrawal patterns, interest-bearing
transaction accounts, defined as money market, NOW and savings accounts, of
$42.0 million with a weighted-average cost of 1.00 percent were anticipated to
mature within one year. In addition, time deposits totaling $95.5 million with a
weighted-average cost of 2.77 percent were scheduled to mature within the same
time frame.

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

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

                                       98
<PAGE>

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

Additionally, we supplement the market risk disclosure model through simulation
analysis utilizing interest rate shocks. The model analyzes the effects
instantaneous parallel shifts of plus or minus 100 basis points will have on the
economic values of other financial instruments. The results of the model at
December 31, 2004, are summarized as follows:

CHANGES IN FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
                                                      FAIR VALUE
                                            ------------------------------
            DECEMBER 31, 2004               +100 BPS    LEVEL     -100 BPS
-----------------------------------------   --------   --------   --------
<S>                                         <C>        <C>        <C>
Other financial assets:
Cash and due from banks .................   $ 11,802   $ 11,802   $ 11,802
Federal funds sold ......................        900        900        900
Investment securities ...................    116,306    118,756    120,555
Loans held for sale, net ................      1,937      1,937      1,937
Net loans ...............................    373,487    378,614    384,165
Accrued interest receivable .............      2,319      2,319      2,319
                                            --------   --------   --------
  Total .................................   $506,751   $514,328   $521,678
                                            ========   ========   ========
Other financial liabilities:
Noninterest-bearing deposits ............   $ 67,714   $ 67,714   $ 67,714
Money market, NOW and savings accounts...    199,851    199,851    199,851
Time deposits ...........................    211,561    215,546    219,715
Accrued interest payable ................      1,075      1,075      1,075
                                            --------   --------   --------
  Total..................................   $480,201   $484,186   $488,355
                                            ========   ========   ========
</TABLE>

We also utilize a gap analysis model that considers repricing frequencies of RSA
and RSL in addition to maturity distributions in order to monitor IRR. Gap
analysis attempts to measure our interest rate exposure by calculating the net
amount of RSA and RSL that reprice within specific time intervals. A positive
gap occurs when the amount of RSA repricing in a specific period is greater than
the amount of RSL repricing within that same time frame and is indicated by a
RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL
repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio
less than 1.0. A positive gap implies that earnings will be impacted favorably
if interest rates rise and adversely if interest rates fall during the period. A
negative gap tends to indicate that earnings will be affected inversely to
interest rate changes.

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

                                       99
<PAGE>

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

Interest rate sensitivity

<TABLE>
<CAPTION>
                                                     DUE AFTER    DUE AFTER
                                                   THREE MONTHS    ONE YEAR
                                      DUE WITHIN     BUT WITHIN   BUT WITHIN  DUE AFTER
     DECEMBER 31, 2004               THREE MONTHS  TWELVE MONTHS  FIVE YEARS  FIVE YEARS   TOTAL
-----------------------------        ------------  -------------  ----------  ----------  --------
<S>                                  <C>           <C>            <C>         <C>         <C>
Rate-sensitive assets:
Investment securities ...........      $  7,738     $  35,656     $   41,414    $33,948   $118,756
Loans held for sale, net ........         1,917         1,917
Loans, net of unearned income ...       112,365        49,430        172,517     47,411    381,723
Federal funds sold ..............           900                                                900
                                       --------     ---------     ----------    -------   --------
  Total .........................      $122,920     $  85,086     $  213,931    $81,359   $503,296
                                       ========     =========     ==========    =======   ========
Rate-sensitive liabilities:
Money market accounts ...........                   $  24,071                             $ 24,071
NOW accounts ....................                      48,558                               48,558
Savings accounts ................                                 $  127,222               127,222
Time deposits less than $100 ....      $ 28,187        50,810         77,125    $20,305    176,427
Time deposits $100 or more ......         7,353        10,624         12,028      4,487     34,492
                                       --------     ---------     ----------    -------   --------
  Total .........................      $ 35,540     $ 134,063     $  216,375    $24,792   $410,770
                                       ========     =========     ==========    =======   ========
Rate-sensitivity gap:
  Period ........................      $ 87,380     $ (48,977)    $   (2,444)   $56,567
  Cumulative ....................      $ 87,380     $  38,403     $   35,959    $92,526   $ 92,526

RSA/RSL ratio:
  Period ........................          3.46          0.63           0.99       3.28
  Cumulative ....................          3.46          1.23           1.09       1.23       1.23
</TABLE>

At December 31, 2004 and 2003, we had cumulative one-year RSA/RSL ratios of 1.23
and 1.36. As previously mentioned, this indicated that if interest rates
increase, our earnings would likely be favorably impacted. Given the current
rising interest rate environment, ALCO focused on maintaining this advantageous
position by monitoring and making certain the gap position between RSA and RSL
remained positive. Specifically, we predominantly offer commercial loans with
adjustable-rate terms that either reprice immediately or within one year. In
addition, we continued to offer promotional rates on our longer-term
certificates of deposit in an attempt to extend the average maturities of these
types of funds. Should interest rates increase, a greater amount of RSA would
reprice upward in the near term and at a faster pace than RSL, thereby
positively affecting net interest income. However, these forward-looking
statements are qualified in the aforementioned section entitled "Forward-Looking
Discussion" in this Management's Discussion and Analysis.

The change in our ratio from the previous year-end resulted from a $37.2 million
or 28.1 percent increase in RSL partially offset by a $27.8 million or 15.4
percent increase in RSA maturing or repricing within one year. The increase in
RSL resulted from a $25.3 million increase in total time deposits maturing or
repricing within this time frame, coupled with increases of $6.7 million in
money market accounts and $5.2 million in NOW accounts. With regard to time
deposits, in 2001 and 2000, we offered promotional rates on certificates of
deposit and IRAs having maturity terms

                                       100
<PAGE>

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

of 42 months and 60 months. These fixed-rate promotional certificates, which
have a weighted-average cost of 5.90 percent, account for approximately 94.1
percent of the total increase in time deposits maturing or repricing within the
next twelve months. The majority of the growth in money market and NOW accounts
resulted from an increase in the deposit balances of local school districts and
certain not-for-profit educational agencies. Due to the somewhat cyclical nature
associated with these deposits, we classified money market and NOW accounts in
the "due after three months but within twelve months" category.

With respect to the increase in RSA maturing or repricing within a twelve month
time horizon, investment securities increased $25.8 million and loans, net of
unearned income, rose $13.9 million. Although short-term interest rates began to
increase during 2004, long-term interest rates fell causing a flattening in the
yield curve. In an effort to mitigate IRR in the investment portfolio and
provide a source of liquidity, we chose to invest in fixed-rate, short-term U.S.
Government-sponsored agency securities. The increase in loans, net of unearned
income, resulted from an increase in commercial lending, which primarily
involves loans with adjustable-rate terms that reprice in the near term.
Partially offsetting these increases were reductions of $1.3 million in loans
held for sale, net, and $10.6 million in federal funds sold.

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

We utilize a simulation model to address the failure of the static gap model to
address the dynamic changes in the balance sheet composition or prevailing
interest rates and to enhance our asset/liability management. This model creates
pro forma net interest income scenarios under various interest rate shocks.
Model results at December 31, 2004, were similar to the performance indicated by
our static gap analysis. Given instantaneous and parallel shifts in general
market rates of plus 100 basis points, our projected net interest income for the
12 months ended December 31, 2005, would increase 1.1 percent from model results
using current interest rates.

                                       101
<PAGE>

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

Conversely, our net interest income would decrease by 1.1 percent given an
instantaneous and parallel shift in general market rates of minus 100 basis
points.

We will continue to monitor our IRR position in 2005 and employ deposit and loan
pricing strategies and direct the reinvestment of loan and investment payments
and prepayments in order to maintain our favorable IRR position.

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

LIQUIDITY:

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

      -     Funding new and existing loan commitments;

      -     Payment of deposits on demand or at their contractual maturity;

      -     Repayment of borrowings as they mature;

      -     Payment of lease obligations; and o Payment of

      -     perating expenses.

Historically, core deposits have been our primary source of liquidity because of
their stability and lower cost, in general, than other types of funding.
Providing additional sources of funds are loan and investment payments and
prepayments and the ability to sell both available-for-sale securities and
mortgage loans held for sale. As a final source of liquidity, we can exercise
existing credit arrangements with the FHLB-Pgh. We manage liquidity daily, thus
enabling us to effectively monitor fluctuations in our position and to adapt our
position according to market fluctuations and balance sheet trends. We believe
our liquidity is adequate to meet both present and future financial obligations
and commitments on a timely basis.

Information concerning our future contractual obligations by payment due dates
at December 31, 2004, is summarized as follows. Contractual obligations for
deposit accounts do not include accrued interest. Payments for deposits without
a contractual maturity, noninterest-bearing deposits and money market, NOW and
savings accounts, are based on our historical

                                       102
<PAGE>

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

experience, judgement and statistical analysis, as applicable, concerning their
most likely withdrawal behaviors. Operating lease contractual payments include
the effects of escalation clauses that provide for inflation adjustments to the
rental payments.

Maturity distribution of contractual obligations

<TABLE>
<CAPTION>
                                                            AFTER ONE  AFTER THREE
                                              DUE WITHIN   BUT WITHIN   BUT WITHIN    AFTER
            DECEMBER 31, 2004                  ONE YEAR    THREE YEARS  FIVE YEARS  FIVE YEARS    TOTAL
------------------------------------------    ----------   ----------- -----------  ----------   ---------
<S>                                           <C>          <C>         <C>          <C>          <C>
Deposits without a contractual maturity...     $ 56,188     $ 96,322     $74,918     $40,137     $267,565
Time deposits less than $100 .............       77,553       58,456      20,113      20,305      176,427
Time deposits $100 or more ...............       17,977        9,775       2,253       4,487       34,492
Operating leases .........................          211          354         323         707        1,595
                                               --------     --------     -------     -------     --------
  Total ..................................     $151,929     $164,907     $97,607     $65,636     $480,079
                                               ========     ========     =======     =======     ========
</TABLE>

We employ a number of analytical techniques in assessing the adequacy of our
liquidity position. One such technique is the use of ratio analysis to
illustrate our reliance on noncore funds, time deposits in denominations of $100
or more and borrowings from the FHLB-Pgh, to fund our investments and loans
maturing after 2005. At December 31, 2004, our noncore funds consisted of only
large denomination time deposits, as we had no outstanding borrowings from the
FHLB-Pgh. Large denomination time deposits are not considered to be a strong
source of liquidity since they are very interest rate sensitive and are
considered to be highly volatile. At December 31, 2004, our net noncore funding
dependence ratio, the difference between noncore funds and short-term
investments to long-term assets, was negative 2.2 percent. Similarly, our net
short-term noncore funding dependence ratio, noncore funds maturing within one
year, less short-term investments to long-term assets equaled negative 5.8
percent at the end of 2004. Negative ratios indicated that at December 31, 2004,
we did not use noncore funds to fund our long-term assets. In comparison, our
peer group, with net noncore and net short-term noncore funding dependence
ratios of 21.3 percent and 19.0 percent, relied on noncore funds as a
significant source of liquidity. We believe that by maintaining adequate volumes
of short-term investments and implementing competitive pricing strategies on
deposits, we can ensure adequate liquidity to support future growth.

The Consolidated Statements of Cash Flows present the change in cash and cash
equivalents from operating, investing and financing activities. Cash and cash
equivalents consist of cash on hand, cash items in the process of collection,
noninterest-bearing deposits with other banks, balances with the Federal Reserve
Bank of Philadelphia and the FHLB-Pgh and federal funds sold. Cash and cash
equivalents decreased $15.9 million for the year ended December 31, 2004. This
decline followed a net cash increase of $7.2 million in 2003. During 2004, cash
provided by financing activities and operating activities did not exceed cash
used in investing activities.

                                       103
<PAGE>

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

Financing activities provided net cash of $15.6 million in 2004 compared to
$19.2 million in 2003. Deposit gathering, which is our predominant financing
activity, slowed somewhat in 2004. Competitive pressures began to intensify
amidst rising interest rates and a rebounding stock market. This resulted in a
$3.3 million decrease in the amount of funds provided from deposit gathering.
Another source of funds generated by financing activities is proceeds received
from issuance of common stock as part of our dividend reinvestment plan ("DRP").
Uses of cash categorized as financing activities include the repurchase and
retirement of shares of our common stock and the payment of dividends to
stockholders.

Operating activities provided net cash of $8.4 million in 2004 and $8.7 million
in 2003. Net income, adjusted for the effects of noncash transactions such as
depreciation and the provision for loan losses, and net changes in current
assets, is the primary source of funds from operations.

Our primary investing activities involve transactions related to our investment
securities and lending activities. Net cash outlays for investing activities
increased $19.2 million and totaled $39.9 million in 2004, compared to $20.7
million in 2003. Purchases of investment securities declined $29.3 million and
net cash used in lending activities decreased $10.7 million. We also experienced
a reduction of $60.8 million in cash provided by our investment portfolio
through repayments, maturities and sales. We received cash of $60.0 million from
repayments of investment securities in 2003, compared to $18.2 million in 2004.
Approximately two-thirds of this reduction was attributable to a 50.0 percent
decline in the average amount of mortgage-backed securities held in 2004
compared to 2003. The remainder could be explained by changes in the interest
rate environment and their corresponding effects on repayments of
mortgage-backed securities. As mentioned previously, general market rates
declined significantly in 2003 compared to an increase in 2004. In general,
declining interest rates will cause an increase in the amount of repayments
received from these types of securities, whereas, rising rates will cause cash
receipts to decline. We received $19.0 million in proceeds from the sale of
investments in 2003. There were no sales of investment securities in 2004. In
order to provide a guaranteed source of liquidity in the near term, the majority
of the securities purchased in 2004 were short-term U.S. Government-sponsored
agency securities maturing in constant intervals over the next 24 months.

Our liquidity position, as well as that of the banking industry in general, was
favorably affected by economic conditions in recent years. Our customers,
concerned about employment conditions and the stock market, chose to increase
their savings, and sought out the safety of bank deposit accounts to invest
their funds. Economic conditions have since stabilized

                                       104
<PAGE>

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

and the stock market has rebounded. These factors, coupled with rising
short-term interest rates, have already caused deposit growth to slow and may
hinder liquidity by making it more difficult for banks to attract and retain
core deposits. We, however, cannot predict or guarantee movements in the stock
market, changes in economic conditions or investment preferences of consumers.
Regardless of changes in the economy or stock market, we believe that through
constant monitoring and adherence to our liquidity plan, we will have the means
to provide adequate cash to fund our normal operations in 2005.

CAPITAL ADEQUACY:

We believe a strong capital position is essential to our continued growth and
profitability. A solid capital base provides depositors and stockholders with a
margin of safety, while allowing us to take advantage of profitable
opportunities, support future growth and provide protection against any
unforeseen losses.

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

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

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

      -     Any planned asset growth;

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

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

Stockholders' equity totaled $47.3 million or $25.38 per share at December 31,
2004, an increase of $0.8 million from $46.5 million or $24.41 per share at
December 31, 2003. Net income of $4.7 million was the primary factor
contributing to the capital improvement. Repurchases of common stock, net cash
dividends declared and a decrease in the net unrealized gain on investment
securities also affected stockholders' equity during 2004.

                                      105
<PAGE>

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

We periodically purchase shares of our common stock under a Board-approved stock
repurchase program. Under this program, we repurchased and retired 48,365 shares
for $2.0 million in 2004, 44,788 shares for $1.6 million in 2003 and 37,933
shares for $1.2 million in 2002. On March 17, 2004, the Board of Directors
approved the 2004 Stock Repurchase Program authorizing the repurchase of up to
57,221 shares, which was amended on November 17, 2004, to allow for the
repurchase of up to an additional 55,931 shares. As of December 31, 2004, there
were 67,808 shares available for repurchase under this Program. The 2004 Stock
Repurchase Program has no expiration date. We plan to buyback the available
shares in 2005, if upon analysis, such repurchases meet our targeted internal
rate of return and after-tax return on investment.

Dividends declared totaled $1,658 or $0.88 per share in 2004 and $1,687 or $0.88
per share in 2003. Dividends declared, as a percent of net income, equaled 35.1
percent in 2004 and 35.9 percent in 2003. It is the intention of our Board of
Directors to continue to pay cash dividends in the future. However, they
consider our operating results, financial and economic conditions, capital and
growth objectives, appropriate dividend restrictions and other relevant factors
when declaring dividends. We rely on dividends received from our subsidiary,
Community Bank, for payment of dividends to stockholders. Community Bank's
ability to pay dividends is subject to federal and state regulations.
Accordingly, Community Bank, without prior regulatory approval, may declare
dividends to us totaling $5,188 at December 31, 2004.

Stockholders may automatically reinvest their dividends in shares of our common
stock through our DRP. The DRP not only provides stockholders with a convenient
means to invest in our common stock without brokerage commissions, but also
furnishes us with additional funds for general corporate purposes. During the
years ended December 31, 2004 and 2003, 6,228 shares and 6,547 shares were
issued under this plan.

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

                                       106
<PAGE>

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

Our and Community Bank's capital ratios at December 31, 2004 and 2003, as well
as the required minimum ratios for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions as defined by the
Federal Deposit Insurance Corporation Improvement Act of 1991, are summarized as
follows:

Regulatory capital

<TABLE>
<CAPTION>
                                                                                    MINIMUM TO BE WELL
                                                                                    CAPITALIZED UNDER
                                                               MINIMUM FOR CAPITAL  PROMPT CORRECTIVE
                                                  ACTUAL        ADEQUACY PURPOSES   ACTION PROVISIONS
                                            ------------------ -------------------  -----------------
               DECEMBER 31                    2004      2003     2004       2003      2004     2003
-----------------------------------------   --------  --------  -------   --------  -------   -------
<S>                                         <C>       <C>       <C>       <C>       <C>       <C>
Basis for ratios:
Tier I capital to risk-weighted assets:
  Consolidated...........................   $ 45,094  $ 43,466  $15,881   $14,590
  Community Bank.........................     43,045    42,113   15,864    14,567   $23,796   $21,850
Total capital to risk-weighted assets:
  Consolidated...........................     48,953    47,050   31,762    29,180
  Community Bank.........................     46,904    45,697   31,728    29,134    39,660    36,417
Tier I capital to total average assets
 less intangible assets:
  Consolidated...........................     45,094    43,466   20,608    20,076
  Community Bank.........................     43,045    42,113  $20,580   $20,049   $25,725   $25,061

Risk-weighted assets:
  Consolidated...........................    384,967   357,240
  Community Bank.........................    384,539   356,667
Risk-weighted off-balance sheet items:
  Consolidated...........................     12,056     7,506
  Community Bank.........................     12,056     7,506
Average assets for Leverage ratio:
  Consolidated...........................    515,195   501,900
  Community Bank.........................   $514,504  $501,220

Ratios:
Tier I capital as a percentage of risk-
 weighted assets and off-balance sheet
 items:
  Consolidated...........................       11.4%     11.9%     4.0%      4.0%
  Community Bank.........................       10.9      11.6      4.0       4.0       6.0%      6.0%
Total of Tier I and Tier II capital as a
 percentage of risk-weighted assets and
 off-balance sheet items:
  Consolidated...........................       12.3      12.9      8.0       8.0
  Community Bank.........................       11.8      12.5      8.0       8.0      10.0      10.0
Tier I capital as a percentage of total
 average assets less intangible assets:
  Consolidated...........................        8.8       8.7      4.0       4.0
  Community Bank.........................        8.4%      8.4%     4.0%      4.0%      5.0%      5.0%
</TABLE>

Our and Community Bank's risk-based capital ratios are strong and have
consistently exceeded the minimum regulatory capital ratios of 4.0 percent and
8.0 percent required for adequately capitalized institutions. The ratio of Tier
I capital to risk-weighted assets was 11.4 percent and 11.9 percent at December
31, 2004 and 2003, and our total capital to risk-weighted assets ratio was 12.3
percent at year-end 2004, compared to 12.9 percent at

                                       107
<PAGE>

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

the end of 2003. An increase in risk-weighted assets and off-balance sheet items
to a greater extent than both Tier I and total capital caused the slight decline
in the ratios. Specifically, total risk-weighted assets and off-balance sheet
items rose $32.3 million or 8.9 percent, while Tier I capital increased $1.6
million or 3.7 percent and total capital grew $1.9 million or 4.0 percent.
Community Bank's Tier I risk-based and total risk-based capital ratios also
declined for reasons similar to those discussed for the consolidated ratios. Our
Leverage ratio improved to 8.8 percent at December 31, 2004, from 8.7 percent at
December 31, 2003, while Community Bank's Leverage ratio remained stable at 8.4
percent. Similar to the Tier I risk-based and total risk-based capital ratios,
the Leverage ratio for us and Community Bank well exceeded the minimum of 4.0
percent for capital adequacy purposes. Based on the most recent notification
from the FDIC, Community Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action at December 31, 2004 and 2003.
There are no conditions or events since this notification that we believe have
changed Community Bank's category.

REVIEW OF FINANCIAL PERFORMANCE:

We were able to record marginal earnings growth in 2004 in spite of having to
counteract a slight compression in our net interest margin, a decline in demand
for mortgage-related products and an increase in expenses from infrastructure
expansion. Our net income totaled $4,725 or $2.50 per share in 2004 compared to
$4,700 or $2.45 per share in 2003. ROAA and ROAE were 0.92 percent and 9.97
percent in 2004, versus 0.93 percent and 10.23 percent in 2003. Rising market
rates impacted the value of our available-for-sale investment securities. As a
result, we experienced a loss in other comprehensive income, net of income tax
benefits, of $579 in 2004. Similarly, in 2003 we reported an other comprehensive
loss, net of income tax benefits, of $471.

Tax-equivalent net interest income improved slightly, by $292 or 1.6 percent in
2004. Growth in average earning assets over interest-bearing liabilities, more
than offset a 3 basis point reduction in our net interest spread. Our net
interest margin was 3.76 percent in 2004 compared to 3.80 percent in 2003.

Demand for mortgage loans and refinancing slowed in 2004 and was the greatest
factor influencing the 11.6 percent reduction in noninterest income. The decline
in mortgage lending resulted in a 52.4 percent decrease in gains on the sale of
residential mortgages.

