Management’s
Discussion and Analysis


of


Financial
Condition and Results of Operations








Safe Harbor
Statement





Forward-looking
statements (statements which are not historical facts) in this Annual Report on
Form 10-K are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as “may,” “will,” “to,” “expect,” “believe,” “anticipate,” “intend,”
“could,” “would,” “estimate,” or “continue” or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements are based on information currently available to
Commercial National Financial Corporation (the Corporation), and the Corporation
assumes no obligation to update these statements as circumstances change.
Investors are cautioned that all forward-looking statements involve risk and
uncertainties, including changes in general economic and financial market
conditions, unforeseen credit problems, and the Corporation’s ability to execute
its business plans. The actual results of future events could differ materially
from those stated in any forward-looking statements herein.











Critical Accounting
Policies






Disclosure
of the Corporation's significant accounting policies is included in Note 1
to the consolidated financial statements. Certain of these policies are
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained in
management's discussion and analysis for the most sensitive of these issues,
including the provision and allowance for loan losses.






In
determining the allowance for loan losses, management makes significant
estimates. Consideration is given to a variety of factors in establishing this
estimate. In estimating the allowance for loan losses, management considers
current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews,
its borrowers' perceived financial and managerial strengths, the adequacy of the
underlying collateral, if collateral dependent, or present value of future cash
flows and other relevant factors.




Overview





The
purpose of this discussion and the accompanying financial data is to provide aid
in understanding and evaluating the financial condition and results of
operations of the Corporation for the years ended December 31, 2007 and 2006.
This information should be read in conjunction with the consolidated financial
statements and related footnotes for the years under review.





The
Corporation is a one-bank holding company, with wholly-owned subsidiaries
Commercial Bank & Trust of PA (the Bank), and Commercial National Insurance
Services, Inc. (CNIS). In June 2004, CNIS sold all of its assets and is now
inactive.





The
Corporation reported net income of $3.1 million or $1.01 per share for the year
ended 2007 compared to $3.0 million or $0.95 per share for the year ended 2006.
The Corporation’s return on average assets ratios for 2007 and 2006 were 0.89%
and 0.90%, respectively. Return on average equity for the same two periods were
8.25% and 7.77%, respectively.





1




The
Corporation purchased 362,113 shares of its own common stock in the first
quarter of 2006. The costs associated with this purchase were $180,000, which
includes legal and professional costs of $150,000 and additional director and
miscellaneous costs of $30,000 associated with the due diligence process prior
to the stock purchase. The Corporation recognized $181,000 in interest income
during 2006 due to the payoff of one loan that had been in non-accrual status
and the upgrade of three loan relationships that were removed from non-accrual
status.





The
Corporation’s largest segment of operating results is dependent upon net
interest income. Net interest income is calculated as earnings on
interest-earning assets less interest paid on interest-bearing liabilities. For
the years ended 2007 and 2006, net interest income was $11.8 million and $11.8
million, respectively,with 2006 benefiting from $181,000 of interest income due to the payoff
and change of status of non-accrual loans noted above.The related tax-equivalent
net interest margin for these two years was 3.80% and 4.03%, respectively. The 2007 decrease in the
margin is mostly due to the increase in the cost of interest bearing
liabilities, which increased faster than the increase in yields on earning
assets. The Corporation anticipates margin compression will moderate and
potentially improve in 2008, due to the recent rate cuts by the Federal Reserve
Bank and the potential that the costs   on interest bearing
liabilities will decrease proportionally more in comparison to the decrease in
yields on earning assets.   Other factors that can affect the
Corporation’s operating results are activity in the loan loss provision and
components of non-interest income and non-interest expense.





The
business strategy for 2008 is to continue asset growth through traditional loans
and deposits supplemented by trust products offered to customers in its
marketplace. Management anticipates potential improvement in net interest
margins in 2008.  Loans and deposits will continue to be competitively
priced by the Corporation with the intention of acquiring profitable market
share.





Financial
Condition





Total
assets of the Corporation were $367.6 million on December 31, 2007 compared to
$338.2 million on December 31, 2006. This increase in assets is a result of an
increase in securities and the increases in investment in life insurance; these
increases were minimally offset by decreases in loan receivables, cash and other
assets.  The increase in total liabilities was attributed to an
increase in short and long term borrowings.





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





The total
loan portfolio decreased  $2.6 million in 2007, with an end of year
balance of $225.1 million compared with the 2006 end of year balance of $227.7
million. The majority of year to year change is due to; decreases in
construction mortgages of $3.8 million, lines of credit of $1.2 million,
installments of $1.4 million, tax frees of $2.3 million, consumer loans of $1.1
million and $1.8 million in commercial real estate loans were partially offset
by a increase in residential mortgages of $9.3 million.





Total
investment securities increased  $30.1 million during 2007. The
Corporation purchased $39.5 million of mortgage-backed securities and the
Corporation’s investments increased in fair value by $1.3 million. These
increases were offset by $9.9 million in principal pay downs of mortgage-backed
securities and a $100,000 municipal bond maturity.  All of the
Corporation’s securities are held as available for sale. These securities
consist of mortgage-backed securities and taxable and tax-free municipal bonds.
All of the mortgage- backed securities are US Government Agencies and are triple
‘A’ rated bonds.   The Corporation also owns restricted Federal
Home Loan Bank stock. Depending upon market fluctuations or other circumstances
that may arise, such as changes in prepayment rates, the Corporation may sell
securities for asset/liability management and liquidity purposes.





At
December 31, 2007, total deposits were $293.5 million compared
with  $293.9 million as of December 31, 2006.  This $400,000
decrease was the result of the following; a decrease of $785,000 in non-interest
bearing demand deposits, a $774,000 increase in NOW accounts, a $3.0 million
decrease in money market accounts, an $8.0 million decrease in savings accounts
and a $10.6 million increase in certificates of deposits.





Total
short-term borrowings increased $8.2 million in 2007, ending the year at $13.2
million compared to the 2006 balance of $5.0 million.  Long-term
borrowings increased $20.0 million in 2007, from the $0 balance in
2006.   These borrowings were utilized to fund the increases in
securities.





Shareholders’
equity was $38.5 million on December 31, 2007 compared to $37.2 million on
December 31, 2006, an increase of  $1.3 million. The change in
shareholders’ equity consists of net income of $3.1 million and an increase in
other comprehensive income of  $871,000 being offset by dividends
declared of $2.4 million and the purchase of treasury stock
of  $275,000.  Book value per common share at year-end 2007
increased by 3.84% to $12.70 from $12.23 at year-end 2006.











2





Share
Repurchase





During
2007, the Corporation purchased 16,000 shares of common stock at an average
price per share of  $17.13, these shares are held as treasury
shares.





On March
24, 2006, the Corporation repurchased 362,113 shares of its common stock held by
certain of its shareholders.  The repurchased shares represented
approximately 10.6% of the total shares then outstanding.  The
aggregate purchase price for the stock was approximately $6.7 million, which is
$18.50 per share.  All repurchased shares are held as treasury shares.
The repurchase of these shares was approved by the Board of Directors based, in
part, upon receiving an opinion from the Corporation's financial advisor,
SunTrust Robinson Humphrey that the purchase price was fair to the Corporation.
A more complete description of the transaction can be found in the Corporation's
8-K filed with the Commission March 27, 2006.





Results of
Operations





Net
income increased $100,000, or 3.33%, to $3.1 million for the year ended December
31, 2007 from $3.0 million for the year ended December 31, 2006.





Net Interest
Income





In 2007,
interest income was $19.0 million compared to $17.6 million in 2006, an increase
of $1.4 million. A $670,000 increase in loan income, combined with an increase
of $951,000 in investment income offset by a decrease in other interest of
$220,000. Loan income increased in 2007 due to both higher average loan volumes
and higher yields for 2007 compared with 2006.  The income on
investment securities increased due to higher average balances and higher yields
in 2007 compared to 2006. The other interest decreased due to a decrease in
average Federal Funds sold in 2007 compared to 2006 averages.





For 2007,
interest expense was $7.3 million compared to $5.9 million in 2006, an increase
of  $1.4 million.  The $1.4 million increase is mainly the
result of higher average volumes and higher rates on certificates of deposits
and an increase in total borrowings from Federal Home Loan Bank
(FHLB).  Certificate of deposit costs increased $909,000 in 2007 and
FHLB interest cost increased $404,000 in 2007.





As
a result of these factors, net interest income in 2007 was $11.8 million, the
same as 2006.




















3








The
following table displays the Corporation’s average balance sheet, annual
interest earned and paid, and annual yields on interest earning assets and
interest-bearing liabilities for 2007 and 2006.