Noninterest expense rose 1.2 percent in 2004. Increases in net occupancy and
equipment expense related to infrastructure expansion and other expenses were
partially offset by reductions in salaries and employee

                                       108
<PAGE>

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

benefits expense. This increase, coupled with the reduction in the net interest
margin and noninterest income, negatively impacted our productivity as indicated
by the operating efficiency ratio. This ratio, defined as noninterest expense
divided by net interest income and noninterest income, is a key industry ratio
that measures productivity. Our operating efficiency ratio weakened to 71.0
percent in 2004, from 69.4 percent in 2003. However, the overhead ratio, another
measure of productivity defined as noninterest expense as a percentage of
average total assets, improved from 2.9 percent in 2003 to 2.8 percent in 2004.

NET INTEREST INCOME:

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

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

      -     Changes in general market interest rates; and

      -     The level of nonperforming assets.

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

The banking industry continued to experience margin compression in 2004.
However, the compression was not as severe as exhibited in 2003 and started
showing improvement in the fourth quarter as interest rates began to rise. The
net interest margin for all FDIC-insured commercial banks compressed 21 basis
points to 3.61 percent in 2004 from 3.82 percent in 2003. The yield on earning
assets for these institutions fell 32 basis points to 5.02

                                       109
<PAGE>

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

percent in 2004 from 5.34 percent last year, while fund costs, already at
historic lows, could not react to the same magnitude. The cost of funding
earning assets decreased 11 basis points to 1.41 percent in 2004 from 1.52
percent in 2003. Margins for FDIC-insured commercial banks improved 2 basis
points to 3.73 percent in the fourth quarter from 3.71 percent in the third
quarter. Margins for Pennsylvania banks declined to the same extent. For these
banks, the yield on earning assets fell 21 basis points in 2004, while their
cost of funds, as a percentage of average earning assets, remained unchanged. As
a result, their average net interest margin compressed 21 basis points to 3.23
percent in 2004 from 3.44 percent in 2003. Similar to all FDIC- and Pennsylvania
insured banks, banks in our peer group reported lower net interest margins in
2004. This group's tax-equivalent net interest margin decreased 7 basis points
to 4.00 percent in 2004 from 4.07 percent in 2003.

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

                                      110
<PAGE>

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

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

NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME

<TABLE>
<CAPTION>
                                                            2004 VS. 2003                    2003 VS. 2002
                                                     ---------------------------     -----------------------------
                                                         INCREASE (DECREASE)              INCREASE (DECREASE)
                                                           ATTRIBUTABLE TO                  ATTRIBUTABLE TO
                                                     ---------------------------     -----------------------------
                                                     TOTAL                            TOTAL
                                                     CHANGE    RATE       VOLUME      CHANGE     RATE       VOLUME
                                                     ------   -------     ------     -------    -------     ------
<S>                                                  <C>      <C>         <C>        <C>        <C>         <C>
Interest income:
Loans:
  Taxable...................................         $(631)   $(2,097)    $1,466     $  (583)   $(2,014)    $1,431
  Tax-exempt................................           103       (157)       260         138       (386)       524
Investments:
  Taxable...................................           134        385       (251)     (1,518)    (1,891)       373
  Tax-exempt................................           (21)        (7)       (14)       (453)       (19)      (434)
Federal funds sold..........................           (32)        35        (67)       (168)       (96)       (72)
                                                     -----    -------     ------     -------    -------     ------
    Total interest income...................          (447)    (1,841)     1,394      (2,584)    (4,406)     1,822
                                                     -----    -------     ------     -------    -------     ------

Interest expense:
Money market accounts.......................            43          5         38        (197)      (152)       (45)
NOW accounts................................            77         40         37        (176)      (183)         7
Savings accounts............................          (337)      (353)        16        (708)    (1,032)       324
Time deposits less than $100................          (580)      (358)      (222)     (1,028)    (1,044)        16
Time deposits $100 or more..................            60          3         57        (138)      (134)        (4)
Short-term borrowings.......................            (2)         3         (5)          3         (1)         4
Long-term debt..............................
                                                     -----    -------     ------     -------    -------     ------
    Total interest expense..................          (739)      (660)       (79)     (2,244)    (2,546)       302
                                                     -----    -------     ------     -------    -------     ------
    Net interest income.....................         $ 292    $(1,181)    $1,473     $  (340)   $(1,860)    $1,520
                                                     =====    =======     ======     =======    =======     ======
</TABLE>

Tax-equivalent net interest income improved $292 to $18,346 in 2004 from $18,054
in 2003. Growth in average earnings assets over interest-bearing liabilities
more than offset a 3 basis point reduction in our net interest spread.

Average earning assets grew $12.9 million or 2.7 percent in 2004 to $488.3
million from $475.4 million in 2003. As a result, interest revenue increased
$1,394. Interest-bearing liabilities averaged $401.7 million in 2004, an
increase of $4.7 million compared to $397.0 million in 2003. Despite the
increase in average interest-bearing liabilities, interest expense declined $79
in 2004. This decrease is attributed to the mix component, as the majority of
the growth was concentrated in lower-costing deposits, money market and NOW
accounts, while higher costing time deposits declined. With regard to growth in
average earning assets, taxable and tax-

                                      111

<PAGE>

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

exempt loans grew $22.3 million and $5.2 million, which together resulted in
additional interest revenue of $1,726. Average investments and federal funds
sold decreased $9.4 million and $5.2 million, which lowered interest revenue by
$265 and $67. With regard to volumes of interest-bearing liabilities, a $5.8
million decline in time deposits less than $100 reduced interest expense by
$222. Although we experienced growth in all other major deposit categories, the
additional interest expense did not exceed the reduction caused by that of time
deposits. Growth in NOW accounts of $3.9 million, money market accounts of $3.6
million, time deposit $100 or more of $1.7 million and savings accounts of $1.6
million together resulted in additional interest expense of $148.

We are aware that recent changes in monetary policy has and will continue to
have an affect on our net interest income. The yields on our earning assets and
costs of our interest-bearing liabilities, which have been plummeting in recent
periods, showed signs of reacting to the shift in monetary policy during the
second half of 2004. Because of the short-term nature of our investment
portfolio, we were able to enhance the yield earned as repayments were
reinvested at higher yields. The tax-equivalent yield on our investment
portfolio, which fell 188 basis points in 2003, increased 47 basis points in
2004. In addition, certain larger-balance, money market and NOW accounts of
local school districts and municipalities are priced in accordance with changes
in the three-month Treasury Bill. The cost of money market and NOW accounts,
which declined 89 basis points and 47 basis points in 2003, rose 3 basis points
and 10 basis points in 2004.

Tax-equivalent net interest net interest income was adversely affected by $1,181
in 2004 due to changes in interest rates. The tax-equivalent yield on earning
assets declined 24 basis points to 5.65 percent in 2004 from 5.89 percent in
2003. Our cost of funds also decreased, by 21 basis points to 2.30 percent in
2004 from 2.51 percent in 2003. Loan yields continued to decline and had the
greatest effect on net interest income. The tax-equivalent yield on our loan
portfolio decreased 63 basis points to 6.12 percent in 2004 from 6.75 percent in
2003 and caused a reduction in interest revenue of $2,254. Partially offsetting
the effect of loan yields on net interest income was reductions in the rates
paid on savings accounts of 27 basis points and time deposits less than $100 of
20 basis points. These decreases had a positive effect on net interest income by
reducing interest expense by $353 and $358.

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

                                      112

<PAGE>

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

SUMMARY OF NET INTEREST INCOME

<TABLE>
<CAPTION>
                                                                 2004                            2003
                                                     ----------------------------    ----------------------------
                                                                INTEREST    AVERAGE             INTEREST   AVERAGE
                                                     AVERAGE    INCOME/    INTEREST  AVERAGE    INCOME/    INTEREST
                                                     BALANCE    EXPENSE      RATE    BALANCE    EXPENSE      RATE
                                                     --------   --------   --------  --------   --------   --------
<S>                                                  <C>        <C>        <C>       <C>        <C>        <C>
ASSETS:
Earning assets:
Loans:
  Taxable.....................................       $346,990   $21,597      6.22%   $324,705   $22,228      6.85%
  Tax-exempt..................................         27,090     1,284      4.74      21,853     1,181      5.40
Investments:
  Taxable.....................................         71,274     2,168      3.04      80,520     2,034      2.53
  Tax-exempt..................................         32,057     2,382      7.43      32,240     2,403      7.45
Federal funds sold............................         10,857       148      1.36      16,116       180      1.12
                                                     --------   -------              --------   -------
    Total earning assets......................        488,268    27,579      5.65%    475,434    28,026      5.89%
Less: allowance for loan losses...............          3,779                           3,732
Other assets..................................         31,396                          31,160
                                                     --------                        --------
    Total assets..............................       $515,885                        $502,862
                                                     ========                        ========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts.........................       $ 20,098       213      1.06%   $ 16,494       170      1.03%
NOW accounts..................................         42,480       425      1.00      38,600       348      0.90
Savings accounts..............................        129,564       985      0.76     127,975     1,322      1.03
Time deposits less than $100..................        180,044     6,632      3.68     185,873     7,212      3.88
Time deposits $100 or more....................         29,488       977      3.31      27,755       917      3.30
Short-term borrowings.........................             15         1      2.35         265         3      1.13
Long-term debt................................
                                                     --------   -------              --------   -------
    Total interest-bearing liabilities........        401,689     9,233      2.30%    396,962     9,972      2.51%
Noninterest-bearing deposits..................         63,954                          56,743
Other liabilities.............................          2,856                           3,207
Stockholders' equity..........................         47,386                          45,950
                                                     --------                        --------
    Total liabilities and stockholders' equity       $515,885                        $502,862
                                                     ========   -------              ========   -------
    Net interest/income spread................                  $18,346      3.35%              $18,054      3.38%
                                                                =======                         =======
    Net interest margin.......................                               3.76%                           3.80%
Tax-equivalent adjustments:
Loans.........................................                  $   436                         $   401
Investments...................................                      810                             817
                                                                -------                         -------
    Total adjustments.........................                  $ 1,246                         $ 1,218
                                                                =======                         =======
</TABLE>

Note: Average balances were calculated using average daily balances. Average
balances for loans include nonaccrual loans. Interest income on taxable loans
includes fees of $763 in 2004, $1,030 in 2003, $812 in 2002, $673 in 2001 and
$445 in 2000. Available-for-sale securities, included in investment securities,
are stated at amortized cost with the related average unrealized holding gains
of $2,839 in 2004, $3,367 in 2003, $2,614 in 2002 and $1,337 in 2001, and an
average unrealized holding loss of $810 in 2000 included in other assets.
Tax-equivalent adjustments were calculated using the prevailing federal
statutory tax rate of 34.0 percent.

                                      113

<PAGE>

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

SUMMARY OF NET INTEREST INCOME (CONTINUED)

<TABLE>
<CAPTION>
            2002                               2001                              2000
-----------------------------      -----------------------------     ---------------------------
           INTEREST   AVERAGE                 INTEREST   AVERAGE               INTEREST  AVERAGE
 AVERAGE   INCOME/   INTEREST       AVERAGE    INCOME/  INTEREST      AVERAGE  INCOME/   INTEREST
 BALANCE   EXPENSE     RATE         BALANCE   EXPENSE     RATE        BALANCE  EXPENSE     RATE
--------   --------  --------      --------   --------  --------     --------  --------  --------
<C>        <C>       <C>           <C>        <C>       <C>          <C>       <C>       <C>
$304,849   $22,811      7.48%      $291,514   $24,393      8.37%     $278,931   $23,562      8.45%
  13,386     1,043      7.79          8,179       713      8.72        10,228       977      9.55

  72,155     3,552      4.92         64,172     3,619      5.64        60,810     3,567      5.87
  38,060     2,856      7.50         35,490     2,670      7.52        31,915     2,492      7.81
  21,241       348      1.64         18,451       767      4.16         2,679       164      6.12
--------   -------                 --------   -------                --------   -------
 449,691    30,610      6.81%       417,806    32,162      7.70%      384,563    30,762      8.00%
   3,488                              3,426                             3,492
  28,748                             26,323                            25,797
--------                           --------                          --------
$474,951                           $440,703                          $406,868
========                           ========                          ========

$ 19,073       367      1.92%      $ 29,390     1,105      3.76%     $ 20,710       735      3.55%
  38,125       524      1.37         29,099       510      1.75        25,569       606      2.37
 108,137     2,030      1.88         79,616     1,790      2.25        73,171     1,846      2.52
 185,508     8,240      4.44        185,015    10,112      5.47       175,522     9,942      5.66
  27,861     1,055      3.79         32,075     1,613      5.03        32,302     1,931      5.98
       8                2.00              5                5.00         2,374       150      6.32
                                          6         1      7.50            37         2      7.50
--------   -------                 --------   -------                --------   -------
 378,712    12,216      3.23%       355,206    15,131      4.26%      329,685    15,212      4.61%
  49,441                             42,235                            37,953
   3,435                              3,504                             3,402
  43,363                             39,758                            35,828
--------                           --------                          --------
$474,951                           $440,703                          $406,868
========   -------                 ========   -------                ========   -------
           $18,394      3.58%                 $17,031      3.44%                $15,550      3.39%
           =======                            =======                           =======
                        4.09%                              4.08%                             4.04%

           $   355                            $   242                           $   332
               971                                908                               847
           -------                            -------                           -------
           $ 1,326                            $ 1,150                           $ 1,179
           =======                            =======                           =======
</TABLE>

                                      114

<PAGE>

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

PROVISION FOR LOAN LOSSES:

As previously mentioned, asset quality in the banking industry continued to
improve in 2004. Nonperforming assets for all FDIC-insured commercial banks
decreased 20.5 percent in 2004 after decreasing 12.6 percent in 2003. As a
percentage of total assets, nonperforming assets, improved to 0.55 percent at
December 31, 2004, from 0.77 percent at the end of 2003. In addition, net
charge-offs for these institutions decreased for the second consecutive year.
Similar to 2003, banks responded by cutting back on their provision for loan
losses by $8.6 billion or 24.8 percent in 2004. Pennsylvania banks also
experienced an improvement in asset quality as evidenced by a 24.0 percent
reduction in nonperforming asset levels. In addition, the amount of loans
charged-off decreased 30.9 percent, and as a result, Pennsylvania banks reduced
their provision for loan losses by 52.1 percent.

We evaluate the adequacy of the allowance for loan losses account on a quarterly
basis utilizing our systematic analysis in accordance with procedural
discipline. We take into consideration certain factors such as composition of
the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs,
prevailing economic conditions and other relevant factors when determining the
adequacy of the allowance for loan losses account. We make monthly provisions to
the allowance for loan losses account in order to maintain the allowance at an
appropriate level. The provision for loan losses equaled $600 in 2004, an
increase of $120 compared to $480 in 2003. Based on our most recent evaluation
at December 31, 2004, we believe that the allowance was adequate to absorb any
known or potential losses in our portfolio.

NONINTEREST INCOME:

The composite of all FDIC-insured banks experienced a $2.4 billion or 1.3
percent decline in noninterest income in 2004. In addition, gains on the sale of
investment securities for these banks decreased 34.5 percent. Conversely,
noninterest income for insured Pennsylvania banks improved $298.3 million or 6.3
percent after declining for two consecutive years.

As previously mentioned, the demand for mortgage loans and refinancing slowed
considerably in 2004, which resulted in a $635 or 52.4 percent decrease in gains
on the sale of residential mortgages. Overall, noninterest revenue declined $468
or 11.6 percent to $3,566 in 2004 from $4,034 in 2003. Partially mitigating the
effect of the decline in gains on residential mortgage sales was a $180 or 6.4
percent increase in service charges, fees and commissions.

Fee-based revenue growth is important to improving profitability, as it lessens
reliance on traditional, spread-based income. Our ratio of

                                      115

<PAGE>

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

noninterest income, excluding gains on the sale of investments, as a percentage
of average total assets, deteriorated to 0.69 percent in 2004 from 0.80 percent
in 2003. In comparison, this ratio for our peer group was 1.04 percent in 2004
and 1.14 percent in 2003.

During the first quarter of 2005, we introduced new overdraft protection
alternatives to our customers. We believe these alternatives will not only
strengthen our customer relationships, but provide us with a new source of fee
income.

NONINTEREST EXPENSE:

Bank productivity weakened for the second consecutive year, as evidenced by an
increase in the efficiency ratio for all FDIC-insured commercial banks to 58.0
percent in 2004 from 56.5 percent in 2003. For these institutions, noninterest
expense increased $11.6 billion or 4.7 percent. Insured Pennsylvania banks
experienced an even greater increase in noninterest expense, rising $738.1
million or 11.6 percent in 2004. However, as a percentage of average earning
assets, noninterest expense decreased to 4.1 percent in 2004 compared to 4.2
percent in 2003.

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

Noninterest expense increased $178 or 1.2 percent to $14,662 in 2004 from
$14,484 for the same period of 2003. The slight increase was due mainly to a
$214 or 9.5 percent rise in occupancy and equipment expense coupled with a $173
or 3.4 percent increase in other expenses. Salaries and employee benefits
expense declined $209 or 2.9 percent.

                                      116

<PAGE>

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

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

NONINTEREST EXPENSE

<TABLE>
<CAPTION>
          YEAR ENDED DECEMBER 31                  2004     2003     2002     2001     2000
-------------------------------------------     -------  -------  -------  -------  -------
<S>                                             <C>      <C>      <C>      <C>      <C>
Salaries and employee benefits expense:
Salaries and payroll taxes.................     $ 5,617  $ 5,929  $ 5,623  $ 4,755  $ 4,419
Employee benefits..........................       1,351    1,248    1,144      883      800
                                                -------  -------  -------  -------  -------
  Salaries and employee benefits expense...       6,968    7,177    6,767    5,638    5,219
                                                -------  -------  -------  -------  -------

Net occupancy and equipment expense:
Net occupancy expense......................       1,158      991      836      766      781
Equipment expense..........................       1,306    1,259    1,017      914      911
                                                -------  -------  -------  -------  -------
  Net occupancy and equipment expense......       2,464    2,250    1,853    1,680    1,692
                                                -------  -------  -------  -------  -------

Other expenses:
Marketing expense..........................         586      425      482      381      365
Other taxes................................         394      444      399      407      315
Stationery and supplies....................         365      385      465      389      406
Contractual services.......................       1,556    1,579    1,494    1,320    1,183
Insurance, including FDIC assessment.......         235      207      187      169      164
Other......................................       2,094    2,017    1,883    1,886    1,725
                                                -------  -------  -------  -------  -------
  Other expenses...........................       5,230    5,057    4,910    4,552    4,158
                                                -------  -------  -------  -------  -------
    Total noninterest expense..............     $14,662  $14,484  $13,530  $11,870  $11,069
                                                =======  =======  =======  =======  =======
</TABLE>

Salaries and employee benefits expense constitutes the majority of our
noninterest expense. Total personnel costs decreased $209 or 2.9 percent to
$6,968 in 2004 from $7,177 in 2003. Under GAAP certain loan origination costs,
which are payroll related to specific lending activities, are required to be
deferred and recognized over the life of each loan as an adjustment to yield. At
the beginning of 2004, we re-evaluated these costs by major loan classification,
and revised the estimated amount of loan origination costs deferred for each
completed loan in each major loan classification. As a result of this action, we
recognized a change in the accounting estimate in 2004. The application of the
revised estimates to a greater number of originations in 2004 caused the decline
in salaries and employee benefits expense as compared to 2003.

Net occupancy and equipment expense increased $214 or 9.5 percent to $2,464 in
2004, compared to $2,250 in 2003. Additional rental and occupancy costs
associated with the relocation of our Loan Operations Department to a new
facility was the primary factor leading to the increase. Also contributing were
higher maintenance costs related to our document imaging system and a loss from
flood damage due to Hurricane Ivan.

As previously mentioned, we received authorization from the Commonwealth of
Pennsylvania Department of Banking to close and transfer the assets and
liabilities of our Factoryville branch office. As of December 31, 2004, we have
not incurred any costs associated with this closure, nor do we expect to incur
any material costs related to it in 2005. We anticipate

                                      117

<PAGE>

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

reductions of $136 in salaries and employee benefits expense and $34 in
occupancy expense in 2005 as a result of this action.

For a discussion on recent SFASs issued by the FASB related to net occupancy and
equipment expense, refer to the note entitled, "Summary of significant
accounting policies-Premises and equipment, net," in the Notes to Consolidated
Financial Statements to this Annual Report.

For a discussion on recent SFASs issued by the FASB related to disposal
activities, refer to the note entitled, "Summary of significant accounting
policies-Disposal activities," in the Notes to Consolidated Financial Statements
to this Annual Report.

Other expenses increased $173 or 3.4 percent to $5,230 in 2004 from $5,057 in
2003. The increase was due primarily to a 37.8 percent increase in
marketing-related expenses related to our contributions to certain educational
improvement organizations and not-for-profit agencies.

Our deposits are insured by the FDIC and are subject to deposit insurance
assessments to maintain the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC places each insured bank into one of nine risk categories based
on the bank's capitalization and supervisory evaluations provided to the FDIC by
the bank's primary federal regulator. An insured bank's assessment rate is then
determined by the risk category into which it is classified. Recently, the FDIC
decided to retain the existing BIF assessment schedules of $0.00 per 100 dollars
of deposits for banks classified in the highest capital and supervisory
evaluation category and $0.27 per 100 dollars of deposits for banks classified
in the lowest category. We were classified in the highest capital and
supervisory evaluation category at December 31, 2004, and will be exempt from
paying a BIF assessment for the first half of 2005.

There is a separate levy assessed on all FDIC-insured institutions to bear the
cost of Finance Corporation ("FICO") funding. The FDIC established the annual
FICO assessment rates effective for the fourth quarter of 2004 at $0.0146 and
first quarter of 2005 at $0.0144 per 100 dollars of BIF-assessable deposits. Our
FICO assessments were $68 and $70 for the years ended December 31, 2004 and
2003.