COMMERCIAL
      NATIONAL FINANCIAL CORPORATIONFinancial
      ComparisonsConsolidated
      Average Balance Sheet, Interest Income/Expense and
Rates(Dollars
      in Thousands)








2007
            2006


Average
      Balance
            Interest
      Income/
              Expense
            Yield
      or Rate (a)
            Average
      Balance
            Interest
      Income/
              Expense
            Yield
      or Rate (a)


Interest-earning
      assetsLoans
      net of unearned
              income
      (b) (c)
            
            $
            226,713
            
            
            $
            13,946
            
            
            
            6.15
            %
            
            $
            218,944
            
            
            $
            13,305
            
            
            
            6.08
            %Taxable
      securities
            
            
            84,304
            
            
            
            5,050
            
            
            
            5.99
            
            
            
            69,785
            
            
            
            4,092
            
            
            
            5.87Non-taxable
      securities
            
            
            3,442
            
            
            
            206
            
            
            
            5.98
            
            
            
            3,720
            
            
            
            217
            
            
            
            5.82Interest-bearing
      deposits with    banks
            
            
            244
            
            
            
            11
            
            
            
            4.51
            
            
            
            58
            
            
            
            3
            
            
            
            4.31Federal
      funds sold
            
            
            2,291
            
            
            
            121
            
            
            
            5.28
            
            
            
            7,451
            
            
            
            349
            
            
            
            4.68Total
      earning assets
            
            
            316,994
            
            
            
            19,334
            
            
            
            6.10
            
            
            
            299,958
            
            
            
            17,966
            
            
            
            5.99Non-interest-earning
      assetsCash
            
            
            8,838
            
            
            
            
            
            
            
            
            
            
            
            8,948Allowance
      for loan losses
            
            
            (1,856
            )
            
            
            
            
            
            
            
            
            
            
            (1,681
            )Other
      assets
            
            
            20,630
            
            
            
            
            
            
            
            
            
            
            
            20,227Total
      non-interest-earning         assets
            
            
            27,612
            
            
            
            
            
            
            
            
            
            
            
            27,494Total
      assets
            
            $
            344,606
            
            
            
            
            
            
            
            
            
            
            $
            327,452Liabilities
      and Shareholders’ EquityInterest-bearing
      depositsNOW
      accounts
            
            $
            21,459
            
            
            
            32
            
            
            
            0.15
            
            
            $
            21,185
            
            
            
            32
            
            
            
            0.15Money
      Market accounts
            
            
            22,777
            
            
            
            251
            
            
            
            1.10
            
            
            
            26,330
            
            
            
            239
            
            
            
            0.91Savings
      deposits
            
            
            46,711
            
            
            
            516
            
            
            
            1.10
            
            
            
            47,624
            
            
            
            458
            
            
            
            0.96Time
      deposits
            
            
            137,842
            
            
            
            5,908
            
            
            
            4.30
            
            
            
            124,706
            
            
            
            4,999
            
            
            
            4.01Short-term
      borrowings
            
            
            6,171
            
            
            
            313
            
            
            
            5.10
            
            
            
            2,533
            
            
            
            136
            
            
            
            5.37Long-term
      borrowings
            
            
            5,699
            
            
            
            259
            
            
            
            4.54
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      interest-bearing
              liabilities
            
            
            240,659
            
            
            
            7,279
            
            
            
            3.03
            
            
            
            222,378
            
            
            
            5,864
            
            
            
            2.64Non-interest-bearing
      deposits
            
            
            65,319
            
            
            
            
            
            
            
            
            
            
            
            65,629Other
liabilities
            
            
            1,484
            
            
            
            
            
            
            
            
            
            
            
            1,393Shareholders'
    equity
            
            
            37,144
            
            
            
            
            
            
            
            
            
            
            
            38,052Total
      non-interest-bearingFunding sources
            
            
            103,947
            
            
            
            
            
            
            
            
            
            
            
            105,074Total liabilities
      andshareholders'
      equity
            
            $
            344,606
            
            
            
            
            
            
            
            
            
            
            $
            327,452Net
      interest income and netYield
      on interest earning assets
            
            
            $
            12,055
            
            
            
            3.80
            %
            
            
            
            
            
            $
            12,102
            
            
            
            4.03
            %


(a)
            Yields
      on interest earning assets have been computed on a tax-equivalent basis
      using the 34% federal income tax statutory
rate.


(b)
            Income
      on non-accrual loans is accounted for on the cash basis, and the loan
      balances are included in interest earning
  assets.


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





4


The
following table illustrates the impact and interaction of rate and volume
changes for the years under review. Yields on earning assets have been computed
on a tax-equivalent basis using 34% tax rate.







Analysis of Year-to-Year Changes in Net Interest
      Income(Dollars
      in Thousands)





2007 Change from 2006Total
            
            
            Change
      Due
            
            
            Change
      DueChange
            
            
            To
      Volume
            
            
            To
      RateInterest-earning
      assetsLoans
      net of unearned income
            
            $
            641
            
            
            $
            472
            
            
            $
            169SecuritiesTaxable
            
            
            958
            
            
            
            851
            
            
            
            107Non-taxable
            
            
            (11
            )
            
            
            (16
            )
            
            
            5Interest-bearing
      deposits with banks
            
            
            8
            
            
            
            10
            
            
            
            (2
            )Federal
      funds sold
            
            
            (228
            )
            
            
            (242
            )
            
            
            14Total interest
      income
            
            
            1,368
            
            
            
            1,075
            
            
            
            293Interest-bearing
      liabilitiesDeposits
            
            
            979
            
            
            
            233
            
            
            
            746Short-term
      borrowings
            
            
            177
            
            
            
            195
            
            
            
            (18
            )Long-term
      borrowings
            
            
            259
            
            
            
            259
            
            
            
            01,22Total interest
      expense
            
            
            1,415
            
            
            
            687
            
            
            
            728Net
      interest income
            
            $
            (47
            )
            
            $
            388
            
            
            $
            (435
            )





Other Operating Income and
Expense





Total
other operating income remained constant at $3.1 million for 2007 and
2006.    Other operating income increases in 2007: higher
trust department income of $107,000, an increase in Bank owned life insurance
income of $43,000 and $20,000 in service charges.  The trust
department assets increased in 2007, resulting in higher earnings. Growth in
cash surrender values of bank owned life insurance increased BOLI income in
2007.   These increases were offset by decreases of $13,000 in
other service charges and fees, a $25,000 decrease in gains from securities and
lower other income.  Other income is lower mainly due to a loss on
sale of other assets in 2007 of $39,000 compared with a 2006 gain of $12,000 in
2006.





Non-interest
expense was  $10.7 million for 2007 and 2006,
respectively.   Non-interest changes were; salaries and employee
benefits increased $170,000 due to normal employee pay raises; director’s fees
increased $63,000; and other expenses increased $53,000. Other expenses
increased in 2007 due to a $163,000 increase in advertising. The Corporation
increased billboard and radio advertising in 2007. This increase in advertising
was offset by multiple decreases in various other expenses, to net to the
$53,000 other expense increase.  The increases in non-interest
expenses were offset by decreases of $93,000 in furniture and equipment, due to
lower depreciation cost in 2007.  Professional fees decreased in 2007
by $186,000 mainly due to higher professional fees incurred in 2006 to
facilitate the treasury stock purchase, previously mentioned under the
“Overview” section.





Income
tax expense was $1,072,000 in 2007 and $1,006,000 in 2006.  The
company’s effective tax rate was 25.9% in 2007 and 25.4% in 2006.





Liquidity and Capital
Resources





Liquidity
measurements evaluate the Corporation’s ability to meet the cash-flow needs of
its depositors and borrowers. The most desirable source of liquidity is deposit
growth. Additional liquidity is provided by the maturity of investments in loans
and securities and the principal and interest received from those earning
assets. Another source of liquidity is represented by the Corporation’s ability
to sell both loans and available-for-sale securities. The Bank is a member of
the FHLB system. The FHLB provides an additional source for liquidity for long-
and short-term funding. Additional sources of funding from financial
institutions have been established for short-term funding needs.











5




Liquidity and Capital
Resources (Continued)





As of
December 31, 2007, the Corporation had available funding of approximately $185
million at the FHLB with an additional $26 million of short-term funding
available through federal funds lines of credit.





The
Corporation has outstanding commitments to fund loans that are made in the
normal course of business. At December 31, 2007, the commitments stood at $35.3
million. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.





Cash
flows provided from operating activities in 2007 decreased by $600,000 to $3.0
million, from $3.6 million in 2006.  The majority of this decrease is
attributed to the increase in interest receivables and a decrease in other
liabilities.