INCOME TAXES:

Our income tax expense decreased $527 to $679 in 2004 from $1,206 in 2003. At
the end of 2003, we committed to an investment that qualified for a $418
one-time Federal Historic Tax Credit. In addition to this tax credit, we utilize
loans and investments of tax-exempt organizations to mitigate our tax burden, as
interest revenue from these sources is not taxable by the

                                      118

<PAGE>

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

federal government. Tax-exempt interest revenue, as a percentage of total
interest revenue, increased to 9.2 percent in 2004 from 8.8 percent in 2003. As
a result of the tax credit and increase in tax-exempt income, our effective tax
rate improved to 12.6 percent in 2004 from 20.4 percent in 2003. Our effective
tax rate continued to be more advantageous than that of our peer group's of 26.4
percent in 2004 and 27.5 percent in 2003.

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

                                      119

<PAGE>

COMM BANCORP, INC.
REPORT OF MANAGEMENT

Management is responsible for the preparation and fair presentation of the
accompanying consolidated balance sheets of Comm Bancorp, Inc. and subsidiaries
(the "Company") as of December 31, 2004 and 2003, and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2004, in accordance with United States generally accepted accounting principles.
This responsibility includes: designing, implementing and maintaining internal
controls relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or
error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable under the circumstances.

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

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

The consolidated financial statements have been audited by Kronick Kalada Berdy
& Co., an independent registered public accounting firm, in accordance with
auditing standards of the Public Company Accounting Oversight Board (United
States). Those standards require that the auditor complies with ethical
requirements, including independence. The auditor plans and performs the audit
to obtain reasonable assurance whether the financial statements are free from
material misstatement. The audit involves selecting and performing procedures to
obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor's judgement, including
an assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error. In making those risk assessments, the auditor
gains an

                                      120

<PAGE>

COMM BANCORP, INC.
REPORT OF MANAGEMENT (CONTINUED)

understanding of the internal control relevant to the Company's preparation and
fair presentation of the consolidated financial statements in order to design
audit procedures that are appropriate under the circumstances, not for the
purpose of expressing an opinion on the effectiveness of the Company's internal
controls. In addition, the Company is required by federal banking regulation to
have a separate audit conducted by Kronick Kalada Berdy & Co. in order for them
to provide an attestation to management's assertions on the effectiveness of
internal control over financial reporting and compliance with laws and
regulations. Management has made an assertion that the Company's system of
internal controls is operating effectively in order to provide reasonable
assurance over the financial reporting and compliance processes. The independent
auditor conducted a separate and distinct audit on the assertion made by
management of the effectiveness of the Company's internal controls over
financial reporting and expressed an unqualified opinion on that assertion.
Kronick Kalada Berdy & Co. reviews the results of its audit with both management
and the Joint Audit Committee of the Board of Directors.

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

Management, based on its assessment of the Company's internal control structure
and procedures for financial reporting and compliance with applicable laws and
regulations, believes that the Company maintained effective internal controls as
of December 31, 2004.

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

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

February 10, 2005

                                      121

<PAGE>

COMM BANCORP, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Comm Bancorp,
Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2004, in
conformity with United States generally accepted accounting principles.

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

February 10, 2005

                                      122

<PAGE>

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

<TABLE>
<CAPTION>
                            YEAR ENDED DECEMBER 31                                   2004         2003         2002
-------------------------------------------------------------------------------   ----------   ----------   ----------
<S>                                                                               <C>          <C>          <C>
INTEREST INCOME:
Interest and fees on loans:
  Taxable......................................................................   $   21,597   $   22,228   $   22,811
  Tax-exempt...................................................................          848          780          688
Interest and dividends on investment securities available-for-sale:
  Taxable......................................................................        2,139        1,994        3,481
  Tax-exempt...................................................................        1,572        1,586        1,885
  Dividends....................................................................           29           40           71
Interest on federal funds sold.................................................          148          180          348
                                                                                  ----------   ----------   ----------
    Total interest income......................................................       26,333       26,808       29,284
                                                                                  ----------   ----------   ----------

INTEREST EXPENSE:
Interest on deposits...........................................................        9,232        9,969       12,216
Interest on short-term borrowings..............................................            1            3
                                                                                  ----------   ----------   ----------
    Total interest expense.....................................................        9,233        9,972       12,216
                                                                                  ----------   ----------   ----------
    Net interest income........................................................       17,100       16,836       17,068
Provision for loan losses......................................................          600          480        1,100
                                                                                  ----------   ----------   ----------
    Net interest income after provision for loan losses........................       16,500       16,356       15,968
                                                                                  ----------   ----------   ----------

NONINTEREST INCOME:
Service charges, fees and commissions..........................................        2,989        2,809        2,904
Net gains on sale of loans.....................................................          577        1,212          919
Net gains on sale of investment securities available-for-sale..................                        13          322
                                                                                  ----------   ----------   ----------
    Total noninterest income...................................................        3,566        4,034        4,145
                                                                                  ----------   ----------   ----------

NONINTEREST EXPENSE:
Salaries and employee benefits expense.........................................        6,968        7,177        6,767
Net occupancy and equipment expense............................................        2,464        2,250        1,853
Other expenses.................................................................        5,230        5,057        4,910
                                                                                  ----------   ----------   ----------
    Total noninterest expense..................................................       14,662       14,484       13,530
                                                                                  ----------   ----------   ----------
Income before income taxes.....................................................        5,404        5,906        6,583
Provision for income tax expense...............................................          679        1,206        1,383
                                                                                  ----------   ----------   ----------
    Net income.................................................................        4,725        4,700        5,200
                                                                                  ----------   ----------   ----------

OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on investment securities available-for-sale..         (878)        (700)       3,245
Reclassification adjustment for gains included in net income...................                       (13)        (322)
Income tax expense (benefit) related to other comprehensive income (loss)......         (299)        (242)         994
                                                                                  ----------   ----------   ----------
    Other comprehensive income (loss), net of income taxes.....................         (579)        (471)       1,929
                                                                                  ----------   ----------   ----------
    Comprehensive income.......................................................   $    4,146   $    4,229   $    7,129
                                                                                  ==========   ==========   ==========

PER SHARE DATA:
Net income.....................................................................   $     2.50   $     2.45   $     2.65
Cash dividends declared........................................................   $     0.88   $     0.88   $     0.82
Average common shares outstanding..............................................    1,890,960    1,921,063    1,960,140
</TABLE>

See Notes to Consolidated Financial Statements.

                                      123

<PAGE>

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

<TABLE>
<CAPTION>
                          DECEMBER 31                                  2004        2003
----------------------------------------------------------------     --------    --------
<S>                                                                  <C>         <C>
ASSETS:
Cash and due from banks.........................................     $ 11,802    $ 17,099
Federal funds sold..............................................          900      11,500
Investment securities available-for-sale........................      118,756     105,248
Loans held for sale, net........................................        1,917       3,205
Loans, net of unearned income...................................      381,723     357,940
  Less: allowance for loan losses...............................        3,859       3,584
                                                                     --------    --------
Net loans.......................................................      377,864     354,356
Premises and equipment, net.....................................       11,628      12,484
Accrued interest receivable.....................................        2,319       2,229
Other assets....................................................        3,136       3,331
                                                                     --------    --------
    Total assets................................................     $528,322    $509,452
                                                                     ========    ========

LIABILITIES:
Deposits:
  Noninterest-bearing...........................................     $ 67,714    $ 59,119
  Interest-bearing..............................................      410,770     400,347
                                                                     --------    --------
    Total deposits..............................................      478,484     459,466
Accrued interest payable........................................        1,075       1,143
Other liabilities...............................................        1,445       2,302
                                                                     --------    --------
    Total liabilities...........................................      481,004     462,911
                                                                     --------    --------

STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares,
 issued and outstanding:
 2004, 1,864,391 shares; 2003, 1,906,528 shares.................          615         629
Capital surplus.................................................        6,675       6,576
Retained earnings...............................................       38,494      37,223
Accumulated other comprehensive income..........................        1,534       2,113
                                                                     --------    --------
    Total stockholders' equity..................................       47,318      46,541
                                                                     --------    --------
    Total liabilities and stockholders' equity..................     $528,322    $509,452
                                                                     ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.

                                      124

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            ACCUMULATED
                                                                                               OTHER            TOTAL
                                                        COMMON     CAPITAL      RETAINED   COMPREHENSIVE    STOCKHOLDERS'
     FOR THE THREE YEARS ENDED DECEMBER 31, 2004        STOCK      SURPLUS      EARNINGS      INCOME            EQUITY
------------------------------------------------------  ------     -------      --------   -------------    -------------
<S>                                                     <C>        <C>          <C>        <C>              <C>
BALANCE, DECEMBER 31, 2001............................  $652       $6,396       $33,145        $  655         $40,848
Net income............................................                            5,200                         5,200
Dividends declared: $0.82 per share...................                           (1,603)                       (1,603)
Dividend reinvestment plan: 6,161 shares issued.......     2          201                                         203
Repurchase and retirement: 37,933 shares..............   (12)        (113)       (1,119)                       (1,244)
Net changes in other comprehensive income (loss)......                                          1,929           1,929
                                                        ----       ------       -------        ------         -------
BALANCE, DECEMBER 31, 2002............................   642        6,484        35,623         2,584          45,333
Net income............................................                            4,700                         4,700
Dividends declared: $0.88 per share...................                           (1,687)                       (1,687)
Dividend reinvestment plan: 6,547 shares issued.......     2          227                                         229
Repurchase and retirement: 44,788 shares..............   (15)        (135)       (1,413)                       (1,563)
Net changes in other comprehensive income (loss)......                                           (471)           (471)
                                                        ----       ------       -------        ------         -------
BALANCE, DECEMBER 31, 2003............................   629        6,576        37,223         2,113          46,541
Net income............................................                            4,725                         4,725
Dividends declared: $0.88 per share...................                           (1,658)                       (1,658)
Dividend reinvestment plan: 6,228 shares issued.......     2          244                                         246
Repurchase and retirement: 48,365 shares..............   (16)        (145)       (1,796)                       (1,957)
Net changes in other comprehensive income (loss)......                                           (579)           (579)
                                                        ----       ------       -------        ------         -------
BALANCE, DECEMBER 31, 2004............................  $615       $6,675       $38,494        $1,534         $47,318
                                                        ====       ======       =======        ======         =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                      125

<PAGE>

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

<TABLE>
<CAPTION>
                            YEAR ENDED DECEMBER 31                                  2004      2003      2002
-------------------------------------------------------------------------------   --------  --------  --------
<S>                                                                               <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.....................................................................   $  4,725  $  4,700  $  5,200
Adjustments:
  Provision for loan losses....................................................        600       480     1,100
  Depreciation, amortization and accretion.....................................      2,338     3,534     2,292
  Amortization of net loan costs (fees)........................................          6      (168)     (138)
  Deferred income tax expense (benefit)........................................        113       154       (41)
  Gains on sale of investment securities available-for-sale....................                  (13)     (322)
  Losses (gains) on foreclosed assets..........................................         34                (174)
  Losses on disposition of equipment...........................................                    5
  Changes in:
    Loans held for sale, net...................................................      1,288       711    (2,031)
    Accrued interest receivable................................................        (90)      (65)      319
    Other assets...............................................................        (74)     (489)     (199)
    Accrued interest payable...................................................        (68)     (215)     (521)
    Other liabilities..........................................................       (525)       36        88
                                                                                  --------  --------  --------
      Net cash provided by operating activities................................      8,347     8,670     5,573
                                                                                  --------  --------  --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available-for-sale.................               19,015    15,064
Proceeds from repayments of investment securities available-for-sale...........     18,218    59,972    34,499
Purchases of investment securities available-for-sale..........................    (33,481)  (62,828)  (51,224)
Proceeds from sale of foreclosed assets........................................        280       219     2,272
Net increase in lending activities.............................................    (24,566)  (35,278)  (14,010)
Purchases of premises and equipment............................................       (335)   (1,797)   (3,121)
                                                                                  --------  --------  --------
      Net cash used in investing activities....................................    (39,884)  (20,697)  (16,520)
                                                                                  --------  --------  --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
  Money market, NOW, savings and noninterest-bearing accounts..................     18,134    20,744    30,404
  Time deposits................................................................        884     1,509    (9,396)
Proceeds from the issuance of common shares....................................        246       229       203
Repurchase and retirement of common shares.....................................     (1,957)   (1,563)   (1,244)
Cash dividends paid............................................................     (1,667)   (1,676)   (1,571)
                                                                                  --------  --------  --------
      Net cash provided by financing activities................................     15,640    19,243    18,396
                                                                                  --------  --------  --------
      Net increase (decrease) in cash and cash equivalents.....................    (15,897)    7,216     7,449
      Cash and cash equivalents at beginning of year...........................     28,599    21,383    13,934
                                                                                  --------  --------  --------
      Cash and cash equivalents at end of year.................................   $ 12,702  $ 28,599  $ 21,383
                                                                                  ========  ========  ========

SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
  Interest.....................................................................   $  9,301  $ 10,187  $ 12,737
  Income taxes.................................................................        578     1,257     1,348
Noncash items:
  Transfers of loans to foreclosed assets......................................        452       440       320
  Unrealized losses (gains) on investment securities available-for-sale, net...   $    579  $    471  $ (1,929)
</TABLE>

See Notes to Consolidated Financial Statements.

                                      126

<PAGE>

COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF OPERATIONS:

Comm Bancorp, Inc., a bank holding company incorporated under the laws of
Pennsylvania, provides a full range of financial services through its
wholly-owned subsidiaries: Community Bank and Trust Company ("Community Bank"),
including its subsidiaries, Community Leasing Corporation and Comm Financial
Services Corporation; and Comm Realty Corporation (collectively, the "Company").
The Company services its individual and commercial customers through 17
full-service branches located within the Lackawanna, Monroe, Susquehanna, Wayne
and Wyoming counties of Northeastern Pennsylvania.

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

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

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

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

                                      127

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

BASIS OF PRESENTATION:

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

VARIABLE INTEREST ENTITIES:

On January 17, 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
addresses consolidation by business enterprises of variable interest entities. A
revised version of Interpretation No. 46 was issued on December 24, 2003.
Interpretation No. 46 provides guidance on how to identify a variable interest
entity and determine when the assets, liabilities, noncontrolling interests and
results of operations of a variable interest entity are to be included in an
entity's consolidated financial statements. A variable interest entity exists
when either the total equity investment at risk is not sufficient to permit the
entity to finance its activities by itself, or the equity investors lack one of
the three characteristics associated with owning a controlling financial
interest. Those characteristics include: (i) the direct or indirect ability to
make decisions about an entity's activities through voting rights or similar
rights; (ii) the obligation to absorb the expected losses of an entity if they
occur; or (iii) the right to receive the expected residual returns of the entity
if they occur. The revisions to Interpretation No. 46 clarify some provisions.
For entities that are considered "special-purpose," Interpretation No. 46 was
effective for the first reporting period ending after December 15, 2003.

Application for all other types of entities was required for periods ending
after March 15, 2004, unless previously applied. The Company has no interests
that meet the criteria to be treated as a variable interest entity, therefore
the adoption of this Interpretation had no effect on the operating results or
financial position of the Company.

                                      128

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

SEGMENT DISCLOSURE:

On October 13, 2004, the FASB's Emerging Issues Task Force ("EITF") issued EITF
Issue No. 04-10, "Determining Whether to Aggregate Operating Segments That Do
Not Meet the Quantitative Thresholds." EITF Issue No. 04-10 states that
operating segments that do not meet the quantitative thresholds can be
aggregated only if aggregation is consistent with the objective and basic
principles of Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures About Segments of an Enterprise and Related Information," whereby
the segments have similar economic characteristics, and the segments share a
majority of the aggregation criteria listed in SFAS No. 131. The early
application of this consensus on December 31, 2004, had no effect on the
operating results or financial position of the Company.

Public companies are required by GAAP to report information about operating
segments in annual financial statements and to report selected information about
operating segments in interim financial reports issued to stockholders. GAAP
permits the aggregation of two or more operating segments into a single segment
if the segments have similar economic characteristics and share a majority of
the following aggregation criteria: (i) products and services; (ii) operating
processes; (iii) customer bases; (iv) delivery systems; and (v) regulatory
oversight. The Company's 17 branch banking offices, all similar with respect to
these characteristics, have exhibited similar long-term financial performance.
Therefore, they were aggregated into a single operating segment.

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

USE OF ESTIMATES:

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

                                      129

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Management maintains the allowance for loan losses at a level it believes
adequate to absorb probable credit losses related to specifically identified
loans, as well as probable incurred losses inherent in the remainder of the loan
portfolio as of the balance sheet dates. The balance in the allowance for loan
losses account is based on past events and current economic conditions. The
Company employs the Federal Financial Institutions Examination Council
Interagency Policy Statement on the Allowance for Loan Losses as the primary
analytical guidance in assessing the adequacy of the allowance account. This
Statement requires adherence to GAAP for determining the adequacy of the
allowance for loan losses account for both financial and regulatory reporting
purposes. Under GAAP, the adequacy of the allowance account is determined based
on the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," for loans specifically identified to be individually evaluated for
impairment, and the requirements of SFAS No. 5, "Accounting for Contingencies,"
for large groups of smaller-balance homogeneous loans to be collectively
evaluated for impairment.

The allowance for loan losses account consists of an allocated element and an
unallocated element. The allocated element consists of a specific portion for
the impairment of loans individually evaluated under SFAS No. 114, and a formula
portion for the impairment of those loans collectively evaluated under SFAS No.
5.

Identified loans individually evaluated for impairment under SFAS No. 114
include: (i) loans to borrowers having an aggregate exposure of $500 or more;
(ii) loans that are past due 90 days or more; (iii) nonaccrual loans; (iv) any
loans internally classified as substandard, doubtful, loss, special mention or
watch; (v) loans to officers and directors; and (vi) a random sample of loans
with balances between $250 and $500. A loan is considered impaired when, based
on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. All amounts due according to the contractual terms means that both
the contractual interest payments and the contractual principal payments of a
loan will be collected as scheduled in the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value
and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the

                                      130

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

shortfall in relation to the principal and interest owed. Loans considered
impaired under SFAS No. 114 are measured for impairment based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the fair value of the collateral if the loan is collateral dependent. If
the present value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral, if the loan is
collateral dependent, is less than the recorded investment in the loan,
including accrued interest and net deferred loan fees, the Company will
recognize the impairment by adjusting the allowance for loan losses account
through charges to earnings as a provision for loan losses.

For identified loans considered not impaired, management determines if these
loans share similar risk with those grouped and collectively evaluated for
impairment under SFAS No. 5.

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

                                      131

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

ability and depth of lending management and other relevant staff; (viii) changes
in the quality of the loan review system and the degree of oversight by the
board of directors; and (ix) the effect of external factors such as competition
and legal and regulatory requirements.

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

The unallocated element is used to cover inherent losses that exist as of the
evaluation date, but which have not been identified as part of the allocated
allowance using the above impairment evaluation methodology due to limitations
in the process. One such limitation is the imprecision of accurately estimating
the impact current economic conditions will have on historical loss rates.
Variations in the magnitude of impact may cause estimated credit losses
associated with the current portfolio to differ from historical loss experience,
resulting in an allowance that is higher or lower than the anticipated level.
Management establishes the unallocated

                                      132

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

element of the allowance by considering a number of environmental risks similar
to the ones used for determining the qualitative factors. Management continually
monitors trends in historical and qualitative factors, including trends in the
volume, composition and credit quality of the portfolio. Management utilizes
these trends to evaluate the reasonableness of the unallocated element.

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

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

Real estate acquired in connection with foreclosures or in satisfaction of loans
is written-down to the lower of the related loan balance or 80.0 percent of fair
market value for residential properties or 75.0 percent of fair market value for
commercial properties based upon estimates derived through independent
appraisals. However, proceeds realized from sales may ultimately be higher or
lower than those estimates.

Intangible assets include goodwill and a core deposit intangible. Goodwill is
evaluated at least annually for impairment. Any impairment losses arising from
such testing are reported in the income statement in the current period as a
separate line item within operations. The core deposit's useful life is
evaluated each reporting period in order to determine if it should be adjusted.

                                      133

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

INVESTMENT SECURITIES:

Investment securities are classified and accounted for as either
held-to-maturity, available-for-sale or trading based on management's intent at
the time of acquisition. Management is required to reassess the appropriateness
of the classifications at each reporting date. The Company does not buy or hold
securities principally for the purpose of selling them in the near term in order
to generate profits from market appreciation. Accordingly, there were no
investment securities classified as trading at December 31, 2004 and 2003.

Debt securities are classified as held-to-maturity when management has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at cost, adjusted for amortization of premium and
accretion of discount. The Company did not have any investment securities
classified as held-to-maturity at December 31, 2004 and 2003.

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

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

Realized gains and losses are computed using the specific identification method
and are included in noninterest income. Premiums are amortized and discounts are
accreted over the contractual lives of investment securities using the interest
method, except for mortgage-backed securities, where amortization or accretion
is prorated based on principal repayments.

                                      134

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Management periodically evaluates each investment security to determine if a
decline in fair value below its amortized cost is other than temporary. If a
decline is judged to be other than temporary, the individual security is
written-down to fair value with the amount of the write-down included in
earnings.

On December 31, 2003, the Company adopted the FASB's EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF Issue No. 03-1 requires certain quantitative and qualitative
disclosures for debt and marketable-equity securities classified as
available-for-sale or held-to-maturity under SFAS No. 115 that are impaired as
of the balance sheet date, but for which an other-than-temporary impairment has
not been recognized. Quantitative information required includes the total
related fair value of investments with unrealized losses and the total amount of
these unrealized losses by investment category. The quantitative information is
segmented by those investments that have been in a continuous unrealized loss
position for less than 12 months and those that have been in a continuous
unrealized loss position for 12 months or longer. Additional information, in
narrative form, is required to provide sufficient information to allow financial
statement users to understand the quantitative disclosures and the information
that the investor considered in reaching the conclusion that the impairments are
not other than temporary. Such information includes: (i) the nature of the
investments; (ii) the causes of the impairments; (iii) the number of investments
that are in an unrealized loss position; (iv) the severity and duration of the
impairments; and (v) other evidence considered by the investor in reaching a
conclusion that the investments are not other than temporarily impaired. The
disclosures are effective for fiscal years ending after December 15, 2003. The
required quantitative and qualitative disclosures for the Company's investments
with unrealized losses that have not been recognized as other-than-temporary
impairments are provided in Note 3. The adoption of EITF Issue No. 03-1 had no
effect on the operating results or financial position of the Company.