Cash
flows used in investing activities totaled $28.3 million in 2007, compared to
cash used by investing activities in 2006 of $18.9 million.  The
majority of cash used in investing activities was used to purchase securities in
2007, which offset cash inflows from principal pay-downs on mortgage-backed
securities and the decrease in loan outstandings.





Cash
provided from financing activities totaled $25.0 million in 2007, compared to
$12.6 million in 2006.  Cash provided by increases in long-term
borrowing and short-term borrowings offset decreases in cash for dividends paid,
purchase of treasury stock and a slight decrease in deposits.





Interest Sensitivity and
Market Risk





Time
deposits of $100,000 or more at December 31, 2007 are as follows:





Amount
            
            
            Percent(in
      thousands)Remaining
      maturity:3
      months or less
            
            $
            14,306
            
            
            
            33
            %Over
      3 through 6 months
            
            
            14,054
            
            
            
            32Over
      6 months through 12 months
            
            
            10,171
            
            
            
            23Over
      12 months
            
            
            4,903
            
            
            
            12Total
            
            $
            43,434
            
            
            
            100
            %








The
following table shows final loan maturities and rate sensitivities of the loan
portfolio excluding consumer installment, mortgage and non-accrual loans and
before unearned income at December 31, 2007  (in
thousands)








Within
            
            
            One-Five
            
            
            AfterOne Year
            
            
            Years
            
            
            Five Years
            
            
            TotalCommercial
      and industrial
            
            $
            4,485
            
            
            $
            15,084
            
            
            $
            1,730
            
            
            $
            21,299Real
      estate-construction
            
            
            1,289
            
            
            
            -
            
            
            
            713
            
            
            
            2,002Other
            
            
            948
            
            
            
            2,027
            
            
            
            6,739
            
            
            
            9,714Totals
            
            $
            6,722
            
            
            $
            17,111
            
            
            $
            9,182
            
            
            $
            33,015Loans
      at fixed interest rates
            
            
            
            
            
            $
            10,072
            
            
            $
            8,449Loans
      at variable interest rates
            
            
            
            
            
            
            7,039
            
            
            
            733$
            17,111
            
            
            $
            9,182











6








The
following tables present a five-year summary of loan classifications and the
maturity distribution of securities at December 31 of each such
year:


Loans
      by Classification at December 31,(in
      thousands)2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Commercial
            
            $
            21,299
            
            
            $
            18,188
            
            
            $
            18,275
            
            
            $
            15,933
            
            
            $
            14,802Real
      estate – commercial
            
            
            62,779
            
            
            
            65,786
            
            
            
            60,794
            
            
            
            55,555
            
            
            
            51,006Real
      estate - construction
            
            
            2,002
            
            
            
            1,256
            
            
            
            910
            
            
            
            258
            
            
            
            1,108Real
      estate – other
            
            
            127,781
            
            
            
            128,364
            
            
            
            115,294
            
            
            
            107,819
            
            
            
            106,121Consumer
      - installment
            
            
            3,265
            
            
            
            3,704
            
            
            
            2,929
            
            
            
            886
            
            
            
            1,405Municipal
            
            
            8,955
            
            
            
            11,226
            
            
            
            7,596
            
            
            
            10,002
            
            
            
            10,622Other
            
            
            733
            
            
            
            805
            
            
            
            1,019
            
            
            
            1,579
            
            
            
            2,179Total
      loans
            
            
            226,814
            
            
            
            229,329
            
            
            
            206,817
            
            
            
            192,032
            
            
            
            187,243Net
      unamortizedcosts/(fees)
            
            
            191
            
            
            
            199
            
            
            
            222
            
            
            
            223
            
            
            
            139Total
      loans, net ofcosts/(fees)
            
            $
            227,005
            
            
            $
            229,528
            
            
            $
            207,039
            
            
            $
            192,255
            
            
            $
            187,382








Maturity
      Distribution of Securities at December 31, 2007(in
      thousands)U.S
            
            
            State
      &
            
            
            Total
            
            
            WeightedGovt.
            
            
            Political
            
            
            Amortized
            
            
            AverageAgencies
      (1)
            
            
            Subdivisions
      (2)
            
            
            Cost
            
            
            YieldWithin
      1 year
            
            $
            -
            
            
            $
            100
            
            
            $
            100
            
            
            
            5.21
            %After
      1 but within 5 years
            
            
            -
            
            
            
            2,871
            
            
            
            2,871
            
            
            
            5.00
            %After
      5 but within 10 years
            
            
            -
            
            
            
            2,348
            
            
            
            2,348
            
            
            
            6.00
            %After
      10 years
            
            
            102,464
            
            
            
            -
            
            
            
            102,464
            
            
            
            6.08
            %$
            102,464
            
            
            $
            5,319
            
            
            $
            107,783
            
            
            
            6.05
            %


Included
in U.S. Government Agencies are mortgage-backed securities. These securities
carry an amortized cost of $102.5 million and mature based upon their estimated
contractual maturities. Expected maturities will differ from contractual
maturities because borrowers may have the right to prepay with or without
prepayment penalties.





(1)
Includes mortgage-backed securities (see above)


(2) Yield
on tax-exempt obligations has been computed on a fully


tax-equivalent basis (using statutory
federal income tax rate of 34%)





Fair
      Values of Securities at December 31,(in
      thousands)2007
            
            
            2006
            
            
            2005U.S
      Govt. Agencies
            
            $
            104,625
            
            
            $
            73,644
            
            
            $
            63,779Obligations
      of State &
              Political
      Subdivisions
            
            
            5,335
            
            
            
            5,352
            
            
            
            2,338$
            109,960
            
            
            $
            78,996
            
            
            $
            66,117


7


Interest Sensitivity and
Market Risk





The
Corporation’s market risk is primarily interest rate risk. Interest rate risk
arises due to timing differences between interest sensitive assets and
liabilities. Management monitors its interest sensitivity position with the
intent of structuring the balance sheet so that movements of interest rates on
assets and liabilities produce a relatively constant net interest margin. The
Corporation’s interest rate risk management is the responsibility of the
Asset/Liability Management Committee, which reports to the Board of Directors.
This Committee establishes policies for monitoring and coordinating the
Corporation’s sources, uses and pricing of funds.





The
following table lists the amounts and ratio of assets and liabilities subject to
change as of December 31, 2007.





Interest
Sensitivity Analysis (In Thousands)





0-30
      Days
            
            
            31-90
      Days
            
            
            91-180
      Days
            
            
            181-365
      Days
            
            
            1-5
      Years
            
            
            Over
      5 Years
            
            
            TotalsInterest-earning
      assets:Securities
            
            $
            896
            
            
            $
            2,392
            
            
            $
            4,887
            
            
            $
            9,321
            
            
            $
            52,933
            
            
            $
            37,354
            
            
            $
            107,783Loans
            
            
            16,869
            
            
            
            10,494
            
            
            
            15,840
            
            
            
            27,875
            
            
            
            141,742
            
            
            
            14,185
            
            
            
            227,005Total
      interest-sensitiveAssets
            
            
            17,765
            
            
            
            12,886
            
            
            
            20,727
            
            
            
            37,196
            
            
            
            194,675
            
            
            
            51,539
            
            
            
            334,788Interest-bearing
      liabilities:Certificates
      of deposit
            
            
            12,854
            
            
            
            24,413
            
            
            
            38,439
            
            
            
            33,123
            
            
            
            31,787
            
            
            
            19
            
            
            
            140,635Other
      interest-bearing deposits
            
            
            35,284
            
            
            
            238
            
            
            
            357
            
            
            
            713
            
            
            
            35,426
            
            
            
            15,952
            
            
            
            87,970Short
      term borrowings
            
            
            13,175
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,175Long
      term borrowings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            20,000
            
            
            
            -
            
            
            
            20,000Total
      interest-sensitiveLiabilities
            
            
            61,313
            
            
            
            24,651
            
            
            
            38,796
            
            
            
            33,836
            
            
            
            87,213
            
            
            
            15,971
            
            
            
            261,780Interest
      sensitivity gap
            
            $
            (43,548
            )
            
            $
            (11,765
            )
            
            $
            (18,069
            )
            
            $
            3,360
            
            
            $
            107,462
            
            
            $
            35,568
            
            
            $
            73,008Cumulative
      gap
            
            $
            ( 43,548
            )
            
            $
            (55,313
            )
            
            $
            (73,382
            )
            
            $
            (70,022
            )
            
            $
            37,440
            
            
            $
            73,008Ratio
      of cumulative gap toInterest
      sensitive assets
            
            
            13.00
            %
            
            
            16.52
            %
            
            
            21.91
            %
            
            
            20.92
            %
            
            
            1.03
            %
            
            
            21.81
            %





Loan and
security assumptions are based upon contractual maturity and prepayment
estimates. Included in other interest bearing deposits are savings, money market
and interest-bearing transaction accounts. These accounts are subject to
immediate withdrawal. However, based upon historical performance, management
considers a certain portion of the accounts to be stable core
deposits.





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





The
Corporation also monitors interest rate risk through computer simulations that
project the impact of changing interest rates on earnings. This process projects
a baseline net interest income (assuming no changes in interest rate levels) and
estimates changes to that baseline net interest income resulting from changes in
interest rate levels. The Corporation utilizes the results of this model in
evaluating its interest rate risk. This model incorporates a number of
additional factors. These factors include: (1) the expected exercise of call
features on various assets and liabilities; (2) the expected rates at which
various rate sensitive assets and liabilities will reprice; (3) the expected
relative movements in different interest rate indexes that are used as the basis
for pricing or repricing various assets and liabilities; (4) expected changes in
administered rates on interest-bearing transaction, savings, money market and
time deposit accounts and the expected impact of competition on the pricing or
repricing of such accounts; and (5) other factors. Inclusion of these factors in
the model is intended to more accurately project the Corporation’s changes in
net interest income resulting from an immediate and sustained parallel shift in
interest rates of up 100 basis points (bps), up 200 bps, down 100 bps and down
200 bps. While the Corporation believes this model provides a useful projection
of its interest rate risk, the model includes a number of assumptions and
predictions that are subject to continual refinement. These assumptions and
predictions include inputs to compute baseline net interest income, growth
rates, competition and a variety of other factors that are difficult to
accurately predict.


8


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





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





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





The
following table presents the simulation model's projected impact of an immediate
and sustained parallel shift in interest rates on the projected baseline net
interest income for a twelve-month period commencing January 1,
2008.





%
      Change in projected
            %
      Change in projectedChange
      in interest
            Baseline
            Economicrates
            net
      interest income
            value
      of capital+200
      basis points
            (10.2%)
            (35.0%)+100
      basis points
            (4.9%)
            (15.8%)-100
      basis points
            2.1%
            3.3%-200
      basis points
            1.2%
            5.7%





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





The
current simulation model reports indicates the potential economic value of
capital decline, if there was an immediate 200 basis point increase in interest
rates is not within established corporate interest risk guidelines, as noted
above.  The Corporation made a strategic decision to shorten
maturities on interest sensitive liabilities, leading to the position of being
outside of our internal guidelines.  The Corporation is closely
monitoring balance sheet interest rate risk and anticipates lowering interest
rate risk to the balance sheet over the next twelve months.





Allowance for Loan Losses
and Credit Review





Maintaining
a high quality loan portfolio is of great importance to the Corporation. The
Corporation manages the risk characteristics of the loan portfolio through the
use of prudent lending policies and procedures and monitors risk through a
periodic review process provided by internal auditors, regulatory authorities
and internal loan review procedures. These reviews include an analysis of credit
quality, diversification of industry, compliance with policies and procedures,
and current economic conditions. In addition to these reviews, the Corporation
annually has commercial loan reviews performed by a third party specializing in
this area.





The
Corporation’s credit culture fosters and actively supports the extension of
credit on sound, fundamental lending policies. Each credit is to be logical,
legal, constructive and acceptable within policy guidelines.





The
allowance for loan losses is a valuation reserve that is intended to account for
credit losses which may be expected in the Corporation’s loan portfolio as a
result of the credit risk involved in the normal granting of credit. Adequate
management of the allowance is an integral part of the credit risk management
process. The Corporation will maintain an adequate allowance in anticipation of
losses reflected as of the evaluation date. Management is cognizant of the
subjective nature of decisions regarding loan portfolio factors and the
variability over time of internal and external factors affecting portfolio
quality, and realizes that an effective asset review system is essential to
establishing the basis for an adequate allowance. To improve the accuracy of
determining the allowance, management will continuously monitor all factors and
current conditions that may affect loss recognition.





The
amount of the provision/(credit) for loan losses was $90,000 in 2007 and
$210,000 in 2006.  For each of the same years, the net charge-offs
(recoveries) against the allowance for loan losses was $27,000 and $40,000,
respectively. The allowance for loan losses is maintained at a level that
represents management’s best estimates of losses in the loan portfolio at the
balance sheet date. However, there can be no assurance that the allowance for
loan losses will be adequate to cover losses, which may be realized in the
future, or that additional provisions for losses on loans will not be
required.











9








The table
below provides an analysis of the allowance for loan losses for each of the five
years ended December 31:





Years Ended December 31,
              (Dollars
      in thousands)2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Loans
      outstanding at end of the year,net of unearned
      income
            
            $
            227,005
            
            
            $
            229,528
            
            
            $
            207,039
            
            
            $
            192,255
            
            
            $
            187,382Average
      loans outstanding
            
            $
            226,713
            
            
            $
            218,944
            
            
            $
            199,505
            
            
            $
            187,918
            
            
            $
            183,628Allowance
      for loan losses:Balance,
      beginning of year
            
            $
            1,806
            
            
            $
            1,636
            
            
            $
            1,855
            
            
            $
            2,462
            
            
            $
            2,707Loans
      charged off:Commercial
      and tax free
            
            
            48
            
            
            
            47
            
            
            
            105
            
            
            
            251
            
            
            
            29Consumer
            
            
            18
            
            
            
            13
            
            
            
            30
            
            
            
            41
            
            
            
            32Real
      estate
            
            
            0
            
            
            
            0
            
            
            
            20
            
            
            
            69
            
            
            
            272Total
      loans charged off
            
            
            66
            
            
            
            60
            
            
            
            155
            
            
            
            361
            
            
            
            333Recoveries:Commercial
      and tax free
            
            
            29
            
            
            
            11
            
            
            
            296
            
            
            
            136
            
            
            
            21Consumer
            
            
            10
            
            
            
            9
            
            
            
            5
            
            
            
            10
            
            
            
            13Real
      estate
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            44
            
            
            
            15Total
      recoveries
            
            
            39
            
            
            
            20
            
            
            
            301
            
            
            
            190
            
            
            
            49Net
      loans charged off/(recovered)
            
            
            27
            
            
            
            40
            
            
            
            (146
            )
            
            
            171
            
            
            
            284Provision
      charged/(credited) to expense
            
            
            90
            
            
            
            210
            
            
            
            (365
            )
            
            
            (436
            )
            
            
            39Balance,
      end of year
            
            $
            1,869
            
            
            $
            1,806
            
            
            $
            1,636
            
            
            $
            1,855
            
            
            $
            2,462Ratios:Net
      (recoveries)/charge-offs as apercentage of average
      loansoutstanding
            
            
            0.01
            %
            
            
            0.02
            %
            
            
            (0.07
            )%
            
            
            0.09
            %
            
            
            0.15
            %Allowance
      for loan lossesas a percentage of average
      loansoutstanding
            
            
            0.82
            %
            
            
            0.83
            %
            
            
            0.82
            %
            
            
            0.99
            %
            
            
            1.34
            %








Management’s
review and evaluation of loan loss experience and loan loss potential on
outstanding loans occurs on a quarterly basis and includes a review of such
factors as charge-off history, delinquent loans, loan collateral value, the
borrower’s financial condition, current economic conditions and the current
requirements of the appropriate regulatory agencies. As a result of this
on-going study, management believes that the allowance for loan loss amount for
December 31, 2007 is adequate.


10


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





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in thousands)Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            Percent
            
            
            
            
            
            PercentAmount
            
            
            Of
      Loan
            
            
            Amount
            
            
            Of
      Loan
            
            
            Amount
            
            
            Of
      Loan
            
            
            Amount
            
            
            Of
      Loan
            
            
            Amount
            
            
            Of
      LoanType
            
            
            
            
            
            Type
            
            
            
            
            
            Type
            
            
            
            
            
            Type
            
            
            
            
            
            TypeCommercial
            
            $
            1,731
            
            
            
            47
            %
            
            $
            1,668
            
            
            
            47
            %
            
            $
            1,540
            
            
            
            47
            %
            
            $
            1,771
            
            
            
            42
            %
            
            $
            2,371
            
            
            
            40
            %Residential
            
            
            104
            
            
            
            52
            
            
            
            97
            
            
            
            52
            
            
            
            63
            
            
            
            52
            
            
            
            58
            
            
            
            56
            
            
            
            69
            
            
            
            58Consumer
            
            
            34
            
            
            
            1
            
            
            
            41
            
            
            
            1
            
            
            
            33
            
            
            
            1
            
            
            
            26
            
            
            
            2
            
            
            
            22
            
            
            
            2Total
            
            $
            1,869
            
            
            
            100
            %
            
            $
            1,806
            
            
            
            100
            %
            
            $
            1,636
            
            
            
            100
            %
            
            $
            1,855
            
            
            