On September 30, 2004, the FASB issued FASB Staff Position ("FSP") EITF 03-1-1,
which delays the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF Issue No. 03-1. The delay of the effective
date will be superseded concurrent with the final issuance of FSP EITF 03-1-a.
Disclosure guidance and the requirement to recognize other-than-temporary
impairments set forth in EITF Issue No. 03-1 remain effective.

                                      135

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Transfers of securities between categories are recorded at fair value at the
date of the transfer. The accounting for the resulting unrealized gains or
losses is determined by the category into which the security is transferred.
There were no transfers of securities between categories during the years ended
December 31, 2004 and 2003.

On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amended and
clarified accounting for derivative instruments including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. Specifically, SFAS No. 149 clarified under what circumstances a
contract with an initial net investment meets the characteristics of a
derivative and when a derivative contains a financing component that warrants
special reporting in the Statement of Cash Flows. In addition, the Statement
amended certain other existing pronouncements, which will result in more
consistent reporting of contracts that are derivatives in their entirety or
contain embedded derivatives that warrant separate accounting. SFAS No. 149 is
effective for contracts entered into or modified, and for hedging relationships
designated after June 30, 2003. The provisions that relate to SFAS No. 133
implementation issues are required to be applied in accordance with their
respective dates. The adoption of the provisions of SFAS No. 149 did not have a
material effect on the operating results or financial position of the Company.

LOANS HELD FOR SALE, NET:

Loans held for sale consist of one-to-four family residential mortgages
originated and intended for sale in the secondary market. The loans are carried
in aggregate at the lower of cost or estimated market value, based upon current
delivery prices in the secondary mortgage market. Net unrealized losses are
recognized through a valuation allowance by corresponding charges to income.
Gains or losses on the sale of these loans are recognized in noninterest income
at the time of sale using the specific identification method. Loan origination
fees, net of certain direct loan origination costs, are included in net gains or
losses upon the sale of the related mortgage loan. All loans are sold without
recourse. The aggregate cost of these loans was lower than their estimated
market value at December 31, 2004 and 2003, accordingly, no valuation allowance
was deemed necessary.

LOANS:

Loans, including direct financing leases, are stated at outstanding principal
balances, net of unearned interest and net deferred loan fees or

                                      136

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

costs. Interest income is accrued on the principal amount outstanding, except
for certain scheduled payment loans for which interest is accrued based on a
predetermined amortization schedule. Unearned interest on leases and installment
loans is recognized over the respective loan terms using the effective interest
method. Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized over the contractual life of the related loan as an
adjustment to yield using the effective interest method. Delinquency fees on
loans are recognized in income when chargeable, assuming collectibility is
reasonably assured. For direct financing leases, any gain or loss realized upon
disposal of equipment returned at the end of the lease term is included in other
income or expense.

GAAP requires certain costs directly related to specified activities performed
by the lender for completed loans to be deferred and amortized over the life of
the loan. Those activities include: (i) evaluating the prospective borrower's
financial condition; (ii) evaluating and recording guarantees, collateral and
other security arrangements; (iii) negotiating loan terms; (iv) preparing and
processing loan documents; and (v) closing the transaction. During the year
ended December 31, 2004, management re-evaluated these costs by major loan
classification, and revised the estimated amount of loan origination costs
deferred for each completed loan in each major loan classification. As a result
of this action, the Company recognized a change in accounting estimate in 2004.

On December 13, 2004, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer." SOP 03-3 addresses accounting for differences between contractual
cash flows and cash flows expected to be collected from an investor's initial
investment in loans or loans accounted for as debt securities acquired in a
transfer, if those differences are attributable, at least in part, to credit
quality. It includes such loans acquired in business combinations and applies to
all nongovernmental entities. It does not apply to loans originated by the
entity. SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. The adoption of SOP 03-3 on January 1, 2005, is not expected
to have a material effect on the operating results or financial position of the
Company.

NONPERFORMING ASSETS:

Nonperforming assets consist of nonperforming loans and foreclosed assets.
Nonperforming loans include nonaccrual loans, restructured loans and accruing
loans past due 90 days or more. The past due status of a loan is

                                      137

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

Restructured loans are loans with original terms, interest rate, or both, that
have been modified as a result of a deterioration in the borrower's financial
condition. Interest income on restructured loans is recognized when earned,
using the interest method. There were no restructured loans outstanding at
December 31, 2004 and 2003.

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

Foreclosed assets are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosures. The Company includes such properties in other
assets. A loan is classified as in-substance foreclosure when the Company has
taken possession of the collateral regardless of whether formal foreclosure
proceedings take place. Foreclosed assets are recorded at the lower of the
related loan balance or 80.0 percent of its fair market value for residential
properties or 75.0 percent of its fair market value for commercial properties at
the time of acquisition. Any excess of the loan balance over the recorded value
is charged to the allowance for loan losses. Subsequent declines in the recorded
values of the properties prior to their disposal and costs to maintain the
assets are included in other expenses. No allowance for losses has been
established subsequent to the acquisition of foreclosed assets during the three
years ended December 31, 2004. Any gain or loss realized upon disposal of
foreclosed assets is included in noninterest income or noninterest expense. The
historical average holding period for such properties is less than 12 months.

                                      138

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

ALLOWANCE FOR LOAN LOSSES:

The allowance for loan losses account is maintained through a provision for loan
losses charged to earnings. Loans, or portions of loans, determined to be
uncollectible are charged against the allowance account and subsequent
recoveries, if any, are credited to the account. Nonaccrual, restructured and
large delinquent commercial and real estate loans are reviewed monthly to
determine if carrying value reductions are warranted or if these classifications
should be changed. Consumer loans are considered losses when they are 120 days
past due, except those expected to be recovered through insurance or collateral
disposition proceeds.

Management evaluates the adequacy of the allowance for loan losses account
quarterly. Identified loans individually evaluated for impairment under SFAS No.
114 are reviewed to determine if impairment exists or if the level of impairment
has changed. Historical loss factors and qualitative factors are updated and
used to estimate the level of impairment for loans collectively evaluated under
SFAS No. 5. Based on these evaluations, the allowance for loan losses account is
adjusted for any deficiency through the provision for loan losses in the current
period.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:

In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commitments under home equity and credit card arrangements and commercial
letters of credit. These financial instruments are recorded in the financial
statements when they are exercised. Fees on commercial letters of credit and on
unused, available lines of credit and credit card arrangements are recorded as
service charges, fees and commissions and are included in noninterest income
when earned.

PREMISES AND EQUIPMENT, NET:

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

                                      139

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

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

On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 applies to all entities and addresses
financial accounting and reporting obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to the legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and normal
operations of a long-lived asset, except for certain obligations of lessees. The
adoption of this Statement did not have a material effect on the operating
results or financial position of the Company.

MORTGAGE SERVICING RIGHTS:

Mortgage servicing rights are recognized as a separate asset when acquired
through sales of loan originations. The Company determines a mortgage servicing
right by allocating the total costs incurred between the loan sold and the
servicing right, based on their relative fair values at the date of the sale.
Mortgage servicing rights are included in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying mortgage loans. In addition,
mortgage servicing rights are evaluated for impairment at each reporting date
based on the fair value of those rights. To determine the fair value, the
Company estimates the present value of future cash flows incorporating
assumptions such as cost of servicing, discount rates, prepayment speeds and
default rates. For purposes of measuring impairment, the rights are stratified
by loan type, term and interest rate. The amount of impairment recognized,
through a valuation allowance, is the amount by which the mortgage servicing
rights for a stratum exceed their fair value.

INTANGIBLE ASSETS:

Goodwill is included in other assets, and as required by GAAP, tested for
impairment annually or when circumstances arise indicating impairment has
occurred. Any impairment losses arising from such testing are reported in the
income statement as a separate line item within operations. There were

                                      140

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

no impairment losses recognized upon the initial application of SFAS No. 142 on
January 1, 2002, or as a result of periodic impairment testing in 2004, 2003 and
2002.

The core deposit intangible that resulted from branch acquisitions is included
in other assets and amortized on a straight-line basis over eight years ending
December 31, 2005. Management, on a periodic basis, reviews the core deposit
intangible and evaluates events or changes in circumstances that may indicate a
change in its remaining useful life. On January 20, 2005, the Company received
authorization from the Commonwealth of Pennsylvania Department of Banking to
close and transfer the assets and liabilities from one of the acquired branches
located in Factoryville, Pennsylvania. The deposits and related core deposit
intangible will be consolidated with an existing branch office effective April
1, 2005. As of December 31, 2004, there were no events or changes in
circumstances that would lead management to believe that the core deposit
intangible has become impaired or that its useful life should be adjusted.

DISPOSAL ACTIVITIES:

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

As of December 31, 2004, no costs have been incurred in connection with the
pending closure and transfer of assets and liabilities of the Factoryville,
Pennsylvania, branch office. Management does not expect a material amount of
costs to be incurred from undertaking such action in 2005. Salaries and
employees benefits expense and net occupancy expense are expected to be reduced
by $136 and $34, respectively, in 2005 as a result of the branch closure.

TRUST ASSETS:

Assets held in a fiduciary or agency capacity for customers are not included in
the accompanying consolidated balance sheets since they are not the Company's
assets. Trust income is recorded on a cash basis, which is

                                      141

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

not materially different than if reported on an accrual basis, and is included
in noninterest income. Revenue from trust services did not meet any of the
quantitative thresholds for required segment disclosure under GAAP.

EXTINGUISHMENT OF DEBT:

On January 1, 2003, the Company adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinded SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements," and SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." SFAS No. 145 also amended SFAS No. 13, "Accounting
for Leases," to eliminate any inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The adoption of this Statement did not have a material effect on the operating
results or financial position of the Company.

STATEMENTS OF CASH FLOWS:

The Consolidated Statements of Cash Flows are presented using the indirect
method. For the purpose of cash flow, cash and cash equivalents include cash on
hand, cash items in the process of collection, noninterest-bearing deposits with
other banks, balances with the FRB and FHLB-Pgh and federal funds sold. Federal
funds sold are highly-liquid investments sold for one-day periods.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial. Accordingly, such
assets and liabilities are excluded from disclosure requirements. For example,
no benefit is recorded for the value of low- cost funding subsequently
discussed. In addition, Community Bank's Trust Division contributes fee income
annually. Trust assets and liabilities are not considered financial instruments
for this disclosure, and their values have not been incorporated into the fair
value estimates. Other significant items that are not considered financial
instruments include deferred tax assets, premises and equipment, foreclosed
assets and intangible assets. Accordingly, the net aggregate fair value amounts
presented do not represent the underlying value of the Company.

                                      142

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

The Company's assets that were considered financial instruments approximated
97.2 percent of total assets at December 31, 2004, and 96.9 percent of total
assets at December 31, 2003. Liabilities that were considered financial
instruments approximated 99.7 percent and 99.5 percent of total liabilities at
December 31, 2004 and 2003, respectively. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets. In many cases, these values cannot be
realized in immediate settlement of the instrument.

The following methods and assumptions were used by the Company to construct the
summary table in Note 10 containing the fair values and related carrying amounts
of financial instruments:

CASH AND CASH EQUIVALENTS: The carrying values of cash and cash equivalents as
reported on the balance sheet approximate fair value.

INVESTMENT SECURITIES: The fair value of investment securities is based on
quoted market prices. The carrying values of restricted equity securities
approximate fair value.

LOANS HELD FOR SALE, NET: The fair value of loans held for sale, net, are based
on quoted market prices.

NET LOANS: For adjustable-rate loans that reprice immediately and with no
significant credit risk, fair values are based on carrying values. The fair
values of all other loans are estimated using discounted cash flow analysis,
using interest rates currently offered for loans with similar terms to borrowers
of similar credit risk. Fair values for impaired loans are estimated using
discounted cash flow analysis determined by the loan review function or
underlying collateral values, where applicable.

ACCRUED INTEREST RECEIVABLE: The carrying value of accrued interest receivable
as reported on the balance sheet approximates fair value.

DEPOSITS WITHOUT STATED MATURITIES: The fair value of demand deposits, savings
accounts and certain money market accounts is the amount payable on demand at
the reporting date. The fair value estimates do not include the benefit that
results from such low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market.

                                      143

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

DEPOSITS WITH STATED MATURITIES: The carrying value of adjustable-rate,
fixed-term time deposits approximates their fair value at the reporting date.
For fixed-rate time deposits, the present value of future cash flows is used to
estimate fair value. The discount rates used are the current rates offered for
time deposits with similar maturities.

ACCRUED INTEREST PAYABLE: The carrying value of accrued interest payable as
reported on the balance sheet approximates fair value.

COMMITMENTS: The majority of commitments to extend credit, unused portions of
home equity and credit card lines and letters of credit carry current market
interest rates if converted to loans. Because such commitments are generally
unassignable by either the Company or the borrower, they only have value to the
Company and the borrower. None of the commitments are subject to undue credit
risk. The estimated fair value approximates the recorded deferred fee amounts
and is included in net loans.

COMPREHENSIVE INCOME:

The components of comprehensive income and their related tax effects are
reported in the Consolidated Statements of Income and Comprehensive Income. The
accumulated other comprehensive income included in the Consolidated Statements
of Changes in Stockholders' Equity relates entirely to the net unrealized gains
and losses on available-for-sale securities.

ADVERTISING COSTS:

Advertising costs are expensed as incurred and totaled $405 in 2004, $369 in
2003 and $411 in 2002.

WEB SITE OPERATIONAL COSTS:

Costs associated with the operation of the Company's web site are expensed as
incurred and totaled $30 in 2004, $37 in 2003 and $32 in 2002.

OTHER EXPENSES:

None of the items included in other expenses reported in the Consolidated
Statements of Income and Comprehensive Income exceeded 1.0 percent of the
aggregate of total interest income and noninterest income with the exception of
directors and committee fees and Pennsylvania capital shares tax expense.
Directors and committee fees amounted to $438 in 2004, $425 in 2003 and $459 in
2002. Capital shares tax expense is disclosed in Note 12.

                                      144

<PAGE>

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

INCOME TAXES:

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

The Parent Company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate return basis,
and remit amounts determined to be currently payable to the Parent Company.

EARNINGS PER COMMON SHARE:

The Company had no dilutive potential common shares outstanding during the
three-year period ended December 31, 2004, therefore, the per share data
presented on the face of the Consolidated Statements of Income and Comprehensive
Income relates to basic per share amounts.

2. CASH AND DUE FROM BANKS:

The Federal Reserve Act, as amended, imposes reserve requirements on all member
depository institutions. The Company's required reserve balances, which were
satisfied through the restriction of vault cash, were $2,759 and $2,654 at
December 31, 2004 and 2003, respectively. These reserve requirements averaged
$2,579 in 2004 and $2,629 in 2003.

Community Bank maintains compensating balances with the FRB and various other
correspondent banks, most of which are not required, to offset specific charges
for check clearing and other services. Balances maintained for these purposes
were $7,194 and $11,196 at December 31, 2004 and 2003, respectively.
Compensating balances with correspondent banks averaged $6,675 in 2004 and
$6,373 in 2003.

                                      145
<PAGE>

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

3. INVESTMENT SECURITIES:

All investment securities were classified as available-for-sale for the years
ended December 31, 2004 and 2003. The amortized cost and fair value of
available-for-sale securities aggregated by investment category at December 31,
2004 and 2003, are summarized as follows:

<TABLE>
<CAPTION>
                                                AMORTIZED  UNREALIZED  UNREALIZED   FAIR
            DECEMBER 31, 2004                     COST       GAINS       LOSSES     VALUE
------------------------------------------      ---------  ----------  ----------  --------
<S>                                             <C>        <C>         <C>         <C>
U.S. Government agencies..................      $  44,869                $  224    $ 44,645
State and municipals:
  Taxable.................................         17,287      $   12       401      16,898
  Tax-exempt..............................         31,949       2,660         4      34,605
Mortgage-backed securities................         21,136         249       104      21,281
Equity securities:
  Restricted..............................          1,153                             1,153
  Other...................................             38         136                   174
                                                ---------      ------    ------    --------
    Total.................................      $ 116,432      $3,057    $  733    $118,756
                                                =========      ======    ======    ========
</TABLE>

<TABLE>
<CAPTION>
                                                AMORTIZED  UNREALIZED  UNREALIZED   FAIR
            DECEMBER 31, 2003                     COST       GAINS       LOSSES     VALUE
------------------------------------------      ---------  ----------  ----------  --------
<S>                                             <C>        <C>         <C>         <C>
U.S. Government agencies..................      $  16,313    $   64                $ 16,377
State and municipals:
  Taxable.................................         17,352        32      $333        17,051
  Tax-exempt..............................         31,962     2,826                  34,788
Mortgage-backed securities................         34,598       632       131        35,099
Equity securities:
  Restricted..............................          1,783                             1,783
  Other...................................             38       112                     150
                                                ---------    ------      ----      --------
    Total.................................      $ 102,046    $3,666      $464      $105,248
                                                =========    ======      ====      ========
</TABLE>
The fair value and gross unrealized losses of available-for-sale securities with
unrealized losses for which an other-than-temporary impairment has not been
recognized at December 31, 2004 and 2003, aggregated by investment category and
length of time that the individual securities have been in a continuous
unrealized loss position, are summarized as follows:

<TABLE>
<CAPTION>
                                                LESS THAN 12 MONTHS    12 MONTHS OR MORE             TOTAL
                                                -------------------   -------------------     -------------------
                                                FAIR     UNREALIZED    FAIR    UNREALIZED     FAIR     UNREALIZED
             DECEMBER 31, 2004                  VALUE      LOSSES      VALUE     LOSSES       VALUE      LOSSES
-------------------------------------------     -------  ----------   -------  ----------     -------  ----------
<S>                                             <C>      <C>          <C>      <C>            <C>      <C>
U.S. Government agencies...................     $44,645    $ 224                              $44,645    $ 224
State and municipals:
  Taxable..................................       7,484      107      $ 9,102    $ 294         16,586      401
  Tax-exempt...............................         849        4                                  849        4
Mortgage-backed securities.................       5,223       31        5,337       73         10,560      104
Equity securities:
  Restricted...............................
  Other....................................
                                                -------    -----      -------    -----        -------    -----
    Total..................................     $58,201    $ 366      $14,439    $ 367        $72,640    $ 733
                                                =======    =====      =======    =====        =======    =====
</TABLE>

                                      146

<PAGE>

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

3. INVESTMENT SECURITIES (CONTINUED):

<TABLE>
<CAPTION>
                                                LESS THAN 12 MONTHS   12 MONTHS OR MORE           TOTAL
                                                -------------------  -------------------  ----------------------
                                                 FAIR    UNREALIZED  FAIR     UNREALIZED   FAIR       UNREALIZED
             DECEMBER 31, 2003                   VALUE     LOSSES    VALUE      LOSSES     VALUE        LOSSES
-------------------------------------------     -------  ----------  -----    ----------  --------    ----------
<S>                                             <C>      <C>         <C>      <C>         <C>         <C>
U.S. Government agencies...................
State and municipals:
  Taxable..................................     $16,576    $ 333                          $ 16,576      $ 333
  Tax-exempt...............................
Mortgage-backed securities.................       9,373      129     $ 213       $  2        9,586        131
Equity securities:
  Restricted...............................
  Other....................................
                                                -------    -----     -----       ----     --------      -----
    Total..................................     $25,949    $ 462     $ 213       $  2     $ 26,162      $ 464
                                                =======    =====     =====       ====     ========      =====
</TABLE>

At December 31, 2004, the Company had 223 investment securities. There were 55
investment securities in an unrealized loss position at December 31, 2004, of
which 15 securities where in an unrealized loss position for 12 months or more.
Deterioration in the value of these securities was attributable to changes in
market interest rates and not the credit quality of the issuers. All of the
investment securities in an unrealized loss position for 12 months or more at
December 31, 2004, had a credit rating of "AA" or higher. None of these
investment securities were in an unrealized loss position longer than six
consecutive quarters or had an unrealized loss of greater than 5.0 percent.
Moreover, these investment securities are short-term having weighted-average
lives of less than four years at December 31, 2004. The Company has the ability
and intent to hold all of these investments until such time as the value
recovers or the securities mature. Furthermore, based on the previously
mentioned evidential matter, management believes that the cost of these
securities is recoverable within a reasonable period of time. As a result,
management believes none of the investment securities in an unrealized loss
position at December 31, 2004, represents an other-than-temporary impairment.

There were no sales of investment securities in 2004. Proceeds from the sales of
available-for-sale securities amounted to $19,015 in 2003 and $15,064 in 2002.
Gross gains of $19 and $322 were realized on the sale of securities in 2003 and
2002, respectively. Gross losses of $6 were realized on the sale of securities
in 2003. There were no gross losses realized on the sale of securities in 2002.
The income tax provision applicable to net realized gains amounted to $4 in 2003
and $109 in 2002.

Net unrealized holding gains and losses on available-for-sale securities are
included as a separate component in stockholders' equity. The Company had net
unrealized holding gains of $1,534, net of deferred income taxes of $790, at
December 31, 2004, and $2,113, net of deferred income taxes of $1,089, at
December 31, 2003.

Investment securities with an amortized cost of $37,366 at December 31, 2004,
and $36,349 at December 31, 2003, were pledged to secure deposits, to

                                      147

<PAGE>

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

3. INVESTMENT SECURITIES (CONTINUED):

qualify for fiduciary powers and for other purposes required or permitted by
law. The fair value of these securities was $37,381 at December 31, 2004, and
$36,865 at December 31, 2003.