            100
            %
            
            $
            2,462
            
            
            
            100
            %





The
following table details, for each of the most recent five years, the year end
loan amounts which were accounted for on a non-accrual basis or were past due 90
days or more:





Dec.
      31, 2007Loans on non-accrual
      basis
            
            $
            156Loans past due 90 days or
      more
            
            
            -Renegotiated
loans
            
            
            350Total
            
            $
            506Dec.
      31, 2006Loans on non-accrual
      basis
            
            $
            561Loans past due 90 days or
      more
            
            
            -Renegotiated
loans
            
            
            2,823Total
            
            $
            3,384Dec.
      31, 2005Loans on non-accrual
      basis
            
            $
            1,308Loans past due 90 days or
      more
            
            
            2Renegotiated
loans
            
            
            2,860Total
            
            $
            4,170Dec.
      31, 2004Loans on non-accrual
      basis
            
            $
            1,667Loans past due 90 days or
      more
            
            
            12Renegotiated
loans
            
            
            3,083Total
            
            $
            4,762Dec.
      31, 2003Loans on non-accrual
      basis
            
            $
            2,331Loans past due 90 days or
      more
            
            
            5Renegotiated
loans
            
            
            -Total
            
            $
            2,336





Loans
that were past due 90 days or more, or were on non-accrual represented 0.07% of
total loans on December 31, 2007, which was down from 0.24% on December 31, 2006
and 0.63% on December 31, 2005. The Corporation’s policy is to place a loan on
non-accrual basis when it becomes 90 days past due provided that the loan is
well collateralized and evidence indicates a reasonable likelihood for
collection. Also, a loan is placed on non-accrual in the event of a material
decline in business activity that may hinder the borrower’s ability to repay the
loan.





As of
December 31, 2007,$16,000 of non-accrual loans were paying principal or principal and
interest with payments recognized on a cash basis. Renegotiated loans decreased
due to the reclassification of a $2.4 million loan. The loan was upgraded based
on their continued performance.  At present, the Corporation has no
knowledge of other outstanding loans that present a serious doubt in regard to
the borrower's ability to comply with the current loan repayment terms. As of
December 31, 2007 the Corporation had $554,000 in foreclosed real estate
compared to $905,000 at the end of 2006.





In 2007,
the gross amount of interest that would have been recorded on non-accrual loans
would have been $7,000. The actual interest reflected in income on these loans
was $1,000.


11





Capital





The
shareholders’ equity or the capital base represents the investment by the
Corporation’s owners either initially or through retention of earnings (net
after income tax less dividend payments). This investment acts as a safeguard
against future uncertainties. The amount of capital which is deemed appropriate
is dependent upon an assessment of the Corporation’s total assets, the quality
of its loans and securities, its historical earnings record, its business
prospects for the near and long term, the management and information systems in
place and the general competence and abilities of the Corporation’s
management.





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





As of
December 31, 2007, Commercial Bank & Trust of PA had Tier I and total equity
capital to risk adjusted asset ratios of 16.8% and 17.6%, respectively. In 2007
the leverage ratio was 9.9%. At December 31, 2006, Commercial Bank & Trust
of PA had Tier I and total equity capital to risk adjusted assets ratios of
16.9% and 17.8%, respectively. The leverage ratio was 10.8%.





The table
below presents Commercial Bank & Trust of PA’s capital position at December
31, 2007.


(dollar
amounts in thousands)





Percentof
      AdjustedAmount
            
            
            AssetsTier I Capital
            
            $
            36,556
            
            
            
            16.8
            %Tier I Capital
      Requirement
            
            
            8,707
            
            
            
            4.0Total Equity
    Capital
            
            $
            38,425
            
            
            
            17.6
            %Risk-Based
      Requirement
            
            
            17,414
            
            
            
            8.0Leverage Capital
            
            $
            36,556
            
            
            
            9.9
            %Leverage
    Requirement
            
            
            14,688
            
            
            
            4.0








Inflation and Changing
Prices





Inflation
can be significant to a banking institution because of its implication for the
interest rate environment and its influence on personnel expenses and the costs
of supplies and materials needed for daily operations. However, such a large
portion of the Corporation’s assets and liabilities are represented by monetary
investments, inflationary impact tends to be dampened except for the differences
caused by maturity variances. Management efforts to gauge and control these
variances have been discussed earlier under rate sensitivity. Inflation can have
a more direct impact on non-interest expenses. Expenses are closely monitored by
management and consistent attention is given to controlling these cost areas in
an attempt to limit their increase to manageable levels.





Interest
rate movements will continue to influence ongoing earnings levels. Even though
the exact impact of these factors cannot be predicted, the Corporation believes
that given its financial strength and stability, it will be able to meet these
situations in a positive manner.





12


Market
Makers





The
following firms have committed to make a market in the stock of Commercial
National Financial Corporation. Inquiries concerning their services should be
directed to:





Ferris
      Baker Watts Inc
            Knight
      Equity Markets, LLP100
      Light Street
            525
      Washington BoulevardBaltimore,
      MD 21202
            Jersey
      City, NJ 07310800-638-7411
            201-222-9400F.J.
      Morrisey & Co.
            Ryan,
      Beck & Co.200
      Barr Harbor Drive
            80
      Main StreetWest
      Conshohocken, PA 19428
            West
      Orange, NJ 07052800-842-8928
            973-597-6020








Transfer
Agent





Should
you need assistance regarding changes in the registration of certificates or in
reporting lost certificates please contact:





Registrar
and Transfer Company


Attn:
Investor Relations


10
Commerce Drive


Cranford,
NJ 07016-3572


Telephone
(800) 368-5948


Email:
info@rtco.com


Internet
Address:www.rtco.com





Form
10-K





THE
CORPORATION WILL PROVIDE WITHOUT CHARGE TO ANY SHAREHOLDER A COPY OF ITS 2007
ANNUAL REPORT ON FORM 10-K AS REQUIRED TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. REQUESTS SHOULD BE MADE IN WRITING TO:





Commercial
National Financial Corporation


Attn:  Wendy
S. Schmucker, Secretary


P.O. Box
429


Latrobe,
PA 15650





13
  Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors and Shareholders
 Commercial
National Financial Corporation and Subsidiaries
 Latrobe,
Pennsylvania
  We have
audited the accompanying consolidated statements of financial condition of
Commercial National Financial Corporation and its subsidiaries as of
December 31, 2007 and 2006, and the related consolidated statements of
income, shareholders’ equity and cash flows for the years then
ended.  These consolidated financial statements are the responsibility
of the Corporation's management.  Our responsibility is to express an
opinion on these 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
Corporation is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Corporation’s internal control over financial reporting.  Accordingly,
we express no such opinion.  An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our 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 Commercial National
Financial Corporation and subsidiaries as of December 31, 2007 and 2006,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
  
 
 /s/ Beard Miller Company
LLP
 
 
 Beard
Miller Company LLP
 Pittsburgh,
Pennsylvania
 March 12,
2008
 
  14




Consolidated
Statements of Financial Condition







December
      31,2007
            
            2006(Dollars in Thousands,
      Except per Share
Data)


Assets




Cash
      and due from banks
            
            $
            9,836
            
            
            $
            10,134Interest
      bearing deposits with banks
            
            
            93
            
            
            
            22Cash
      and Cash Equivalents
            
            
            9,929
            
            
            
            10,156Securities
      available for sale
            
            
            109,960
            
            
            
            78,996Restricted
      investments in bank stock
            
            
            2,375
            
            
            
            1,180Loans
      receivable, net of allowance for loan losses of $1,869  in 2007
      and $1,806 in 2006
            
            
            225,136
            
            
            
            227,722Premises
      and equipment, net
            
            
            3,728
            
            
            
            3,886Accrued
      interest receivable
            
            
            1,174
            
            
            
            1,044Investment
      in life insurance
            
            
            14,001
            
            
            
            13,452Other
      assets
            
            
            1,339
            
            
            
            1,760





Total
      Assets
            $367,642
            
            $338,196





Liabilities
and Shareholders’ Equity




Liabilities




Deposits:Non-interest
      bearing
            
            $
            64,914
            
            
            $
            65,699Interest
bearing
            
            
            228,605
            
            
            
            228,221Total
      Deposits
            
            
            293,519
            
            
            
            293,920Short-term
      borrowings
            
            
            13,175
            
            
            
            5,000Long-term
      borrowings
            
            
            20,000
            
            
            
            -Other
      liabilities
            
            
            2,487
            
            
            
            2,047





Total
      Liabilities
            329,181
            
            300,967





Shareholders’
      Equity




Common
      stock, par value $2 per share; authorized 10,000,000 shares; issued
      3,600,000  shares; outstanding 3,028,813 and 3,044,813 shares in
      2007 and 2006
            
            
            7,200
            
            
            
            7,200Retained
      earnings
            
            
            40,505
            
            
            
            39,869Accumulated
      other comprehensive income
            
            
            1,437
            
            
            
            566Treasury
      stock, at cost, 571,187 and 555,187 shares in 2007 and
2006
            
            
            (10,681
            )
            
            
            (10,406
            )





Total
      Shareholders’ Equity
            38,461
            
            37,229





Total
      Liabilities and Shareholders’ Equity
            $367,642
            
            $338,196


See
notes to consolidated financial statements.
 15


Consolidated
Statements of Income







Years
      Ended December 31,2007
            
            2006(In
      Thousands, Except per Share
Amounts)





Interest
      Income


Interest
      and fees on loans
            
            $
            13,724
            
            
            $
            13,054Interest
      and dividends on securities:Taxable
            
            
            5,050
            
            
            
            4,092Exempt from federal income
      taxes
            
            
            136
            
            
            
            143Other
            
            
            132
            
            
            
            352





Total
      Interest Income
            
            
            19,042
            
            
            
            
            17,641





Interest
      Expense


Deposits
            
            
            6,707
            
            
            
            5,728Short-term
      borrowings
            
            
            313
            
            
            
            136Long-term
      borrowings
            
            
            259
            
            
            
            -





Total
      Interest Expense
            
            
            7,279
            
            
            
            
            5,864





Net
      Interest Income
            
            
            11,763
            
            
            
            
            11,777





Provision
      for Loan Losses
            
            
            90
            
            
            
            
            210





Net
      Interest Income after Provision
              for
      Loan Losses
            
            
            11,673
            
            
            
            
            11,567





Other
      Operating Income


Service
      charges on deposit accounts
            
            
            662
            
            
            
            642Other
      service charges and fees
            
            
            697
            
            
            
            710Net
      security gains
            
            
            -
            
            
            
            25Trust
      department income
            
            
            1,029
            
            
            
            922Income
      from investment in life insurance
            
            
            590
            
            
            
            547Other
      income
            
            
            149
            
            
            
            208





Total
      Other Operating Income
            
            
            3,127
            
            
            
            
            3,054





Other
      Operating Expenses


Salaries
      and employee benefits
            
            
            5,324
            
            
            
            5,154Net
      occupancy
            
            
            713
            
            
            
            711Furniture
      and equipment
            
            
            522
            
            
            
            615Professional
      fees
            
            
            453
            
            
            
            639Pennsylvania
      shares tax
            
            
            542
            
            
            
            561ATM  expenses
            
            
            330
            
            
            
            314Director
      fees
            
            
            463
            
            
            
            400Other
      expenses
            
            
            2,316
            
            
            
            2,263





Total
      Other Operating Expenses
            
            
            10,663
            
            
            
            
            10,657





Income
      before Income Taxes
            
            
            4,137
            
            
            
            
            3,964





Income
      Tax Expense
            
            
            1,072
            
            
            
            
            1,006





Net
      Income
            
            $
            3,065
            
            
            
            $
            2,958





Earnings
      per Share, Basic
            
            $
            1.01
            
            
            
            $
            0.95


See
notes to consolidated financial statements.
 16


Consolidated
Statements of Shareholders’ Equity


Years
Ended December 31, 2007 and 2006







Common
                Stock
            
            Retained
      Earnings
            
            Accumulated
                Other
      Comprehensive Income
            
            Treasury
                Stock
            
            Total
                Shareholders’
                Equity(In
      Thousands, Except per Share
Amounts)





Balance
      - December 31, 2005
            
            $
            7,200
            
            
            $
            39,422
            
            
            $
            617
            
            
            $
            (3,578
            )
            
            $
            43,661Comprehensive
      income:Net income
            
            
            -
            
            
            
            2,958
            
            
            
            -
            
            
            
            -
            
            
            
            2,958Change in unrealized net gains
      on securities
              available for sale, net of
      reclassification
              adjustment and deferred income
      taxes
            
            
            -
            
            
            
            -
            
            
            
            (51
            )
            
            
            -
            
            
            
            (51
            )Total Comprehensive
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,907Cash dividends declared, $0.80
      per share
            
            
            -
            
            
            
            (2,511
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,511
            )Purchases of treasury stock
      (368,613 shares)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (6,828
            )
            
            
            (6,828
            )Balance
      - December 31, 2006
            
            
            7,200
            
            
            
            39,869
            
            
            
            566
            
            
            
            (10,406
            )
            
            
            37,229Comprehensive
      income:Net income
            
            
            -
            
            
            
            3,065
            
            
            
            -
            
            
            
            -
            
            
            
            3,065Change in unrealized net gains
      on securities
              available for sale, net of
      reclassification
              adjustment and deferred income
      taxes
            
            
            -
            
            
            
            -
            
            
            
            871
            
            
            
            -
            
            
            
            871Total Comprehensive
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,936Cash dividends declared, $0.80
      per share
            
            
            -
            
            
            
            (2,429
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,429
            )Purchases of treasury stock
      (16,000 shares)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (275
            )
            
            
            (275
            )Balance
      - December 31, 2007
            
            $
            7,200
            
            
            $
            40,505
            
            
            $
            1,437
            
            
            $
            (10,681
            )
            
            $
            38,461











See
notes to consolidated financial statements.
 17


Consolidated
Statements of Cash Flows







Years
      Ended December 31,2007
            
            2006(In
      Thousands)





Cash
      Flows from Operating Activities


Net
      income
            $3,065
            
            $2,958Adjustments
      to reconcile net income to net cash provided by
              Operating
      activities:Depreciation and
      amortization
            521
            
            623Provision for loan
      losses
            90
            
            210Net accretion of securities and
      loan fees
            (133)
            
            (60)Net security
    gains
            -
            
            (25)(Gain) loss on sale of
      foreclosed real estate
            39
            
            (12)Income from investment in life
      insurance
            (590)
            
            (547)Deferred tax expense
      (benefit)
            77
            
            (52)(Increase) decrease in accrued
      interest receivable and
              other assets
            (93)
            
            111Increase (decrease) in other
      liabilities
            (13)
            
            371





Net
      Cash Provided by Operating Activities
            2,963
            
            3,577





Cash
      Flows from Investing Activities


Decrease
      in federal funds sold
            -
            
            16,950Purchases
      of securities
            (39,530)
            
            (42,164)Maturities,
      calls and principal repayments of securities
            10,027
            
            14,969Proceeds
      from sales of securities
            -
            
            14,345Net
      increase in restricted bank stock
            (1,195)
            
            (167)Net
      (increase) decrease in loans
            2,390
            
            (22,731)Proceeds
      from sale of foreclosed assets
            312
            
            29Purchases
      of premises and equipment
            (264)
            
            (105)





Net
      Cash Used in Investing Activities
            (28,260)
            
            (18,874)





Cash
      Flows from Financing Activities


Net
      increase (decrease) in deposits
            (401)
            
            16,911Net
      increase in short-term borrowings
            8,175
            
            5,000Proceeds
      from long-term borrowings
            20,000
            
            -Dividends
      paid
            (2,429)
            
            (2,511)Purchases
      of treasury stock
            (275)
            
            (6,828)





Net
      Cash Provided by Financing Activities
            25,070
            
            12,572





Net
      Decrease in Cash and Cash Equivalents
            (227)
            
            (2,725)





Cash and Cash Equivalents – Beginning
            10,156
            
            12,881





Cash
      and Cash Equivalents – Ending
            $9,929
            
            $10,156


Supplementary
      Cash Flows Information


Interest
      paid
            $7,228
            
            $  5,478





Income
      taxes paid
            $1,113
            
            $     975





Loans
      transferred to foreclosed real estate
            -
            
            $     181





See
notes to consolidated financial statements.
 18
 Notes
to Consolidated Financial Statements





Note
      1 – Summary of Significant Accounting
Policies




General




The
accompanying consolidated financial statements include the accounts of
Commercial National Financial Corporation (the Corporation) and its wholly-owned
subsidiaries, Commercial Bank & Trust of PA, and Commercial National
Insurance Services, Inc. (CNIS) which is currently inactive.  All
material intercompany transactions have been eliminated in
consolidation.




The Bank
operates under a state bank charter and provides full banking
services.  The Corporation is subject to regulation by the Federal
Reserve Board and the Bank is subject to regulation by the Federal Deposit
Insurance Corporation and the Pennsylvania Department of Banking.  The
Bank’s primary business consists of taking deposits and granting loans to
customers who generally do business in the area of Westmoreland County,
Pennsylvania.




As of
December 31, 2007, the Corporation employed 107 people in full-time
and part-time positions.  Approximately 53 employees are represented
by the United Auto Workers, Local 1799.  In 2004, the Corporation and
bargaining unit employees entered into a labor agreement that will expire in
February 2009.