The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at December 31,
2004, is summarized in the table that follows. The weighted- average yield based
on amortized cost has been computed for tax-exempt state and municipals on a
tax-equivalent basis using the federal statutory tax rate of 34.0 percent. The
distributions are based on contractual maturity with the exception of
mortgage-backed securities, including collateralized mortgage obligations
("CMOs") and equity securities. Mortgage-backed securities and CMOs have been
presented based upon estimated cash flows, assuming no change in the current
interest rate environment. Equity securities with no stated contractual
maturities are included in the "After ten years" maturity distribution. Expected
maturities may differ from contracted maturities, or estimated maturities for
mortgage-backed securities and CMOs, because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                      AFTER ONE       AFTER FIVE
                                    WITHIN           BUT WITHIN       BUT WITHIN         AFTER
                                   ONE YEAR          FIVE YEARS       TEN YEARS        TEN YEARS           TOTAL
                                ---------------    --------------   --------------   --------------   ---------------
     DECEMBER 31, 2004           AMOUNT   YIELD    AMOUNT   YIELD    AMOUNT  YIELD    AMOUNT  YIELD    AMOUNT   YIELD
----------------------------    --------  -----    -------  -----   -------  -----   -------  -----   --------  -----
<S>                             <C>       <C>      <C>      <C>     <C>      <C>     <C>      <C>     <C>       <C>
Amortized cost:
U.S. Government agencies....    $ 31,642   2.10%   $13,227   2.51%                                    $ 44,869   2.22%
State and municipals:
  Taxable...................       2,915   1.57     14,372   2.70                                       17,287   2.51
  Tax-exempt................         660   2.22      1,708   6.33   $10,301   7.95%  $19,280   7.54%    31,949   7.50
Mortgage-backed securities         8,276   4.35     12,362   4.55       487   4.88        11   6.36     21,136   4.48
Equity securities:
  Restricted................                                                           1,153   2.21      1,153   2.21
  Other.....................                                                              38   8.67         38   8.67
                                --------           -------          -------          -------          --------
    Total...................    $ 43,493   2.49%   $41,669   3.34%  $10,788   7.81%  $20,482   7.24%  $116,432   4.12%
                                ========           =======          =======          =======          ========
Fair value:
U.S. Government agencies....    $ 31,534           $13,111                                            $ 44,645
State and municipals:
  Taxable...................       2,904            13,994                                              16,898
  Tax-exempt................         660             1,827          $11,154          $20,964            34,605
Mortgage-backed securities         8,296            12,482              492               11            21,281
Equity securities:
  Restricted................                                                           1,153             1,153
  Other.....................                                                             174               174
                                --------           -------          -------          -------          --------
    Total...................    $ 43,394           $41,414          $11,646          $22,302          $118,756
                                ========           =======          =======          =======          ========
</TABLE>

Except for U.S. Government agencies, including mortgage-backed securities, there
were no securities of any individual issuer that exceeded 10.0 percent of
stockholders' equity at December 31, 2004 and 2003. All securities are
considered "investment grade," receiving a rating of "Baa" or higher from
Moody's or "BBB" or higher from Standard and Poor's rating services at December
31, 2004.

                                      148

<PAGE>

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

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

The major classifications of loans outstanding, net of unearned interest and net
deferred loan fees or costs at December 31, 2004 and 2003, are summarized as
follows. Unearned interest totaled $1,849 and $2,118 at December 31, 2004 and
2003, respectively. Net deferred loan costs were $112 at December 31, 2004, and
net deferred loan fees were $471 at December 31, 2003.

<TABLE>
<CAPTION>
                DECEMBER 31                     2004        2003
--------------------------------------------  --------    --------
<S>                                           <C>         <C>
Commercial, financial and others............  $114,341    $100,723
Real estate:
  Construction..............................     6,704       2,983
  Mortgage..................................   230,555     222,621
Consumer, net...............................    27,893      29,726
Lease financing, net........................     2,230       1,887
                                              --------    --------
    Total...................................  $381,723    $357,940
                                              ========    ========
</TABLE>

Fixed-rate loans totaled $159,424 and $163,519, while loans with adjustable
interest rates were $222,299 and $194,421, respectively, at December 31, 2004
and 2003.

The maturity distribution of the loan portfolio by major classification at
December 31, 2004, is summarized as follows:

<TABLE>
<CAPTION>
                                                     AFTER ONE
                                         WITHIN      BUT WITHIN       AFTER
        DECEMBER 31, 2004               ONE YEAR     FIVE YEARS     FIVE YEARS      TOTAL
-----------------------------------     --------    -----------     ----------     --------
<S>                                     <C>         <C>             <C>            <C>
Maturity schedule:
Commercial, financial and others...      $49,924      $17,493         $ 46,924     $114,341
Real estate:
  Construction.....................        6,704                                      6,704
  Mortgage.........................       16,945       51,800          161,810      230,555
Consumer, net......................       10,046       15,108            2,739       27,893
Lease financing, net...............          811        1,419                         2,230
                                         -------      -------         --------     --------
    Total..........................      $84,430      $85,820         $211,473     $381,723
                                         =======      =======         ========     ========
</TABLE>

Loans outstanding to directors, executive officers, principal stockholders or to
their affiliates totaled $5,438 at December 31, 2004, and $5,573 at December 31,
2003. Advances and repayments during 2004 totaled $11,462 and $11,597,
respectively. These loans are made during the ordinary course of business at
normal credit terms. There were no related party loans that were classified as
nonaccrual, past due, restructured or considered a potential credit risk at
December 31, 2004 and 2003.

                                      149

<PAGE>

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

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

At December 31, 2004, the majority of the Company's loans were at least
partially secured by real estate in Northeastern Pennsylvania. Therefore, a
primary concentration of credit risk is directly related to the real estate
market in this area. Changes in the general economy, local economy or in the
real estate market could affect the ultimate collectibility of this portion of
the loan portfolio. Management does not believe there are any other significant
concentrations of credit risk that could affect the loan portfolio.

The analysis of changes affecting the allowance for loan losses account for each
of the three years ended December 31, 2004, 2003 and 2002, is summarized as
follows:

<TABLE>
<CAPTION>
                                                   2004     2003     2002
                                                  ------   ------   ------
<S>                                               <C>      <C>      <C>
Balance, January 1............................    $3,584   $3,745   $3,220
Provision for loan losses.....................       600      480    1,100
Loans charged-off.............................      (482)    (753)    (709)
Loans recovered...............................       157      112      134
                                                  ------   ------   ------
Balance, December 31..........................    $3,859   $3,584   $3,745
                                                  ======   ======   ======
</TABLE>

Information concerning nonperforming assets at December 31, 2004 and 2003, is
summarized as follows:

<TABLE>
<CAPTION>
                     DECEMBER 31                          2004    2003
-----------------------------------------------------    ------  ------
<S>                                                      <C>     <C>
Nonaccrual loans:
Commercial, financial and others.....................    $  849  $  306
Real estate:
  Construction.......................................
  Mortgage...........................................     1,123   1,077
Consumer, net........................................                63
Lease financing, net.................................
                                                         ------  ------
    Total nonaccrual loans...........................     1,972   1,446
                                                         ------  ------
Accruing loans past due 90 days or more:
Commercial, financial and others.....................        91     124
Real estate:
  Construction.......................................
  Mortgage...........................................       653     352
Consumer, net........................................       169     151
Lease financing, net.................................                73
                                                         ------  ------
    Total accruing loans past due 90 days or more....       913     700
                                                         ------  ------
    Total nonperforming loans........................     2,885   2,146
Foreclosed assets....................................       399     261
                                                         ------  ------
    Total nonperforming assets.......................    $3,284  $2,407
                                                         ======  ======
</TABLE>

                                      150

<PAGE>

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

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

Information relating to the recorded investment in impaired loans at December
31, 2004 and 2003, is summarized as follows:

<TABLE>
<CAPTION>
                DECEMBER 31                    2004    2003
-------------------------------------------   ------  ------
<S>                                           <C>     <C>
Impaired loans:
With a related allowance...................   $2,930  $  747
With no related allowance..................    4,136     907
                                              ------  ------
  Total....................................   $7,066  $1,654
                                              ======  ======
</TABLE>

The analysis of changes affecting the allowance for loan losses related to
impaired loans for each of the three years ended December 31, 2004, 2003 and
2002, is summarized as follows:

<TABLE>
<CAPTION>
                                                  2004     2003    2002
                                                 ------   -----   -----
<S>                                              <C>      <C>     <C>
Balance, January 1..........................     $  377   $ 877   $ 403
Provision for loan losses...................      1,002      83     944
Loans charged-off...........................       (212)   (609)   (477)
Loans recovered.............................         12      26       7
                                                 ------   -----   -----
Balance, December 31........................     $1,179   $ 377   $ 877
                                                 ======   =====   =====
</TABLE>

Interest income on impaired loans that would have been recognized had the loans
been current and the terms of the loans not been modified, the aggregate amount
of interest income recognized and the amount recognized using the cash-basis
method, and the average recorded investment in impaired loans for each of the
three years ended December 31, 2004, 2003 and 2002, are summarized as follows:

<TABLE>
<CAPTION>
              YEAR ENDED DECEMBER 31                   2004    2003    2002
---------------------------------------------------   ------  ------  ------
<S>                                                   <C>     <C>     <C>
Gross interest due under terms.....................   $  279  $  188  $  201
Interest income recognized.........................      246     145     176
                                                      ------  ------  ------
Interest income not recognized ....................   $   33  $   43  $   25
                                                      ======  ======  ======

Interest income recognized (cash-basis)............   $  246  $  145  $  176

Average recorded investment in impaired loans......   $4,564  $2,510  $2,831
</TABLE>

Cash received on impaired loans applied as a reduction of principal totaled
$1,692 in 2004, $754 in 2003 and $493 in 2002. There were no commitments to
extend additional funds to customers with impaired loans at December 31, 2004
and 2003.

5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES:

In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These instruments involve, to varying degrees, elements of

                                      151

<PAGE>

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

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

credit and interest rate risk in excess of the amount recognized in the
financial statements. Management does not anticipate that losses, if any, that
may occur as a result of funding off-balance sheet commitments, would have a
material adverse effect on the operating results or financial position of the
Company.

The contractual amounts of off-balance sheet commitments at December 31, 2004
and 2003, are summarized as follows:

<TABLE>
<CAPTION>
                        DECEMBER 31                             2004    2003
-----------------------------------------------------------   -------  -------
<S>                                                           <C>      <C>
Commitments to extend credit...............................   $49,504  $44,025
Unused portions of home equity and credit card lines.......    12,776    9,806
Commercial letters of credit...............................     9,062    2,255
                                                              -------  -------
  Total....................................................   $71,342  $56,086
                                                              =======  =======
</TABLE>

The Company's involvement in, and exposure to, credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit, including unused portions of home equity and credit card lines
and commercial letters of credit is represented by the contractual amounts of
those instruments. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Commercial letters of credit are
conditional commitments issued by the Company to support customers in the
purchase of commercial goods. These letters of credit, which are automatically
renewable upon their anniversary date unless canceled prior to such date at the
option of the Company, are guarantees of funding and do not obligate the Company
to make payments to the guaranteed party.

To reduce credit risk related to the use of off-balance sheet credit-related
financial instruments, the Company might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on the Company's
credit evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment and
real estate. Allowance for credit losses, if any, on off-balance sheet credit
related financial instruments is reported separately as a liability. No
allowance was deemed necessary at December 31, 2004 and 2003. These commitments
are generally issued for one year or less and often expire unused in whole or in
part by the customer.

The Company provides deposit and loan products and other financial services to
individual and corporate customers in its five-county market area of Lackawanna,
Monroe, Susquehanna, Wayne and Wyoming. There are no significant concentrations
of credit risk from any individual counterparty

                                      152

<PAGE>

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

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

or groups of counterparties, except for locational concentrations. The
concentrations of the credit portfolio by loan type are set forth in Note 4.
Collateral is required for all real estate exposure and for most other loans,
including off-balance sheet commitments upon extension of credit. Loan-to-value
ratios of no greater than 80.0 percent are maintained, except in the case of
loans secured by deposits or U.S. Government securities. The amount of
collateral obtained is based on management's credit evaluation of the customer.
Collateral varies but may include property, plant and equipment, primary
residential properties, and to a lesser extent, income-producing properties.
Although the credit portfolio is diversified, the Company and its borrowers are
dependent on the continued viability of the Northeastern Pennsylvania economy.
The loan portfolio does not include any form of credit involving
highly-leveraged transactions, defined as financing transactions that involve
the buyout, acquisition or recapitalization of an existing business, including
credit extended to highly-leveraged industries.

Securities and short-term investment activities are conducted with a diverse
group of government entities, corporations and depository institutions. The
counterparty's creditworthiness and type of collateral is evaluated on a
case-by-case basis. At December 31, 2004 and 2003, there were no significant
concentrations of credit risk from any one issuer, with the exception of
securities issued by U.S. Government agencies, including mortgage-backed
securities.

Neither the Company nor any of its property is subject to any material legal
proceedings. Management, after consultation with legal counsel, does not
anticipate that the ultimate liability, if any, arising out of pending and
threatened lawsuits will have a material effect on the operating results or
financial position of the Company.

6. PREMISES AND EQUIPMENT, NET:

Premises and equipment at December 31, 2004 and 2003, are summarized as follows:

<TABLE>
<CAPTION>
                    DECEMBER 31                             2004     2003
----------------------------------------------------      -------  -------
<S>                                                       <C>      <C>
Land................................................      $ 3,525  $ 3,525
Premises............................................       10,476   10,294
Leasehold improvements..............................          291      291
Furniture and equipment.............................        8,844    8,691
                                                          -------  -------
  Total premises and equipment......................       23,136   22,801
Less: accumulated depreciation......................       11,508   10,317
                                                          -------  -------
  Premises and equipment, net.......................      $11,628  $12,484
                                                          =======  =======
</TABLE>

                                      153
<PAGE>

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

6. PREMISES AND EQUIPMENT, NET (CONTINUED):

Depreciation charged to noninterest expense amounted to $1,191 in 2004, $1,168
in 2003 and $962 in 2002. Occupancy expense has been reduced by rental income
from premises leased to others in the amount of $39 in 2004, $70 in 2003 and $61
in 2002.

Certain facilities are leased under operating lease agreements expiring on
various dates until the year 2022. Three leases contain escalation clauses that
provide for inflation adjustments. The effects of such adjustments are included
in the following table. Two leases contain renewal options that provide for
extensions of the original lease terms up to 20 years. The cost of such rentals
is not included in the following table. The realty leases require the Company to
pay real estate taxes, insurances, utilities and repair costs. Rental expense on
operating leases amounted to $226 in 2004, $181 in 2003 and $147 in 2002.

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

<TABLE>
<S>                                                       <C>
2005.................................................     $  211
2006.................................................        181
2007.................................................        173
2008.................................................        176
2009.................................................        147
2010 and thereafter..................................        707
                                                          ------
  Total..............................................     $1,595
                                                          ======
</TABLE>

7. OTHER ASSETS:

The major components of other assets at December 31, 2004 and 2003, are
summarized as follows:

<TABLE>
<CAPTION>
                     DECEMBER 31                           2004       2003
-----------------------------------------------------     ------     ------
<S>                                                       <C>        <C>
Goodwill.............................................     $  349     $  349
Core deposit intangible..............................        270        540
Foreclosed assets....................................        399        261
Mortgage servicing rights............................        719        740
Other................................................      1,399      1,441
                                                          ------     ------
  Total..............................................     $3,136     $3,331
                                                          ======     ======
</TABLE>

The gross carrying amount and accumulated amortization of the core deposit
intangible was $2,178 and $1,908 at December 31, 2004, and $2,178 and $1,638 at
December 31, 2003. Amortization expense of the core deposit intangible amounted
to $270 per year in 2004, 2003 and 2002. The Company will incur estimated future
amortization expense of $270 in 2005, at which time the core deposit intangible
will be fully amortized.

                                       154
<PAGE>

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

7. OTHER ASSETS (CONTINUED):

The net costs of operating foreclosed assets, including gains and losses on the
sale of such properties, were $51 in 2004 and $40 in 2003. The operation of
foreclosed assets generated net revenue of $59 in 2002.

The Company originates one-to-four family residential mortgage loans for sale in
the secondary market with servicing rights retained. Mortgage loans serviced for
others are not included in the accompanying Consolidated Balance Sheets. The
unpaid principal balances of mortgage loans serviced for others were $97,801 at
December 31, 2004, and $89,963 at December 31, 2003. Custodial escrow balances,
maintained in connection with the loan servicing and included in demand
deposits, were $77 and $274 at December 31, 2004 and 2003, respectively.

The analysis of the changes in the balances of mortgage servicing assets for
each of the three years ended December 31, 2004, 2003 and 2002, is summarized as
follows:

<TABLE>
<CAPTION>
                                                          2004       2003       2002
                                                         ------     ------     ------
<S>                                                      <C>        <C>        <C>
Balance, January 1..................................     $  740     $  466     $  192
Additions...........................................        214        541        377
Amortization........................................       (235)      (267)      (103)
                                                         ------     ------     ------
Balance, December 31................................     $  719     $  740     $  466
                                                         ======     ======     ======
</TABLE>

At December 31, 2004, 2003 and 2002, the fair value of the mortgage servicing
assets approximated their carrying value, therefore, no valuation allowance was
deemed necessary.

8. DEPOSITS:

The major components of interest-bearing and noninterest-bearing deposits at
December 31, 2004 and 2003, are summarized as follows:

<TABLE>
<CAPTION>
                       DECEMBER 31                             2004        2003
---------------------------------------------------------    --------    --------
<S>                                                          <C>         <C>
Interest-bearing deposits:
  Money market accounts..................................    $ 24,071    $ 17,369
  NOW accounts...........................................      48,558      43,352
  Savings accounts.......................................     127,222     129,591
  Time deposits less than $100...........................     176,427     180,946
  Time deposits $100 or more.............................      34,492      29,089
                                                             --------    --------
    Total interest-bearing deposits......................     410,770     400,347
Noninterest-bearing deposits.............................      67,714      59,119
                                                             --------    --------
    Total deposits.......................................    $478,484    $459,466
                                                             ========    ========
</TABLE>

                                       155
<PAGE>

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

8. DEPOSITS (CONTINUED):

Deposits of directors, executive officers, principal stockholders or their
affiliates are accepted on the same terms and at the prevailing interest rates
offered at the time of deposit for comparable transactions with unrelated
parties. The amount of related party deposits totaled $6,119 at December 31,
2004, and $7,361 at December 31, 2003.

The maturity distribution of time deposits $100 or more at December 31, 2004 and
2003, is summarized as follows:

<TABLE>
<CAPTION>
                       DECEMBER 31                            2004        2003
---------------------------------------------------------    -------     -------
<S>                                                          <C>         <C>
Within three months......................................    $ 7,353     $ 4,414
After three months but within six months.................      4,426       4,845
After six months but within twelve months................      6,198       3,861
After twelve months......................................     16,515      15,969
                                                             -------     -------
  Total..................................................    $34,492     $29,089
                                                             =======     =======
</TABLE>

Interest expense on time deposits $100 or more amounted to $977 in 2004, $916 in
2003 and $1,055 in 2002.

The aggregate amounts of maturities for all time deposits at December 31, 2004,
are summarized as follows:

<TABLE>
<S>                                                               <C>
2005.........................................................     $  95,530
2006.........................................................        30,550
2007.........................................................        37,681
2008.........................................................        17,170
2009.........................................................         5,196
2010 and thereafter..........................................        24,792
                                                                  ---------
  Total......................................................     $ 210,919
                                                                  =========
</TABLE>

The aggregate amount of deposits reclassified as loans was $312 at December 31,
2004, and $235 at December 31, 2003. Management evaluates transaction accounts
that are overdrawn for collectibility as part of its evaluation for credit
losses. At December 31, 2004 and 2003, no allowance was deemed necessary for
these accounts. During 2004 and 2003, no deposits were received on terms other
than those available in the normal course of business.

9. SHORT-TERM BORROWINGS:

Short-term borrowings available to the Company consist of a line of credit and
advances with the FHLB-Pgh secured under terms of a blanket collateral agreement
by a pledge of FHLB-Pgh stock and certain other qualifying collateral, such as
investment and mortgage-backed securities and mortgage loans. The line of credit
is limited to the Company's maximum borrowing

                                       156
<PAGE>

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

9. SHORT-TERM BORROWINGS (CONTINUED):

capacity ("MBC") with the FHLB-Pgh, which is based on a percentage of qualifying
collateral assets. At December 31, 2004, the MBC was $198,911. Interest accrues
daily on the line based on the rates of FHLB-Pgh discount notes. This rate
resets each day. The line is renewable annually on its anniversary date and
carries no associated commitment fees. The FHLB-Pgh has the right to reduce or
terminate the line at any time without prior notice and the Company may repay
the line at any time without incurring prepayment penalties. Short-term advances
are issued with maturities less than one year based on the FHLB-Pgh's current
cost of funds rate. Advances are limited to the MBC and are not prepayable.
There are no commitment fees associated with the advances, except those for
forward settlement that are based on FHLB-Pgh hedging costs.

There were no short-term borrowings outstanding at December 31, 2004 and 2003,
nor were there short-term borrowings outstanding at any month-end during 2004
and 2003. The average daily balance and weighted-average rate on aggregate
short-term borrowings, which consisted entirely of the FHLB-Pgh line of credit,
was $15 at 2.4 percent in 2004 and $265 at 1.2 percent in 2003.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The estimated fair value of financial instruments at December 31, 2004 and 2003,
is summarized as follows:

<TABLE>
<CAPTION>
                                                      2004                  2003
                                               -------------------   -------------------
                                               CARRYING     FAIR     CARRYING     FAIR
                DECEMBER 31                      VALUE      VALUE      VALUE      VALUE
-------------------------------------------    --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>
Financial assets:
Cash and cash equivalents..................    $ 12,702   $ 12,702   $ 28,599   $ 28,599
Investment securities available-for-sale...     118,756    118,756    105,248    105,248
Loans held for sale, net...................       1,917      1,937      3,205      3,250
Net loans..................................     377,864    378,614    354,356    355,818
Accrued interest receivable................       2,319      2,319      2,229      2,229
                                               --------   --------   --------   --------
  Total....................................    $513,558   $514,328   $493,637   $495,144
                                               ========   ========   ========   ========

Financial liabilities:
Deposits without stated maturities.........    $267,565   $267,565   $249,431   $249,431
Deposits with stated maturities............     210,919    215,546    210,035    216,895
Accrued interest payable...................       1,075      1,075      1,143      1,143
                                               --------   --------   --------   --------
  Total....................................    $479,559   $484,186   $460,609   $467,469
                                               ========   ========   ========   ========
</TABLE>

                                       157
<PAGE>

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

11. EMPLOYEE BENEFIT PLAN:

The Company has a defined contribution plan covering all employees who have
completed 1,000 hours of service, attained 21 years of age and have been
employed by the Company for at least one year. Contributions to the plan are
determined by the Board of Directors and are based on a prescribed percentage of
annual net income allocated to each participant based on their pro rata share of
annual compensation. Pension costs are accrued monthly to salaries and benefits
expense with the plan being funded annually.