The
following summary of accounting and reporting policies is presented to aid the
reader in obtaining a better understanding of the consolidated financial
statements and related financial data of the Corporation and its wholly-owned
subsidiaries contained in this report.  Such policies conform to
generally accepted accounting principles (GAAP) and to general practice within
the banking industry.




Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.




Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans, and the evaluation of other than temporary impairment of
securities.




Significant
Concentrations of Credit Risk




Most of
the Corporation’s activities are with customers located within Westmoreland
County, Pennsylvania.  Note 3 discusses the types of securities
that the Corporation invests in.  Note 4 discusses the types of
lending that the Corporation engages in.  The Corporation does not
have any significant concentrations to any one industry or
customer.  Although the Corporation has a diversified loan portfolio,
exposure to credit loss can be adversely impacted by downturns in local economic
and employment conditions.












19
 Notes
to Consolidated Financial Statements







Note
      1 – Summary of Significant Accounting Policies
  (Continued)




Securities




Debt
securities are classified as “securities available for sale” and reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of shareholders’ equity, net of the related deferred
income tax effect.




Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities.  Declines in the fair value
of available for sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses.  In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Corporation to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair
value.  Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification
method.




Restricted
Investments in Bank Stock




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




Loans




Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances. Interest income is accrued on the unpaid principal
balance.  Loan origination fees, net of associated direct costs, are
deferred and recognized as an adjustment of the yield (interest income) of the
related loans. The Corporation is generally amortizing these amounts over the
contractual life of the loan.




The
accrual of interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing.  A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well
secured.  When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued
in prior years is charged against the allowance for loan
losses.  Interest received on nonaccrual loans generally is either
applied against principal or reported as interest income, according to
management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.




20
 Notes
to Consolidated Financial Statements







Note
      1 – Summary of Significant Accounting Policies
  (Continued)




Allowance
for Loan Losses




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




The
allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated.  Management’s
periodic evaluation of the adequacy of the allowance is based on the
Corporation’s past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower’s ability to repay,
the estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions and other relevant
factors.  This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant revisions as more
information becomes available.




The
allowance consists of specific, general and unallocated
components.  The specific component relates to loans that are
classified as either doubtful, substandard or special mention.  For
such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value of that
loan.  The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors.  An
unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses.  The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.




A loan is
considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price or the fair value of the collateral if the loan
is collateral dependent.




Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.




Off-Balance
Sheet Financial Instruments




In the
ordinary course of business, the Corporation has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit.  Such financial instruments are recorded in the balance sheet
when they are funded.







21
 Notes
to Consolidated Financial Statements







Note
      1 – Summary of Significant Accounting Policies
  (Continued)




Foreclosed
Real Estate




Foreclosed
real estate is comprised of property acquired through a foreclosure proceeding
or acceptance of a deed in lieu of foreclosure and loans classified as
in-substance foreclosure.  A loan is classified as in-substance
foreclosure when the Bank has taken possession of the collateral regardless of
whether formal foreclosure proceedings take place.  Foreclosed real
estate is initially recorded at fair value, net of estimated selling costs, at
the date of foreclosure establishing a new cost basis.  After
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of cost or fair value minus estimated costs to
sell.  Revenues and expenses from operations and changes in the
valuation allowance are included in other expenses.  Foreclosed real
estate at December 31, 2007 and 2006 was $554,000 and $905,000,
respectively, and is included in other assets.




Intangible
Assets




The
Corporation has amortizable intangible assets related to core deposit
intangibles acquired in 2002 through the acquisition of a branch
office.  These intangible assets are being amortized on a
straight-line basis over a period of ten years.  The balance of these
amortizable intangible assets at December 31, 2007 was $438,000 net of
accumulated amortization of $537,000 which is included in other
assets.  Amortization expense of $98,000 and $98,000 was recorded for
the years ended December 31, 2007 and 2006, respectively. Amortization
expense is estimated to be $98,000 in the years ending December 31, 2008, 2009,
2010, 2011 and $46,000 in 2012.




Premises
and Equipment




Premises
and equipment are carried at cost less accumulated depreciation and
amortization.  For financial statement reporting and income tax
purposes, depreciation is computed both on straight-line and accelerated methods
over the estimated useful life of the premises and equipment.  Charges
for maintenance and repairs are expensed as incurred. Amortization is charged
over the term of the respective lease or the estimated useful life of the asset,
whichever is shorter.




Bank
Owned Life Insurance




The
Corporation invests in bank owned life insurance (BOLI) as a source of funding
for employee benefit expenses.  BOLI involves the purchasing of life
insurance by the Corporation on a chosen group of employees.  The
Corporation is the owner and beneficiary of the policies.  This life
insurance investment is carried at the cash surrender value of the underlying
policies.  Income from the investment in the policies is included in
other income on the income statement.




Advertising
Costs




The
Corporation follows the policy of charging the costs of advertising to expense
as incurred.  Total advertising expense for the years ended
December 31, 2007 and 2006 was $345,000 and
$183,000,  respectively.




Trust
Operations




Trust
income is recorded on the cash basis, which approximates the accrual
basis.  Securities and other property held by the Corporation in a
fiduciary or agency capacity for customers of the Trust Department are not
assets of the Corporation and, accordingly, are not included in the accompanying
consolidated financial statements.  Assets under management in the
trust department totaled $176,594,000 and $163,633,000 at December 31, 2007
and 2006, respectively.




22
 Notes
to Consolidated Financial Statements







Note
      1 – Summary of Significant Accounting Policies
  (Continued)




Income
Taxes




Deferred
income tax assets and liabilities are determined based on the differences
between financial statement carrying amounts and the tax basis of existing
assets and liabilities.  These differences are measured at the enacted
tax rates that will be in effect when these differences
reverse.  Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
of the deferred tax assets will 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 Corporation and its
subsidiaries file a consolidated federal income tax return.




Earnings
per Share




Basic
earnings per share have been calculated on the weighted average number of shares
outstanding of 3,038,761 in 2007 and 3,129,245 in 2006. The Corporation
currently maintains a simple capital structure, thus there are no dilutive
effects on earnings per share.




Treasury
Stock




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




Segment
Reporting




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




Management
does not separately allocate expenses, including the cost of funding loan
demand, between the commercial and retail operations of the
Corporation.  As such, discrete information is not available and
segment reporting would not be meaningful.




Statements
of Cash Flows




For
purposes of reporting cash flows, the Corporation has defined cash and cash
equivalents as those amounts included in the balance sheet captions, “Cash and
due from banks” and “Interest bearing deposits with banks.”




Transfers
of Financial Assets




Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.







23
 Notes
to Consolidated Financial Statements







Note
      1 – Summary of Significant Accounting Policies
  (Continued)




New
Accounting Standards




In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements. FASB Statement
No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. We are currently evaluating the potential
impact, if any, of the adoption of FASB Statement No. 157 on our
consolidated financial position, results of operations and cash
flows.




In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
“Effective Date of FASB Statement No. 157,” that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity’s financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years. This deferral does not apply, however, to an entity that applies
Statement 157 in interim or annual financial statements before proposed FSP
157-b is finalized. The Company is currently evaluating the impact, if any, that
the adoption of FSP 157-b will have on the Company’s operating income or net
earnings.




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS No. 159
is effective for our Corporation on January 1, 2008. The Corporation is
evaluating the impact that the adoption of SFAS No. 159 will have on our
consolidated financial statements.




In
September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue
No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF
06-4").  EITF 06-4 requires the recognition of a liability related to
the postretirement benefits covered by an endorsement split-dollar life
insurance arrangement.  The consensus highlights that the employer
(who is also the policyholder) has a liability for the benefit it is providing
to its employee.  As such, if the policyholder has agreed to maintain
the insurance policy in force for the employee's benefit during his or her
retirement, then the liability recognized during the employee's active service
period should be based on the future cost of insurance to be incurred during the
employee's retirement.  Alternatively, if the policyholder has agreed
to provide the employee with a death benefit, then the liability for the future
death benefit should be recognized by following the guidance in SFAS No. 106 or
Accounting Principles Board (APB) Opinion No. 12, as appropriate.  For
transition, an entity can choose to apply the guidance using either of the
following approaches: (a) a change in accounting principle through retrospective
application to all periods presented or (b) a change in accounting principle
through a cumulative-effect adjustment to the balance in retained earnings at
the beginning of the year of adoption.  The Company recorded a
cumulative effect adjustment to retained earnings of $431,245 on January 1,
2008.