Effective January 1, 2002, the Board of Directors ratified an amendment to the
defined contribution plan to include the provisions under section 401(k) of the
Internal Revenue Code ("401(k)"). The 401(k) feature of the plan permits
employees to make voluntary, pre-tax contributions up to 25.0 percent of their
compensation. Company contributions to the 401(k) are determined by the Board of
Directors and are currently based on 100.0 percent matching of voluntary
contributions up to 3.0 percent of the employee's eligible compensation. Company
matching contributions to the 401(k) are funded biweekly and are included in
salaries and benefits expense. Employee contributions under the 401(k) vest
immediately, while matched contributions and discretionary annual contributions
made under the defined contribution plan vest proportionally over five years of
credited service.

Discretionary annual contributions to the plan were $77 in 2004, $83 in 2003 and
$114 in 2002. Discretionary matching contributions under the 401(k) feature of
the plan totaled $145 in 2004, $127 in 2003 and $111 in 2002. Contributions to
the plan are included in salaries and employees benefits expense.

12. INCOME TAXES:

The current and deferred amounts of the provision for income tax expense for
each of the three years ended December 31, 2004, 2003 and 2002, are summarized
as follows:

<TABLE>
<CAPTION>
                  YEAR ENDED DECEMBER 31                      2004     2003     2002
----------------------------------------------------------   ------   ------   -------
<S>                                                          <C>      <C>      <C>
Current...................................................   $  566   $1,052   $ 1,424
Deferred..................................................      113      154       (41)
                                                             ------   ------   -------
  Total...................................................   $  679   $1,206   $ 1,383
                                                             ======   ======   =======
</TABLE>

                                       158
<PAGE>

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

12. INCOME TAXES (CONTINUED):

A reconciliation between the effective income tax expense and the amount of
income tax expense that would have been provided at the federal statutory tax
rate of 34.0 percent for each of the three years ended December 31, 2004, 2003
and 2002, is summarized as follows:

<TABLE>
<CAPTION>
                    YEAR ENDED DECEMBER 31                        2004     2003     2002
--------------------------------------------------------------   ------   ------   ------
<S>                                                              <C>      <C>      <C>
Federal income tax at statutory rate..........................   $1,837   $2,008   $2,238
Differences resulting from:
  Tax-exempt interest, net....................................     (748)    (729)    (783)
  Residential housing program tax credit......................     (419)     (80)     (80)
  Other.......................................................        9        7        8
                                                                 ------   ------   ------
    Federal income tax on income before income taxes..........   $  679   $1,206   $1,383
                                                                 ======   ======   ======
</TABLE>

Sources of change in deferred income taxes and the related tax effects for each
of the three years ended December 31, 2004, 2003 and 2002, are summarized as
follows:

<TABLE>
<CAPTION>
                    YEAR ENDED DECEMBER 31                        2004     2003     2002
--------------------------------------------------------------   ------   ------   ------
<S>                                                              <C>      <C>      <C>
Allowance for loan losses.....................................   $ (116)  $   74   $ (160)
Loans, net of unearned income.................................      198       (9)       1
Accrued interest receivable...................................        8        5        6
Prepaid expenses..............................................      147
Premises and equipment, net...................................      (70)     117      101
Core deposit intangible.......................................      (42)     (43)     (43)
Other.........................................................      (12)      10       54
                                                                 ------   ------   ------
  Change in deferred income taxes affecting the statements of
   income.....................................................      113      154      (41)
Deferred income taxes on investment securities recognized in
 stockholders' equity.........................................     (299)    (242)     994
                                                                 ------   ------   ------
    Total change in deferred income taxes.....................   $ (186)  $  (88)  $  953
                                                                 ======   ======   ======
</TABLE>

                                       159
<PAGE>

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

12. INCOME TAXES (CONTINUED):

Temporary differences between financial statement carrying amounts and tax bases
of assets and liabilities that represent the deferred tax assets and liabilities
at December 31, 2004 and 2003, are summarized as follows:

<TABLE>
<CAPTION>
                          DECEMBER 31                             2004     2003
--------------------------------------------------------------   ------   ------
<S>                                                              <C>      <C>
Deferred tax assets:
  Allowance for loan losses...................................   $1,043   $  927
  Loans, net of unearned income...............................               160
  Accrued interest receivable.................................       41       49
  Core deposit intangible.....................................      299      257
  Other.......................................................        5
                                                                 ------   ------
    Total.....................................................    1,388    1,393
                                                                 ------   ------
Deferred tax liabilities:
  Investment securities available-for-sale....................      790    1,089
  Loans, net of unearned income...............................       38
  Prepaid expenses............................................      147
  Premises and equipment, net.................................      640      710
Other.........................................................                 7
                                                                 ------   ------
    Total.....................................................    1,615    1,806
                                                                 ------   ------
    Net deferred tax liabilities..............................   $ (227)  $ (413)
                                                                 ======   ======
</TABLE>

The Company has determined that the establishment of a valuation reserve for the
deferred tax assets is not required, since it is more likely than not that the
net deferred tax assets could be principally realized through carryback to
taxable income in prior years, and by future reversals of existing taxable
temporary differences, or to a lesser extent, through future taxable income. A
review of the accounting criteria related to the recognition of deferred tax
assets is performed quarterly. Banks in Pennsylvania are not subject to state or
local income taxes, but rather are assessed a tax based on capital. This capital
shares tax, which is included in other expenses, was $377 in 2004, $425 in 2003
and $375 in 2002.

Income tax expense (benefit) related to unrealized holding gains (losses) and
the reclassification adjustments included in other comprehensive income (loss)
for each of the three years ended December 31, 2004, 2003 and 2002, were
calculated using the prevailing federal statutory tax rate of 34.0 percent and
are summarized as follows:

<TABLE>
<CAPTION>
                                YEAR ENDED DECEMBER 31                                     2004     2003     2002
---------------------------------------------------------------------------------------   ------   ------   -------
<S>                                                                                       <C>      <C>      <C>
Income tax expense (benefit):
  Unrealized holding gains (losses) on investment securities available-for-sale........   $ (299)  $ (238)  $ 1,103
  Reclassification adjustment for gains included in net income.........................                (4)     (109)
                                                                                          ------   ------   -------
    Income tax expense (benefit) related to other comprehensive income (loss)..........   $ (299)  $ (242)  $   994
                                                                                          ======   ======   =======
</TABLE>

                                       160
<PAGE>

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

13. PARENT COMPANY FINANCIAL STATEMENTS:

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                    YEAR ENDED DECEMBER 31                         2004       2003     2002
---------------------------------------------------------------   -------   -------   -------
<S>                                                               <C>       <C>       <C>
Income:
Dividends from subsidiaries....................................   $ 3,848   $ 3,011   $ 2,715
Management fees from subsidiaries..............................       262       217       222
Other income...................................................         3         3         7
                                                                  -------   -------   -------
  Total income.................................................     4,113     3,231     2,944
                                                                  -------   -------   -------
Expense:
Occupancy and equipment expenses...............................        76        76        76
Other expenses.................................................       367       280       279
                                                                  -------   -------   -------
  Total expenses...............................................       443       356       355
                                                                  -------   -------   -------
Income before income taxes and undistributed income of
 subsidiaries..................................................     3,670     2,875     2,589
Income tax benefits............................................      (480)     (127)     (124)
                                                                  -------   -------   -------
Income before undistributed income of subsidiaries.............     4,150     3,002     2,713
Equity in undistributed income of subsidiaries.................       575     1,698     2,487
                                                                  -------   -------   -------
  Net income...................................................   $ 4,725   $ 4,700   $ 5,200
                                                                  =======   =======   =======
</TABLE>

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                             DECEMBER 31                                  2004      2003
----------------------------------------------------------------------   -------   -------
<S>                                                                      <C>       <C>
Assets:
Cash..................................................................   $   139   $    20
Investment in bank subsidiary.........................................    45,180    45,115
Investment in nonbank subsidiary......................................                  85
Investment securities available-for-sale..............................       174       150
Other assets..........................................................     2,549     1,814
                                                                         -------   -------
  Total assets........................................................   $48,042   $47,184
                                                                         =======   =======
Liabilities:
Dividends payable.....................................................   $   410   $   419
Other liabilities.....................................................       314       224
                                                                         -------   -------
  Total liabilities...................................................       724       643
Stockholders' equity..................................................    47,318    46,541
                                                                         -------   -------
  Total liabilities and stockholders' equity..........................   $48,042   $47,184
                                                                         =======   =======
</TABLE>

                                       161
<PAGE>

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

13. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED):

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                   YEAR ENDED DECEMBER 31                        2004      2003     2002
------------------------------------------------------------   -------   -------   -------
<S>                                                            <C>       <C>       <C>
Cash flows from operating activities:
Net income..................................................   $ 4,725   $ 4,700   $ 5,200
Adjustments:
  Equity in undistributed income of subsidiaries............      (575)   (1,698)   (2,487)
  Depreciation and amortization.............................        76        76        76
  Changes in:
    Other assets............................................      (811)      (48)     (192)
    Other liabilities.......................................        82       (15)      (41)
                                                               -------   -------   -------
      Net cash provided by operating activities.............     3,497     3,015     2,556
                                                               -------   -------   -------
Cash flows from investing activities:
Capital contribution in nonbank subsidiary..................                           (20)
                                                                                   -------
      Net cash used in investing activities.................                           (20)
                                                                                   -------
Cash flows from financing activities:
Issuance of common stock....................................       246       229       203
Repurchase and retirement of common shares..................    (1,957)   (1,563)   (1,244)
Cash dividends paid.........................................    (1,667)   (1,676)   (1,571)
                                                               -------   -------   -------
      Net cash used in financing activities.................    (3,378)   (3,010)   (2,612)
                                                               -------   -------   -------
      Net increase (decrease) in cash.......................       119         5       (76)
      Cash at beginning of year.............................        20        15        91
                                                               -------   -------   -------
      Cash at end of year...................................   $   139   $    20   $    15
                                                               =======   =======   =======
</TABLE>

14. REGULATORY MATTERS:

Under the Pennsylvania Business Corporation Law of 1988, as amended, the Company
may not pay a dividend if, after payment, either the Company could not pay its
debts as they become due in the usual course of business, or the Company's total
assets would be less than its total liabilities. The determination of total
assets and liabilities may be based upon: (i) financial statements prepared on
the basis of GAAP; (ii) financial statements that are prepared on the basis of
other accounting practices and principles that are reasonable under the
circumstances; or (iii) a fair valuation or other method that is reasonable
under the circumstances.

In addition, the Company is subject to dividend restrictions under the
Pennsylvania Banking Code of 1965, as amended, which allows cash dividends to be
declared and paid out of accumulated net earnings. More stringent dividend
restrictions apply under Federal Reserve Regulation H, which restricts calendar
year dividend payments of member banks to the total of its net profits for that
year combined with its retained net profits of the preceding two calendar years,
less any required transfer to surplus, unless a bank has received prior approval
from the Board of Governors of the

                                       162
<PAGE>

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

14. REGULATORY MATTERS (CONTINUED):

Federal Reserve System ("Federal Reserve Board"). Accordingly, Community Bank,
without prior approval from the Federal Reserve Board, may declare dividends to
the Parent Company of $5,188 at December 31, 2004.

Although subject to the aforementioned regulatory restrictions, the Company's
consolidated retained earnings at December 31, 2004 and 2003, were not
restricted under any borrowing agreement as to payment of dividends or
reacquisition of common stock.

The Company has paid cash dividends since its formation as a bank holding
company in 1983. It is the present intention of the Board of Directors to
continue this dividend payment policy, however, further dividends must
necessarily depend upon earnings, financial condition, appropriate legal
restrictions and other factors relevant at the time the Board of Directors
considers payment of dividends.

The amount of funds available for transfer from Community Bank to the Parent
Company in the form of loans and other extensions of credit is also limited.
Under the provisions of Section 23A of the Federal Reserve Act, transfers to any
one affiliate are limited to 10.0 percent of capital and surplus. At December
31, 2004, the maximum amount available for transfer from Community Bank to the
Parent Company in the form of loans amounted to $4,690. At December 31, 2004 and
2003, there were no loans outstanding, nor were any advances made during 2004
and 2003.

The Company and Community Bank are subject to certain regulatory capital
requirements administered by the federal banking agencies, which are defined by
Section 38 of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's and Community
Bank's financial statements. In the event an institution is deemed to be
undercapitalized by such standards, FDICIA prescribes an increasing amount of
regulatory intervention, including the required institution of a capital
restoration plan and restrictions on the growth of assets, branches or lines of
business. Further restrictions are applied to the significantly or critically
undercapitalized institutions including restrictions on interest payable on
accounts, dismissal of management and appointment of a receiver. For well
capitalized institutions, FDICIA provides authority for regulatory intervention
when the institution is deemed to be engaging in unsafe and unsound practices or
receives a less than satisfactory examination report rating. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Community Bank must meet specific

                                       163
<PAGE>

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

14. REGULATORY MATTERS (CONTINUED):

capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject
to qualitative judgements by the regulators about components, risk weightings
and other factors. Prompt corrective action provisions are not applicable to
bank holding companies.

Community Bank was categorized as well capitalized under the regulatory
framework for prompt corrective action at December 31, 2004 and 2003, based on
the most recent notification from the Federal Deposit Insurance Corporation. To
be categorized as well capitalized, Community Bank must maintain certain minimum
Tier I risk-based, total risk-based and Tier I Leverage ratios as set forth in
the following tables. The Tier I Leverage ratio is defined as Tier I capital to
total average assets less intangible assets. There are no conditions or events
since the most recent notification that management believes have changed
Community Bank's category.

                                       164
<PAGE>

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

14. REGULATORY MATTERS (CONTINUED):

The Company's and Community Bank's capital ratios at December 31, 2004 and 2003,
as well as the required minimum ratios for capital adequacy purposes and to be
well capitalized under the prompt corrective action provisions as defined by
FDICIA, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                MINIMUM TO BE WELL
                                                                                                CAPITALIZED UNDER
                                                                          MINIMUM FOR CAPITAL   PROMPT CORRECTIVE
                                                            ACTUAL         ADEQUACY PURPOSES    ACTION PROVISIONS
                                                      -----------------   -------------------   ------------------
                DECEMBER 31, 2004                      AMOUNT     RATIO    AMOUNT      RATIO    AMOUNT     RATIO
--------------------------------------------------    --------    -----   --------    -------   -------   --------
<S>                                                   <C>         <C>     <C>         <C>       <C>       <C>
Tier I capital to risk-weighted assets:
  Consolidated....................................    $ 45,094     11.4%   $15,881     4.0%
  Community Bank..................................      43,045     10.9     15,864     4.0      $23,796     6.0%
Total capital to risk-weighted assets:
  Consolidated....................................      48,953     12.3     31,762     8.0
  Community Bank..................................      46,904     11.8     31,728     8.0       39,660    10.0
Tier I capital to total average assets
 less intangible assets:
  Consolidated....................................      45,094      8.8     20,608     4.0
  Community Bank..................................    $ 43,045      8.4%   $20,580     4.0%     $25,725     5.0%

Risk-weighted assets:
  Consolidated....................................    $384,967
  Community Bank..................................     384,539
Risk-weighted off-balance sheet items:
  Consolidated....................................      12,056
  Community Bank..................................      12,056
Average assets for Leverage ratio:
  Consolidated....................................     515,195
  Community Bank..................................    $514,504
</TABLE>

<TABLE>
<CAPTION>
                                                                                                MINIMUM TO BE WELL
                                                                                                CAPITALIZED UNDER
                                                                          MINIMUM FOR CAPITAL   PROMPT CORRECTIVE
                                                            ACTUAL         ADEQUACY PURPOSES    ACTION PROVISIONS
                                                      -----------------   -------------------   ------------------
                DECEMBER 31, 2003                      AMOUNT     RATIO    AMOUNT      RATIO    AMOUNT     RATIO
--------------------------------------------------    --------    -----   --------    -------   -------   --------
<S>                                                   <C>         <C>     <C>         <C>       <C>       <C>
Tier I capital to risk-weighted assets:
  Consolidated....................................    $ 43,466     11.9%   $14,590     4.0%
  Community Bank..................................      42,113     11.6     14,567     4.0      $21,850     6.0%
Total capital to risk-weighted assets:
  Consolidated....................................      47,050     12.9     29,180     8.0
  Community Bank..................................      45,697     12.5     29,134     8.0       36,417    10.0
Tier I capital to total average assets
 less intangible assets:
  Consolidated....................................      43,466      8.7     20,076     4.0
  Community Bank..................................    $ 42,113      8.4%   $20,049     4.0%     $25,061     5.0%

Risk-weighted assets:
  Consolidated....................................    $357,240
  Community Bank..................................     356,667
Risk-weighted off-balance sheet items:
  Consolidated....................................       7,506
  Community Bank..................................       7,506
Average assets for Leverage ratio:
  Consolidated....................................     501,900
  Community Bank..................................    $501,220
</TABLE>

                                       165
<PAGE>

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

14. REGULATORY MATTERS (CONTINUED):

Management periodically purchases shares of the Company's common stock under a
stock repurchase program. For the years ended December 31, 2004, 2003 and 2002,
48,365 shares, 44,788 shares and 37,933 shares having an aggregate cost of
$1,957, $1,563 and $1,244, respectively, were purchased and retired under the
program. On March 17, 2004, the Board of Directors ratified the purchase of an
additional 3.0 percent or 57,221 shares of the then outstanding common stock. In
a similar action, on November 17, 2004, another 3.0 percent or 55,931 shares
were ratified by the Board of Directors to be purchased by the Company. At
December 31, 2004, 67,808 shares authorized under the program were available to
be repurchased.

The Company offers its stockholders a Dividend Reinvestment Plan ("DRP"). Under
the DRP, the Company registered with the Securities and Exchange Commission
300,000 shares of its common stock to be sold pursuant to this plan. The DRP
provides stockholders with a simple and convenient method to invest cash
dividends in the Company's common stock without payment of any brokerage
commissions, while also furnishing the Company with additional funds for general
corporate purposes. Main features of the DRP include the following: (i) shares
will be purchased from original issuances; (ii) no optional cash payments; (iii)
eligibility for all registered and street name stockholders; (iv) no minimum or
maximum number of shares participation restrictions; and (v) availability of
full or partial dividend reinvestment. During the years ended December 31, 2004,
2003 and 2002, 6,228 shares, 6,547 shares and 6,161 shares, respectively, were
issued under the DRP.

                                       166
<PAGE>

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

15. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                                               2004                                    2003
                                              --------------------------------------   ---------------------------------------
             QUARTER ENDED                    MARCH 31   JUNE 30   SEPT. 30  DEC. 31   MARCH 31   JUNE 30   SEPT. 30   DEC. 31
----------------------------------------      --------   -------   --------  -------   --------   -------   --------   -------
<S>                                           <C>        <C>       <C>       <C>       <C>        <C>       <C>        <C>
INTEREST INCOME:
Interest and fees on loans:
  Taxable...............................      $  5,289   $ 5,431   $  5,405  $ 5,472   $  5,552   $ 5,612   $  5,617   $ 5,447
  Tax-exempt............................           205       208        191      244        191       187        199       203
Interest and dividends on investment
 securities available-for-sale:
  Taxable...............................           535       499        495      610        658       430        397       509
  Tax-exempt............................           393       395        392      392        400       399        394       393
  Dividends.............................            10        11          7        1         14        11          9         6
Interest on federal funds sold..........            16        22         68       42         28        86         49        17
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Total interest income...............         6,448     6,566      6,558    6,761      6,843     6,725      6,665     6,575
                                              --------   -------   --------  -------   --------   -------   --------   -------

INTEREST EXPENSE:
Interest on deposits....................         2,238     2,240      2,323    2,431      2,672     2,582      2,392     2,323
Interest on short-term borrowings.......                                           1                                         3
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Total interest expense..............         2,238     2,240      2,323    2,432      2,672     2,582      2,392     2,326
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Net interest income.................         4,210     4,326      4,235    4,329      4,171     4,143      4,273     4,249
Provision for loan losses...............           150       150        150      150        120       120        120       120
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Net interest income after
     provision for loan losses..........         4,060     4,176      4,085    4,179      4,051     4,023      4,153     4,129
                                              --------   -------   --------  -------   --------   -------   --------   -------

NONINTEREST INCOME:
Service charges, fees and commissions              726       752        780      731        696       695        702       716
Net gains on sale of loans..............           196       128         84      169        390       295        328       199
Net gains on sale of investments........                                                                                    13
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Total noninterest income ...........           922       880        864      900      1,086       990      1,030       928
                                              --------   -------   --------  -------   --------   -------   --------   -------

NONINTEREST EXPENSE:
Salaries and employee benefits..........         1,726     1,754      1,772    1,716      1,696     1,773      1,859     1,849
Net occupancy and equipment.............           664       599        566      635        540       548        558       604
Other...................................         1,237     1,242      1,426    1,325      1,189     1,257      1,322     1,289
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Total noninterest expense...........         3,627     3,595      3,764    3,676      3,425     3,578      3,739     3,742
                                              --------   -------   --------  -------   --------   -------   --------   -------
Income before income taxes..............         1,355     1,461      1,185    1,403      1,712     1,435      1,444     1,315
Provision for income tax expense........           175       206        120      178        382       290        289       245
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Net income..........................         1,180     1,255      1,065    1,225      1,330     1,145      1,155     1,070
                                              --------   -------   --------  -------   --------   -------   --------   -------

OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on
 investment securities available-
 for-sale...............................           550    (1,991)     1,203     (640)      (236)      212       (408)     (268)
Reclassification adjustment for gains
 included in net income.................                                                                                   (13)
Income tax expense (benefit) related
 to other comprehensive income (loss)...           187      (677)       409     (218)       (80)       72       (139)      (95)
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Other comprehensive income
     (loss), net of income taxes........           363    (1,314)       794     (422)      (156)      140       (269)     (186)
                                              --------   -------   --------  -------   --------   -------   --------   -------
    Comprehensive income (loss).........      $  1,543   $   (59)  $  1,859  $   803   $  1,174   $ 1,285   $    886   $   884
                                              ========   =======   ========  =======   ========   =======   ========   =======

PER SHARE DATA:
Net income..............................      $   0.62   $  0.66   $   0.56  $  0.66   $   0.68   $  0.60   $   0.61   $  0.56
Cash dividends declared.................      $   0.22   $  0.22   $   0.22  $  0.22   $   0.22   $  0.22   $   0.22   $  0.22
</TABLE>

                                       167


<PAGE>


COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

OPERATING ENVIRONMENT:

The subpar economic performance characteristic of the previous two years
appeared to turn around midway through 2003. In the early part of 2003,
uncertainty about the economic outlook and war in Iraq still plagued the United
States economy. The gross domestic product ("GDP"), the value of all goods and
services produced in the United States, grew at a moderate annual pace of 2.0
percent in the first quarter and a slightly higher annual pace of 3.1 percent in
the second quarter. Supported by very accommodative monetary and fiscal policy
initiatives, economic activity accelerated in the second half of the year. The
Federal Open Market Committee, in an effort to support economic expansion and
insure against a drop in inflation, lowered its target federal funds rate 25
basis points to 1.00 percent at its meeting on June 24, 2003. In addition, the
federal government passed fiscal policy in order to help spur the economy by
providing incentives to increase consumer and business spending. The Jobs and
Growth Tax Relief Reconciliation Act of 2003 was signed into law on May 28,
2003. The Act advanced refund checks to households eligible for an increase in
the 2003 child tax credit, lowered withholding schedules for individuals and
provided a partial-expensing incentive for business capital investment. The
economy picked up remarkably following these initiatives, and as a result, GDP
grew at an annual rate of 8.2 percent in the third quarter and 4.1 percent in
the fourth quarter. For the entire year, the United States economy grew 3.1
percent.

Consumer spending, which rose at the same moderate pace in the early part of
2003 as it did in the prior two years, increased considerably after fiscal
policy actions were initiated midway through the year. Personal consumption
jumped 6.9 percent in the third quarter, as the tax rate reductions and advance
child tax credits supported growth in disposable personal income.

After declining in 2002 and 2001, business investment picked up dramatically in
2003, due to increased business profitability and strong productivity gains. For
all of 2003, business investment rose 4.3 percent, after contracting 1.2 percent
in 2002 and 8.4 percent in 2001. However, the increase in productivity continued
to create excess capacity in the labor market. Although the National
unemployment rate fell to 5.4 percent in 2003 from 5.7 percent in 2002, the
decrease was not due to the creation of new jobs, but rather to a reduction in
the labor force, as a large number of potential workers stopped looking for
work.

Employment conditions in the Commonwealth improved to 5.2 percent in 2003 from
5.9 percent in 2002. Similarly, the unemployment rate for all five

                                       168
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

counties in our market area improved in comparison to 2002. However, similar to
the Nation, according to the State Department of Labor and Industry, the
improvement was not due to job creation, but rather a reduction in the region's
labor force. The civilian labor force in our five-county market area fell by
5,600 workers or 2.5 percent in 2003, due primarily to this region's growing
number of retirees. In addition, the number of jobs in December 2003 fell by
3,100 compared with one year earlier.

The banking industry, for the third consecutive year, reported record earnings
in 2003. Higher levels of noninterest income and lower provisions for loan
losses led to a $12.7 billion or 14.1 percent increase in net income for all
Federal Deposit Insurance Corporation ("FDIC")-insured commercial banks. In
addition, banks exhibited strong balance sheet growth. For all FDIC-insured
commercial banks, total assets grew 7.4 percent, loans, net of unearned income,
grew 6.6 percent and total deposits grew 7.2 percent in 2003. Furthermore, the
capital position for these banks improved, as stockholders' equity increased 6.9
percent.

After two years of decline, equity markets rebounded in 2003. Similar to all
major indices, bank stocks posted gains in 2003, as evidenced by an increase in
The NASDAQ(R) Bank Index Composite of 29.9 percent. Economic recovery and higher
stock values influenced the increase in deals announced in 2003, as companies
once again pursued mergers and acquisitions as a means of growth. In the United
States, $523.7 billion in transactions were announced in 2003, a 19.0 percent
increase from 2002. In addition, the number of mergers and acquisitions
announced increased 13.6 percent. Deal values recorded a corresponding increase,
as both the median price-to-earnings and the median price-to-tangible book value
rose.

REVIEW OF FINANCIAL POSITION:

We grew significantly in 2003, surpassing the one-half of $1.0 billion milestone
in total assets. Our strategic initiatives, coupled with economic and market
conditions, affected the demand for both loans and deposits and led to a $23.0
million or 4.7 percent increase in total assets to $509.4 million at December
31, 2003, from $486.4 million at the end of the previous year. Total assets
averaged $502.9 million in 2003, an increase of $27.9 million or 5.9 percent
compared to 2002. As a percentage of average total assets, average earning
assets equaled 94.5 percent in 2003 and 94.7 percent in 2002. Market rates,
already at historic lows, fell even further and forced a 92 basis point
reduction in our tax-equivalent yield on earning assets to 5.89 percent in 2003
from 6.81 percent in 2002.

                                       169
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Loans, net of unearned income, grew substantially, by $34.3 million or 10.6
percent to $357.9 million at December 31, 2003, from $323.6 million at year-end
2002. Our deposits rose $22.3 million or 5.1 percent to $459.5 million at
December 31, 2003, from $437.2 million at the end of 2002.

Stockholders' equity increased $1.2 million to $46.5 million at December 31,
2003, from $45.3 million at December 31, 2002. Our book value grew to $24.41 per
share, compared to $23.31 per share at the end of 2002.

INVESTMENT PORTFOLIO:

Total return is a principal gauge and comprehensive industry-wide approach
measuring investment portfolio performance. This measure is superior to
measuring performance strictly on the basis of yield since it not only considers
income earned similar to the yield approach, but also includes the reinvestment
income on repayments and capital gains and losses whether realized or
unrealized. The total return on our investment portfolio weakened to 3.3 percent
in 2003, from 8.8 percent in 2002. Our investment portfolio ranked in the upper
half of all FDIC-insured bank holding companies, based on a study from an
independent national investment performance ranking company, with respect to
total return over the previous 12 months.

Similar to the approach taken in assessing our performance with respect to
return, we evaluate our risk in comparison to all other financial institutions.
Risk is assessed by quantifying the average life of the investment portfolio as
compared to that of U.S. Treasury securities. This risk measure improved from
1.0 year in 2002 to 0.8 years in 2003. As a result of this improvement,
according to the same independent ranking company, our portfolio ranked in the
upper one-third of all FDIC-insured bank holding companies with regard to low
risk.

Investment securities decreased $19.0 million to $105.2 million at December 31,
2003, from $124.2 million at December 31, 2002. The investment portfolio
averaged $112.8 million and equaled 23.7 percent of average earning assets in
2003, compared to $110.2 million and 24.5 percent in 2002. Net unrealized
holding gains on the investment portfolio, included as a separate component of
stockholders' equity, were $2,113, net of income taxes of $1,089, at December
31, 2003, and $2,584, net of income taxes of $1,331, at December 31, 2002. Due
primarily to a 239 basis point decline in the yield on taxable investments, the
tax-equivalent yield on the investment portfolio fell 188 basis points to 3.93
percent in 2003 from 5.81 percent in 2002.

                                       170
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We received proceeds from the sale of available-for-sale investment securities
of $19.0 million in 2003 and $15.1 million in 2002. The securities sold in 2003
were comprised entirely of short-term bonds of U.S. Government agencies. Net
gains recognized on the sale of investment securities totaled $13 in 2003 and
$322 in 2002. Repayments from investment securities totaled $60.0 million in
2003 and $34.5 million in 2002. We purchased a total of $62.8 million in
investment securities in 2003 compared to $51.2 million in 2002.

At December 31, 2003, investment securities with an amortized cost of $36.3
million were pledged to secure deposits, to qualify for fiduciary powers and for
other purposes required or permitted by law. At December 31, 2002, the amortized
cost of pledged securities equaled $37.4 million. The fair value of such
securities equaled $36.9 million at December 31, 2003, and $38.4 million at
December 31, 2002.

LOAN PORTFOLIO:

Loans, net of unearned income, totaled $357.9 million at December 31, 2003, an
increase of $34.3 million or 10.6 percent from $323.6 million at December 31,
2002. Our emphasis on building relationships with businesses in our market area
led to an increase in business loans, including commercial loans, commercial
mortgages and lease financing, of $56.8 million or 34.0 percent to $224.1
million at year-end 2003 from $167.3 million at the end of 2002. Specifically,
commercial real estate loans rose significantly, $46.7 million or 62.4 percent,
while commercial loans and leases grew $10.1 million or 11.0 percent. Business
loans represented 62.6 percent of total loans, net of unearned income, at
December 31, 2003, compared to 51.7 percent at year-end 2002. Although we
experienced intense mortgage demand in 2003, the majority of new loans and loans
refinanced were subsequently sold in the secondary market. This resulted in a
$19.5 million or 15.8 percent decline in the outstanding balance of residential
mortgages, including construction loans, to $104.1 million at the end of 2003
from $123.6 million at December 31, 2002. Automobile manufacturers continued to
offer either zero percent or very low-rate financing incentives in 2003. As a
result, consumer loans decreased $3.0 million or 9.2 percent to $29.7 million at
December 31, 2003, from $32.7 million at the end of 2002. The loan portfolio
averaged $346.6 million in 2003, an increase of $28.4 million or 8.9 percent
compared to $318.2 million in 2002. The tax-equivalent yield on our loan
portfolio fell 75 basis points to 6.75 percent in 2003 from 7.50 percent in
2002.

Activity in our secondary mortgage banking program flourished. Mortgages
originated and subsequently sold in the secondary market totaled $56.9

                                       171
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

million in 2003, an increase of $17.2 million or 43.3 percent compared to $39.7
million in 2002. We realized net gains on the sale of these loans, included in
noninterest income, of $1,212 in 2003 and $919 in 2002. In addition, we had $3.2
million and $3.9 million of residential mortgage loans held for sale at December
31, 2003 and 2002. Residential mortgage loans serviced for the Federal National
Mortgage Association totaled $90.0 million at December 31, 2003, an increase of
$33.9 million or 60.4 percent compared to $56.1 million at December 31, 2002.

In addition, we experienced strong refinancing activity, as our volume of
refinanced residential mortgages increased $4.7 million or 25.8 percent in 2003.
The number of mortgage refinancings totaled 292 with an aggregate dollar volume
of $22.9 million in 2003, compared to 212, with an aggregate dollar volume of
$18.2 million in 2002.

Our holdings of adjustable-rate loans increased $49.4 million or 34.1 percent in
2003 after increasing $47.4 million or 48.6 percent in 2002. Adjustable-rate
loans totaled $194.4 million and represented 54.3 percent of the loan portfolio
at December 31, 2003, compared to $145.0 million or 44.8 percent at the end of
2002. Heightened refinancing activity, coupled with an increase in the volume of
loans sold in the secondary market, caused a reduction in our residential
mortgage loans. As a result, the amount of fixed-rate loans decreased $15.1
million to $163.5 million at December 31, 2003, from $178.6 million at December
31, 2002.

ASSET QUALITY:

Our asset quality improved in 2003 compared to 2002. Nonperforming assets
decreased $135 or 5.3 percent to $2,407 at December 31, 2003, from $2,542 at the
end of 2002. A reduction of $356 in nonperforming loans was partially offset by
an increase of $221 in foreclosed assets. With regard to nonperforming loans,
loans on nonaccrual status decreased $546, while accruing loans past due 90 days
or more rose $190.

At December 31, 2003 and 2002, we had a recorded investment in impaired loans of
$1,654 and $3,658. The recorded investment in impaired loans averaged $2,510 in
2003 and $2,831 in 2002. At December 31, 2003, the amount of recorded investment
in impaired loans for which there was a related allowance for loan losses and
the amount of the allowance was $747 and $377. Comparatively, the amount of
these loans and their related allowance was $2,500 and $877, at December 31,
2002. The amount of recorded investment for which there was no related allowance
for loan losses was $907 and $1,158 at December 31, 2003 and 2002. During 2003,
activity in the allowance for loan losses account related to impaired loans
included a

                                      172
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

provision charged to operations of $83, losses charged to the allowance of $609
and recoveries of impaired loans previously charged-off of $26. The 2002
activity in the allowance for loan losses account related to impaired loans
included a provision charged to operations of $944, losses charged to the
allowance of $477 and recoveries of impaired loans previously charged-off of $7.
Interest income related to impaired loans would have been $188 in 2003 and $201
in 2002 had the loans been current and the terms of the loans not been modified.
Interest recognized on impaired loans amounted to $145 in 2003 and $176 in 2002.
Included in these amounts was interest recognized on a cash basis of $145 and
$176. Cash received on impaired loans applied as a reduction of principal
totaled $754 in 2003 and $493 in 2002. There were no commitments to extend
additional funds to customers with impaired loans at December 31, 2003 and 2002.

We maintain the allowance for loan losses at a level we believe adequate to
absorb probable credit losses related to specifically identified loans, as well
as probable incurred losses inherent in the remainder of the loan portfolio as
of the balance sheet date. The allocated element of the allowance for loan
losses account was $1,905 at December 31, 2003, compared to $3,734 at December
31, 2002. The decrease resulted from reductions of $500 in the specific portion
for the impairment of loans individually evaluated under Statement of Financial
Accounting Standards ("SFAS") No. 114 and $1,329 in the formula portion for the
impairment of loans collectively evaluated under SFAS No. 5. The decrease in the
specific portion resulted from a decline in the volume of impaired loans with a
recorded investment in excess of their fair value to $747 at year-end 2003 from
$2,500 at the end of the previous year. For these loans, the amount by which the
recorded investment exceeded the fair market value was $377 at December 31,
2003, compared to $877 at the end of 2002. With regard to the formula portion of
the allowance for loans collectively evaluated for impairment under SFAS No. 5,
the decline resulted from a significant reduction in the total loss factor for
identified loans individually evaluated but considered not impaired that share
risk characteristics with other collectively evaluated loans having internal
loan grading classifications of substandard, special mention or watch. The
reduction in the total loss factor resulted from a dramatic improvement in the
historical loss factor, defined as the average of the ratio of net loans
charged-off to loans, net of unearned income, over the past eight quarters, for
these types of loans. The unallocated element was $1,679 at December 31, 2003
and $11 at December 31, 2002.

The allowance for loan losses coverage ratio improved to 167.0 percent at
December 31, 2003, from 149.7 percent at December 31, 2002, and indicated that
our allowance account was more than able to absorb all potential

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COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

losses associated with nonperforming loans. With regard to all nonperforming
assets, our coverage ratio equaled 148.9 percent at the end of 2003 and 147.3
percent at year-end 2002. Furthermore, the allowance for loan losses covered
216.7 percent of loans considered impaired at December 31, 2003. The coverage
ratio for impaired loans at December 31, 2002, was 102.4 percent.

The allowance for loan losses was $3.6 million and approximated 1.00 percent of
loans, net of unearned income, at December 31, 2003, compared to $3.7 million
and 1.16 percent at the end of the previous year. The lower ratio primarily
resulted from a reduction in the provision for loan losses, coupled with the
overall increase in the loan portfolio. Net loans charged-off amounted to $641
or 0.18 percent of average loans outstanding in 2003, compared to $575 or 0.18
percent in 2002. For our peer group, a group of 347 bank holding companies
located within the Federal Reserve District of Philadelphia with consolidated
assets between $500.0 million and $1.0 billion, net charge-offs as a percentage
of average loans outstanding increased to 0.25 percent in 2003 from 0.18 percent
in 2002.

DEPOSITS:

Total deposits grew $22.3 million or 5.1 percent to $459.5 million at December
31, 2003, from $437.2 million at the end of 2002. Of the total deposit growth,
$20.7 million or 92.8 percent was concentrated in demand deposits and
interest-bearing transaction accounts. Noninterest-bearing accounts grew $9.3
million or 18.7 percent from the end of 2002, while interest-bearing transaction
accounts rose $11.4 million or 6.4 percent. We continued to focus on building
comprehensive relationships with our commercial customers. Nearly 31.0 percent
of total growth in interest-bearing transaction accounts occurred in the
commercial sector. Furthermore, commercial checking accounts increased $5.7
million or 63.3 percent.

Total average deposits grew $25.3 million or 5.9 percent to $453.4 million in
2003, from $428.1 million in 2002. Noninterest-bearing deposits averaged $7.3
million or 14.8 percent higher in 2003, while average interest-bearing accounts
grew $18.0 million or 4.8 percent. The growth in interest-bearing accounts
reflected customer preference for liquidity. Average savings accounts increased
$19.9 million or 18.4 percent, as deposits having stated maturities, average
time deposits less than $100 and time deposits $100 or more, exhibited only
marginal growth of $0.2 million. Average money market accounts declined $2.6
million, while average NOW accounts increased $0.5 million. Our cost of deposits
decreased 72 basis points to 2.51 percent in 2003, from 3.23 percent in 2002.

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COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Volatile deposits, time deposits $100 or more, increased $4.6 million to $29.1
million at December 31, 2003, from $24.5 million at the end of 2002. Large
denomination time deposits averaged $27.8 million in 2003 and $27.9 million in
2002. Our average cost of these funds declined 49 basis points to 3.30 percent
in 2003, from 3.79 percent in 2002.

MARKET RISK SENSITIVITY:

We utilize various computerized modeling techniques for market risk management.
One such technique utilizes a tabular presentation of fair value information and
contract terms relevant to determine the future cash flows of market risk
sensitive instruments, categorized by expected maturity dates. According to the
results of this presentation at December 31, 2003, total interest-earning assets
scheduled to mature within one year totaled $109.7 million with a
weighted-average tax-equivalent yield of 4.88 percent. Total interest-bearing
liabilities scheduled to mature within one year equaled $109.5 million with a
weighted-average cost of 1.47 percent. Interest-earning assets scheduled to
mature within one year were primarily comprised of investment securities having
an amortized cost of $17.5 million and a weighted-average tax-equivalent yield
of 4.29 percent and net loans of $77.5 million with a weighted-average
tax-equivalent yield of 5.55 percent. In addition, there were $11.5 million in
federal funds sold and $3.2 million in loans held for sale with weighted-average
yields of 1.00 percent and 5.97 percent at the end of 2003. With regard to
interest-bearing liabilities, based on historical withdrawal patterns,
interest-bearing transaction accounts, defined as money market, NOW and savings
accounts, of $40.0 million with a weighted-average cost of 0.75 percent were
anticipated to mature within one year. In addition, time deposits totaling $69.5
million with a weighted-average cost of 1.89 percent were scheduled to mature
within the same time frame.

In addition to monitoring market risk based on this tabular presentation, we
analyze changes in the fair value of other financial instruments utilizing
interest rate shocks. Specifically, we analyze the effects instantaneous
parallel shifts of plus or minus 100 basis points have on the economic values of
other financial instruments. The results of the model at December 31, 2003,
indicated fair value declines of 1.7 percent in other financial assets and 1.0
percent in other financial liabilities given a parallel and instantaneous rise
of 100 basis points in market interest rates. Conversely, a 100 basis point
decline in market interest rates would result in fair value appreciation of 1.6
percent in other financial assets and 1.0 percent in other financial
liabilities.

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COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We also use models that consider repricing frequencies of rate sensitive assets
("RSA") and rate sensitive liabilities ("RSL") in addition to maturity
distributions. One such technique utilizes a static gap report, which attempts
to measure our interest rate exposure by calculating the net amount of RSA and
RSL that reprice within specific time intervals. At December 31, 2003, our
cumulative one-year RSA/RSL ratio was 1.36, compared to 1.11 at December 31,
2002.

As a final tool to assist in managing market risk sensitivity, we enhance our
asset/liability management by using a simulation model. This model is used to
create pro forma net interest income scenarios under various interest rate
shocks. Model results, using parallel and instantaneous shifts in general market
interest rates of plus and minus 100 basis points, did not change materially
from model results using current interest rates at December 31, 2003.

LIQUIDITY:

The net noncore and net short-term noncore funding dependence ratios illustrate
the change in our liquidity position over the prior year. At December 31, 2003,
our net noncore funding dependence ratio was negative 0.02 percent, compared to
negative 7.50 percent at December 31, 2002. Our net short-term noncore funding
dependence ratio equaled negative 3.72 percent at the end of 2003, compared to
negative 10.00 percent at year-end 2002. Negative ratios indicated that at
December 31, 2003 and 2002, we had no reliance on noncore deposits and
borrowings to fund our long-term assets, namely loans and investments.

Our liquidity position is further explained by analyzing the Consolidated
Statements of Cash Flows. Cash and cash equivalents increased $7.2 million to
$28.6 million at December 31, 2003, from $21.4 million at the end of 2002. For
the year-ended 2002, cash and cash equivalents increased $7.4 million. In both
2003 and 2002, the increases in cash and cash equivalents primarily resulted
from net cash provided by financing activities and, to a lesser extent,
operating activities, partially offset by net cash used in investing activities.

Deposit gathering was our predominant financing activity, as it provided us with
net cash of $22.3 million in 2003 and $21.0 million in 2002. In 2002,
transaction accounts increased $30.4 million, while time deposits declined $9.4
million as depositors, unsure of the economy, interest rates and the stock
market, chose to keep their funds liquid. In 2003, we experienced an increase in
both transaction accounts and time deposits of $20.7 million and $1.6 million.

                                       176
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COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Operating activities provided net cash of $8.7 million in 2003 and $5.6 million
in 2002. Net income, adjusted for the effects of noncash transactions such as
depreciation and the provision for loan losses, and net changes in current
assets, is the primary source of funds from operations.

Our primary investing activities involve transactions related to our investment
securities and lending activities. Net cash outlays for investing activities
totaled $20.7 million in 2003 compared to $16.5 million in 2002. We experienced
an increase in loan demand as evidenced by net funds used in lending activities
of $35.3 million in 2003, an increase of $21.3 million compared to the $14.0
million used in 2002. With regard to our investment portfolio, we received cash
from the sale of investment securities of $19.0 million in 2003 and $15.1
million in 2002. Due to declining market rates, we experienced an increase in
cash received from repayments of investment securities, as the volume of
prepayments on mortgage-backed securities amounted to $60.0 million in 2003
compared to $34.5 million in 2002. Cash outlays for the purchase of investment
securities totaled $62.8 million and $51.2 million in 2003 and 2002.

CAPITAL ADEQUACY:

Stockholders' equity increased $1.2 million to $46.5 million at December 31,
2003, from $45.3 million at December 31, 2002. On a per share basis,
stockholders' equity equaled $24.41 per share and $23.31 per share for these
respective periods. Net income of $4.7 million was the primary factor
contributing to the capital improvement. Also affecting stockholders' equity
were common stock repurchases of $1.6 million, net cash dividends declared of
$1.4 million and a net unrealized loss on investment securities of $0.5 million.

Under the stock repurchase program, we repurchased and retired 44,788 shares for
$1.6 million in 2003 and 37,933 shares for $1.2 million in 2002. We declared
dividends of $1,687 or $0.88 per share in 2003 and $1,603 or $0.82 per share in
2002. Our dividend payout ratio was 35.9 percent and 30.8 percent in 2003 and
2002. During the years ended December 31, 2003 and 2002, 6,547 shares and 6,161
shares were issued under the dividend reinvestment plan.

We and Community Bank have consistently maintained regulatory capital ratios
well above the minimum levels of 4.0 percent and 8.0 percent required for
adequately capitalized institutions. Our risk-based capital ratios declined
slightly in 2003 from 2002, but remained strong. Risk-weighted assets and
off-balance sheet items increased to a greater extent

                                       177
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

than both Tier I and total capital. Specifically, total risk-weighted assets and
off-balance sheet items rose $43.5 million or 13.5 percent, while Tier I capital
increased $1.9 million or 4.6 percent and total capital grew $1.8 million or 3.9
percent. The ratio of Tier I capital to risk-weighted assets was 11.9 percent
and 12.9 percent at December 31, 2003 and 2002, and our total capital to
risk-weighted assets ratio was 12.9 percent at year-end 2003, compared to 14.1
percent at the end of 2002. Our Leverage ratio equaled 8.7 percent and 8.8
percent at December 31, 2003 and 2002.

REVIEW OF FINANCIAL PERFORMANCE:

Net income totaled $4.7 million or $2.45 per share in 2003, compared to $5.2
million or $2.65 per share in 2002. Tighter net interest margins, reductions in
the gain on the sale of investment securities and higher levels of noninterest
expenses all contributed to the decline in net income. Return on average assets
and return on average equity were 0.93 percent and 10.23 percent in 2003,
compared to 1.10 percent and 11.99 percent in 2002. In addition, a rise in
market rates impacted the value of our available-for-sale investment securities.
As a result, we experienced a loss in other comprehensive income, net of income
tax benefits, of $0.5 million in 2003. In comparison, we reported other
comprehensive income, net of income tax expense, of $1.9 million in 2002.

NET INTEREST INCOME:

For the year ended December 31, 2003, tax-equivalent net interest income
decreased $340 to $18,054 from $18,394 for the same period of 2002. The
reduction resulted from a decline in the net interest spread, partially offset
by growth in earning assets over that of interest-bearing liabilities.

Earning asset yields declined to a greater extent than the cost of
interest-bearing liabilities, which resulted in a 20 basis point reduction in
the net interest spread to 3.38 percent in 2003 from 3.58 percent in 2002, and
accounted for a $1,860 decrease in tax-equivalent net interest income due to
changes in rate. The tax-equivalent yield on earning assets compressed 92 basis
points to 5.89 percent in 2003 from 6.81 percent in 2002, which resulted in a
$4,406 reduction in tax-equivalent interest revenue. Accounting for 88.6 percent
of this reduction were decreases of 63 basis points in the yield on taxable
loans and 239 basis points in the yield on taxable investments. These yield
declines reduced interest revenue by $2,014 and $1,891. The cost of
interest-bearing liabilities declined 72 basis points to 2.51 percent in 2003
from 3.23 percent in 2002 and resulted

                                       178
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COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

in a $2,546 reduction in interest expense. Reductions of 85 basis points and 56
basis points in the cost of our savings accounts and time deposits less than
$100 accounted for 81.5 percent of the decrease in interest expense. The cost of
savings accounts fell to 1.03 percent in 2003 compared to 1.88 percent in 2002
and the cost of time deposits less than $100 dropped to 3.88 percent from 4.44
percent. These cost reductions caused interest expense to decline $1,032 and
$1,044.

Average earning assets grew $25.7 million or 5.7 percent in 2003 to $475.4
million from $449.7 million in 2002. This resulted in additional interest
revenue of $1,822. Interest-bearing liabilities averaged $397.0 million in 2003,
an increase of $18.3 million or 4.8 percent compared to $378.7 million in 2002,
and caused an increase in interest expense of $302. With regard to growth in
average earning assets, taxable and tax-exempt loans grew $19.9 million and $8.5
million, which together resulted in additional interest revenue of $1,955.
Taxable investments averaged $8.4 million higher, however, tax-exempt
investments decreased $5.8 million. As a result of changes in the volume of
investments, interest revenue was reduced by $61. The change in average
interest-bearing liabilities was primarily caused by the $19.9 million growth in
savings accounts, which resulted in additional interest expense of $324.
Overall, the change in volumes resulted in additional tax-equivalent net
interest income of $1,520, which partially mitigated the effect of the decline
in spread.

PROVISION FOR LOAN LOSSES:

The provision for loan losses equaled $480 in 2003, a decrease of $620 compared
to $1,100 in 2002. We considered the decrease appropriate based on the continued
improvement in nonperforming assets in 2003.

NONINTEREST INCOME:

Noninterest income totaled $4,034 in 2003 and $4,145 in 2002. Net gains on the
sale of residential mortgages increased $293 or 31.9 percent to $1,212 for the
year ended December 31, 2003. Service charges, fees and commissions decreased
$95 or 3.3 percent compared to the previous year. Net gains on the sale of
investment securities were $13 in 2003 and $322 in 2002.

NONINTEREST EXPENSE:

Noninterest expense increased $954 or 7.1 percent to $14,484 for the year ended
December 31, 2003, from $13,530 for the same period of 2002. We experienced
increases of $410 or 6.1 percent in salaries and employee

                                       179
<PAGE>

COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 VERSUS 2002 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

benefits expense, $397 or 21.4 percent in net occupancy and equipment expense
and $147 or 3.0 percent in other expenses.

Salaries and employee benefits expense constitutes the majority of our
noninterest expense. Total personnel costs rose $410 or 6.1 percent to $7,177 in
2003 from $6,767 in 2002. Additional staff and training required for the new
Tannersville office and personnel added in our Lending and Credit Administration
Divisions were responsible for a 5.4 percent increase in salaries and payroll
taxes. Employee health insurance premiums rose 22.4 percent in 2003 and
primarily caused the increase in employee benefits expense.

Net occupancy and equipment expense was $2,250 in 2003, an increase of $397 or
21.4 percent compared to $1,853 in 2002. Depreciation and maintenance costs
associated with the relocation of the Clifford office in January and the
installation of a document imaging system factored into the increase.

Other expenses were impacted by higher contractual services relative to the
strong volume in originations of one-to-four family residential mortgages that
qualified for sale in the secondary market, and increased state shares tax.
Partially offsetting these higher costs were reductions in marketing costs,
stationery and supply costs and other real estate expense. Other expenses
amounted to $5,057 in 2003, an increase of $147 or 3.0 percent compared to
$4,910 in 2002.

INCOME TAXES:

Our income tax expense decreased $177 to $1,206 for the year ended December 31,
2003, from $1,383 for the same period of 2002. Our effective tax rate improved
from 21.0 percent in 2002 to 20.4 percent in 2003. We utilize loans and
investments of tax-exempt organizations to mitigate our tax burden, as interest
revenue from these sources are not taxable by the federal government. Tax-exempt
interest revenue, as a percentage of total interest revenue, equaled 8.8 percent
in 2003 and 2002.

                                       180
<PAGE>

COMM BANCORP, INC.
DIRECTORS AND OFFICERS

BOARD OF DIRECTORS
COMM BANCORP, INC. AND
COMMUNITY BANK AND TRUST COMPANY

DAVID L. BAKER
Senior Vice President,
Community Bank and Trust Company

THOMAS M. CHESNICK
Retired

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

JUDD B. FITZE
Attorney, Farr, Davis & Fitze

DEAN L. HESSER
President, Tom Hesser Chevrolet, Inc.,
Tom Hesser Ford, LLC & Tom Hesser Nissan, LLC

JOHN P. KAMEEN
SECRETARY
Publisher, The Forest City News

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

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

SUSAN F. MANCUSO
Partner, Mancuso & Mancuso
Accounting & Tax Service

ROBERT A. MAZZONI
Judge of the Court of Common Pleas of
Lackawanna County

J. ROBERT MCDONNELL
VICE CHAIRMAN
Owner, McDonnell's Restaurant

JOSEPH P. MOORE, III
President, J.J. Motors, Inc.

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

CORPORATE OFFICERS
COMM BANCORP, INC.

WILLIAM R. BOYLE
Senior Vice President
Chief Credit Officer

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

JOHN P. KAMEEN
Secretary

J. ROBERT MCDONNELL
Vice Chairman

SCOTT A. SEASOCK
Executive Vice President
Chief Financial Officer

DIRECTORS EMERITUS

MICHAEL T. GOSKOWSKI
President, Kartri Sales Co., Inc.,
M.G. Manufacturing Co., Inc.

WILLIAM B. LOPATOFSKY
Retired

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

                                      181

<PAGE>

COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)

ADVISORY BOARDS

COMMUNITY BANK AND TRUST COMPANY
CARBONDALE BRANCH

JOSEPH J. BRENNAN
Brennan and Brennan Funeral Home

JOHN J. CERRA
Attorney

HENRY E. DEECKE
Henry E. Deecke Real Estate

ROBERT W. FARBER
Quality Perforating, Inc.

JOSEPH R. MAZZA
Mazza Linen Service

CLIFFORD BRANCH

THOMAS J. LOPATOFSKY, JR.
Lenox Propane

SEAN P. MCGRAW
Attorney, McGraw, Peterson & Nepa

PATRICK J. OLIVERI
Oliveri's Crystal Lake Hotel

EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK BRANCHES

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

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

HOWARD D. TRAUGER
Trauger's, Inc.

FOREST CITY BRANCH

THOMAS BAILEYS
Does Not Compute

RICHARD E. CURTIS
CUBE Auto Supply

ALLAN A. HORNBECK, JR.
Allan Hornbeck Chevrolet

JOSEPH LUCCHESI, D.M.D.
Dentist

J. SCOTT MISKOVSKY
Pharmacist, Red Cross Pharmacy

LINDA M. RICHARDS
Sparkware Associates, Inc.

MONTROSE BRANCH

EDGAR B. BAKER
Consultant

THOMAS R. KERR
Tom Kerr Chevrolet

DONNA L. WILLIAMS
Livestock Dealer/Farmer

NICHOLSON BRANCH

RICHARD S. LOCHEN
Lochen's Market

MARK W. NOVITCH
Sherwood's Freightliner
Western Star Sterling

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

SIMPSON BRANCH

FRANCIS LAPERA
Lapera Oil Company, Inc.

ROBERT M. MCDONNELL
McDonnell's Restaurant

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

TANNERSVILLE BRANCH

TIMOTHY B. FISHER, II
Attorney, Fisher & Fisher

GARY HAZEN, CPA
John J. Riley, Inc. Certified Public Accountants

CHARLES R. MARZZACO
Weichert Realtors Acclaim

L. PATRICK ROSS
Pocono Township Supervisor

MATHILDA B. SHEPTAK
Pocono Mountains Vacation Bureau

                                      182

<PAGE>

COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)

OFFICERS
COMMUNITY BANK AND TRUST COMPANY

DAVID L. BAKER
Senior Vice President

WILLIAM R. BOYLE
Senior Vice President
Chief Credit Officer

DEBRA A. CARR
Dickson City Branch Manager

MARK E. CATERSON
Montrose Branch Manager

ROBERT F. DAVIS
Assistant Vice President
Commercial Loan Officer

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

JAY S. FENDRICK
Senior Trust Officer

SHARON J. FONTANA
Tannersville Branch Manager

STEPHANIE A. GANZ, CPA
Vice President of Finance

DEBRA A. GAY
Eaton Township and Lake Winola Regional Manager

GREGORY G. GULA
Vice President
Internal Loan Review Officer

DONALD J. GIBBS
Scranton Branch Manager

DAVID A. JONES
Vice President
Mortgage Department

SHARON A. KOHANSKI
Vice President
Commercial Loan Officer

GARY S. LAVELLE
Vice President
Consumer Loan Officer

ANNETTE M. LYNCH
Assistant Vice President
Loan Administration

PAMELA S. MAGNOTTI
Compliance Officer

MARY ANN MUSHO
Human Resources Director

MICHAEL A. NARCAVAGE
Vice President
Chief Operations Officer

TIMOTHY P. O'BRIEN
Vice President
Commercial Loan Manager

ROBERT P. O'MALLEY
Indirect Loan Officer

M. EVELYN PANTZAR
Vice President
Internal Auditor

JOHN PASH, III
Comptroller

MARY BETH PASQUALICCHIO
Marketing Director

JAMES R. PIETROWSKI
Assistant Vice President
Commercial Loan Officer

VICTORIA L. RANDIS
Eynon Branch Manager

CHERYL A. RUPP
Simpson Branch Manager

THOMAS A. SALUS
Vice President
Credit Administrator

SCOTT A. SEASOCK
Executive Vice President
Chief Financial Officer

THOMAS W. SHEPPARD
Vice President
Clark Summit Branch Manager

RONALD K. SMITH
Vice President
Branch Administrator

TAMI L. SNYDER
Vice President
Information Services

HAROLD F. STOUT
Tunkhannock Branch Manager

BRIAN C. URBAS
Clifford, Forest City and Lakewood Regional Manager

ANN E. VADELLA
Carbondale Branch Manager

LOUIS J. ZEFRAN
Business Development Officer

                                      183

<PAGE>

COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)

BOARD OF DIRECTORS
COMM REALTY CORPORATION

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

SCOTT A. SEASOCK

ERIC G. STEPHENS

OFFICERS
COMM REALTY CORPORATION

THOMAS A. SALUS
President

STEPHANIE A. GANZ, CPA
Treasurer

ROBERT F. DAVIS
Secretary

BOARD OF DIRECTORS
COMMUNITY LEASING CORPORATION

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

SCOTT A. SEASOCK

ERIC G. STEPHENS

OFFICERS
COMMUNITY LEASING CORPORATION

ERIC G. STEPHENS
President

STEPHANIE A. GANZ, CPA
Treasurer

JAMES R. PIETROWSKI
Secretary

BOARD OF DIRECTORS
COMM FINANCIAL SERVICES CORPORATION

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

JOHN P. KAMEEN

SCOTT A. SEASOCK

OFFICERS
COMM FINANCIAL SERVICES CORPORATION

GEORGE J. COBB
President

JOHN PASH, III
Treasurer

MARY ANN MUSHO
Secretary

MEMBERSHIP
COMMUNITY ABSTRACT SERVICES, LLC

WILLIAM F. FARBER, SR.
Community Bank and Trust Company

MICHAEL C. COWLEY
Cowley Law Firm

OFFICERS
COMMUNITY ABSTRACT SERVICES, LLC

MICHAEL C. COWLEY
President and Managing Partner

SCOTT A. SEASOCK
Vice President

STEPHANIE A. GANZ, CPA
Treasurer

WILLIAM R. BOYLE
Secretary

                                      184

<PAGE>

COMM BANCORP, INC.
OTHER INFORMATION

LOCATIONS
COMMUNITY BANK AND TRUST COMPANY

CARBONDALE BRANCHES*
37 Dundaff Street
Carbondale, PA 18407
570-282-7500

92 Brooklyn Street
Carbondale, PA 18407
570-282-2276

CLARKS SUMMIT BRANCH*
125 N. State Street
Clarks Summit, PA 18411
570-586-6876

CLIFFORD BRANCH*
60 Main Street
Clifford, PA 18413
570-222-3168

DICKSON CITY BRANCH*
1601 Main Street
Dickson City, PA 18519
570-489-8900

EATON TOWNSHIP BRANCH*
Cross Country Complex
Route 29
Eaton Township, PA 18657
570-836-1008

EYNON BRANCH*
Eynon Plaza
Route 6
Eynon, PA 18403
570-876-4881

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

FOREST CITY BRANCH*
521 Main Street
Forest City, PA 18421
570-785-3181

LAKE WINOLA BRANCH*
Winola Plaza
Lake Winola, PA 18625
570-378-3195

LAKEWOOD BRANCH
Lake Como Road
Lakewood, PA 18439
570-798-2900

MONTROSE BRANCH*
61 Church Street
Montrose, PA 18801
570-278-3824

NICHOLSON BRANCH*
57 Main Street
Nicholson, PA 18446
570-942-6135

SCRANTON BRANCH*
601 W. Lackawanna Avenue
Scranton, PA 18504
570-558-3600

SIMPSON BRANCH*
347 Main Street
Simpson, PA 18407
570-282-4821

TANNERSVILLE BRANCH*
Route 611
Tannersville, PA 18372
570-619-6620

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

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

LOAN OPERATIONS CENTER
1212 S. Abington Road
Clarks Summit, PA 18411
570-586-0377

REMOTE ATM LOCATIONS
Keystone College
College Avenue
LaPlume, PA 18440

Moses Taylor Hospital
700 Quincy Avenue
Scranton, PA 18510

COMMUNITY ABSTRACT SERVICES, LLC

281 E. Grove Street
Clarks Green, PA 18411
570-587-3060

COMM FINANCIAL SERVICES CORPORATION

125 N. State Street
Clarks Summit, PA 18411
570-586-0377

COMMUNITY LEASING CORPORATION

125 N. State Street
Clarks Summit, PA 18411
570-586-0377

COMM REALTY CORPORATION

125 N. State Street
Clarks Summit, PA 18411
570-586-0377

KLICK(SM) BANKING VIA THE INTERNET

www.combk.com
Customer Service:
800-820-4642, Ext. 109

INTOUCH(SM) TELEPHONE BANKING SYSTEM

800-820-4642

ATM Locations

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<PAGE>

COMM BANCORP, INC.
OTHER INFORMATION (CONTINUED)

STOCKHOLDER INFORMATION

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

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

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

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

MARKET MAKERS:
Ferris, Baker, Watts, Inc.
100 Light Street
Baltimore, MD 21202
800-436-2000

Hill, Thompson, Magid, LP
15 Exchange Place, Suite 800
Jersey City, NJ 07302
800-631-3083

Janney, Montgomery, Scott, LLC
1801 Market Street
Philadelphia, PA 19103
800-526-6397

Knight Equity Markets, LP
525 Washington Boulevard
Jersey City, NJ 07310
800-544-7508

Ryan, Beck & Co.
18 Columbia Turnpike
Florham Park, NJ 07932
800-342-2325

Susquehanna Capital Group
401 City Avenue, Suite 220
Bala Cynwyd, PA 19004
610-617-2600

UBS Capital Markets, LP
Newport Financial Center
111 Pavonia Avenue East
Jersey City, NJ 07310
212-804-3437

COMMUNITY REINVESTMENT:

Copies of Community Bank and Trust Company's Community Reinvestment Statement
may be obtained without charge by writing to Pamela S. Magnotti, Compliance
Officer, at corporate headquarters.

COMMON STOCK MARKET INFORMATION:

Shares of Comm Bancorp, Inc. common stock are listed on The NASDAQ Stock
Market(R) ("NASDAQ") as CommBcp under the symbol "CCBP." As of March 16, 2005,
seven firms were listed on the NASDAQ system as market makers for the Company's
common stock.

The high and low closing sale prices and dividends per share of the Company's
common stock for the four quarters of 2004 and 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                      CASH
                                                    DIVIDENDS
                                HIGH       LOW      DECLARED
                              -------    ------    ----------
<S>                           <C>        <C>       <C>
2004:
First Quarter......           $ 40.87    $ 38.06     $ 0.22
Second Quarter.....             41.45      38.78       0.22
Third Quarter......             41.00      39.20       0.22
Fourth Quarter.....           $ 41.78    $ 39.20     $ 0.22
2003:
First Quarter......           $ 35.48    $ 33.50     $ 0.22
Second Quarter.....             37.40      34.23       0.22
Third Quarter......             36.67      34.25       0.22
Fourth Quarter.....           $ 38.85    $ 35.97     $ 0.22
</TABLE>

DIVIDEND REINVESTMENT:

Comm Bancorp, Inc. offers a Dividend Reinvestment Plan whereby stockholders can
increase their investment in additional shares of common stock without incurring
fees or commissions. A prospectus and enrollment form may be obtained by
contacting American Stock Transfer & Trust Company, Dividend Reinvestment
Department, 59 Maiden Lane, New York, NY 10007, 1-800-278-4353.

DIVIDEND DIRECT DEPOSIT:

Comm Bancorp, Inc. stockholders not participating in the Dividend Reinvestment
Plan may opt to have their dividends deposited directly into their bank account
by contacting American Stock Transfer & Trust Company at 1-800-937-5449.

WEBSITE INFORMATION:

The Company files reports, proxy and information statements and other
information electronically with the Securities and Exchange Commission ("SEC")
through the Electronic Data Gathering Analysis and Retrieval filing system.
Stockholders and other interested parties may read and copy any materials that
the Company files with the SEC at the SEC's Public Reference Room at 450 5th
Street, N.W., Washington, DC 20549. Information on the operation of the Public
Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC's website address is http://www.sec.gov. The Company's website
address is http://www.combk.com. Copies of the Company's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC may be
obtained without charge by writing to Comm Bancorp, Inc., 125 North State
Street, Clarks Summit, PA 18411, Attn: Investor Relations or through our
Internet website.


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