24
 Notes
to Consolidated Financial Statements







Note
      2 - Cash and Due from Banks




Regulations
of the Board of Governors of the Federal Reserve System impose uniform reserve
requirements on all depository institutions with transaction accounts and
non-personal time deposits.  Reserves are maintained in the form of
vault cash or a non-interest bearing balance held with the Federal Reserve
Bank.  The Bank also maintains deposits with the Federal Reserve Bank
and other banks for various services such as check clearing.  The
required reserve at December 31, 2007 and 2006 was approximately $5,029,000
and $4,913,000, respectively.




Note
      3 - Securities




The
amortized cost and fair values of securities available for sale are as
follows:




Amortized
                Cost
            
            Gross
                Unrealized
                Gains
            
            Gross
                Unrealized
                Losses
            
            Fair
                Value(In
      Thousands)





December
      31, 2007:Obligations of states and
      political
              Subdivisions
            $    5,319
            
            $     62
            
            $  (46)
            
            $    5,335Mortgage-backed
      securities
            102,464
            
            2,161
            
            -
            
            104,625





$107,783
            
            $2,223
            
            $  (46)
            
            $109,960





December
      31, 2006:Obligations of states and
      political
              Subdivisions
            $   5,419
            
            $     35
            
            $(102)
            
            $    5,352Mortgage-backed
      securities
            72,720
            
            933
            
            (9)
            
            73,644





$
      78,139
            
            $   968
            
            $(111)
            
            $  78,996





The
amortized cost and fair value of securities at December 31, 2007 by
contractual maturity, are shown below.  Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.




Amortized
                Cost
            
            Fair
                Value(In
      Thousands)





Due
      within one year
            $       100
            
            $         99Due
      after one year through five years
            2,871
            
            2,880Due
      after five years through ten years
            2,348
            
            2,356Due
      after ten years
            102,464
            
            104,625





$107,783
            
            $109,960







Securities
with amortized cost and fair values of $26,629,000 and $27,195,000,
respectively, at December 31, 2007 and $24,526,000 and $24,768,000
respectively, at December 31, 2006 were pledged to secure public deposits
and for other purposes required or permitted by law.




25
 Notes
to Consolidated Financial Statements







Note
      3 - Securities (Continued)




Gross
gains of $-0- and $148,000, and gross losses of $-0- and $123,000 were realized
on sales and calls of securities during 2007 and 2006,
respectively.




The
following table shows the Corporation’s gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2007
and 2006:




December 31,
      2007Less
      than 12 Months
            
            12
      Months or More
            
            TotalFair
                Value
            
            Unrealized
      Losses
            
            Fair
                Value
            
            Unrealized
      Losses
            
            Fair
                Value
            
            Unrealized
      Losses(In
      Thousands)





Obligations
      of states and political subdivisions
            $        -
            
            $    -
            
            $2,323
            
            $(46)
            
            $2,323
            
            $(46)





December 31,
      2006





Mortgage-backed
      securities
            $5,107
            
            $  (9)
            
            $        -
            
            $    -
            
            $5,107
            
            $    (9)Obligations
      of states and political subdivisions
            2,431
            
            (39)
            
            1,885
            
            (63)
            
            4,316
            
            (102)





$7,538
            
            $(48)
            
            $1,885
            
            $(63)
            
            $9,423
            
            $(111)





At
December 31, 2007, seven obligations of state and political subdivisions were in
unrealized loss positions. These unrealized losses are due to a change in
interest rates subsequent to when the securities were purchased.  At
December 31, 2007, all debt securities with temporarily impaired losses
have been rated by either Moody’s and/or S&P with an “A” or better debt
rating.  Management believes the unrealized losses are temporary and
that the Corporation has the ability to hold the securities until maturity or
market price recovery.




Note
      4 - Loans




Loans are
summarized as follows:




December
      31,2007
            
            2006(In
      Thousands)





Commercial
      loans
            
            $
            21,299
            
            
            $
            18,188Real
      estate loans:Commercial
            
            
            62,779
            
            
            
            65,786Construction
            
            
            2,002
            
            
            
            1,256Residential
            
            
            127,781
            
            
            
            128,364Municipal
      loans
            
            
            8,955
            
            
            
            11,226Consumer
      and other loans
            
            
            3,998
            
            
            
            4,509Net
      unamortized costs
            
            
            191
            
            
            
            199





$
            227,005
            
            
            $
            229,528












26
 Notes to Consolidated Financial
Statements







Note
5 - Allowance for Loan Losses




Transactions
in the allowance for loan losses are summarized as follows:




Years
      Ended December 31,2007
            
            2006(In
      Thousands)





Balance,
      January 1
            
            $
            1,806
            
            
            $
            1,636Charge offs
            
            
            (66
            )
            
            
            (60
            )Recoveries
            
            
            39
            
            
            
            20Provision for loan
      losses
            
            
            90
            
            
            
            210





Balance
      at December 31
            
            
            $
            1,869
            
            $
            1,806





At
December 31, 2007 and 2006, the total recorded investment in loans
considered to be impaired was $1,096,000 and $4,437,000,
respectively.  The average recorded investment in impaired loans
during 2007 and 2006 was $4,735,000 and $6,125,000,
respectively.  Impaired loans with balances of $612,000 and $3,612,000
at December 31, 2007 and 2006 had related allowance for loan losses of
$261,000 and $338,000, respectively.  Interest income on impaired
loans of $166,000 and  $489,000 was recognized for cash payments
received in 2007 and 2006, respectively. Loans on which the accrual of interest
has been discontinued amounted to $156,000 and $561,000 at December 31,
2007 and 2006, respectively. There were no loan balances past due 90 days or
more and still accruing interest at December 31, 2007 and 2006.




Note
      6 - Financial Instruments with Off-Balance Sheet
  Risk




The
Corporation is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit, standby letters of credit and financial standby letters of
credit.  Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet.  The contract or notional amount of those instruments reflect
the extent of involvement the Corporation has in particular classes of financial
instruments.  The Corporation does not issue any other instruments
with significant off-balance-sheet risk.




The
Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial standby letters of credit written is
represented by the contract or notional amount of those
instruments.  The Corporation uses the same credit policies in making
such commitments and conditional obligations as it does for on-balance-sheet
instruments.  The following table identifies the contract or notional
amount of those instruments:




December
      31,2007
            
            2006(In
      Thousands)





Financial
      instruments whose contract amounts represent credit risk:Commitments
      to extend credit, including unused lines of credit
            
            $32,158
            
            $31,467Standby
      letters of credit
            
            589
            
            420Financial
      standby letters of credit
            
            2,562
            
            3,434








27
 Notes
to Consolidated Financial Satements




Note
6 - Financial Instruments with Off-Balance Sheet Risk (Continued)




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.  Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  The Corporation
evaluates each customer's credit worthiness on a case-by-case
basis.  The amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit, is based on management's credit evaluation
of the counter party.  Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.




Outstanding
letters of credit written are conditional commitments issued by the Corporation
to secure the performance of a customer to a third party.  The
majority of these standby letters of credit expire within the next twelve
months.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan
commitments.  The Corporation requires collateral supporting these
letters of credit as deemed necessary.  The maximum undiscounted
exposure related to these commitments at December 31, 2007 was $3,151,000
and the approximate value of underlying collateral upon liquidation that would
be expected to cover this maximum potential exposure was
$2,657,000.  The amount of the liability as of December 31, 2007
and 2006 for guarantees under standby letters of credit issued is not
material.




Note
      7 - Premises and Equipment




The
composition of premises and equipment at December 31, 2007 and 2006 is as
follows:




2007
            
            2006(In
      Thousands)





Land
            
            $      437
            
            $     437Premises
            
            5,789
            
            5,789Leasehold
      improvements
            
            229
            
            229Furniture
      and equipment
            
            5,655
            
            5,43612,110
            
            11,891Accumulated
      depreciation and amortization
            
            (8,382)
            
            (8,005)





$  3,728
            
            $
      3,886





Depreciation
and amortization expense was $423,000 and $525,000 for the years ended
December 31, 2007 and 2006, respectively.







28




Notes
to Consolidated Fincial Statements




Note
8 - Interest Bearing Deposits




Interest
bearing deposits include time deposits issued in denominations of $100,000 or
more which amounted to $43,434,000 and $34,047,000 at December 31, 2007 and
2006, respectively.




Interest
bearing deposits at December 31, 2007 and 2006 are detailed as
follows:




2007
            
            2006(In
      Thousands)





Savings
      accounts
            
            $  45,229
            
            $   53,236NOW
      accounts
            
            21,718
            
            20,944Money
      market accounts
            
            21,023
            
            24,022Time
      deposits
            
            140,635
            
            130,019





$228,605
            
            $228,221





Time
deposits at December 31, 2007 had the following scheduled maturities (in
thousands):




2008
            
            $
            108,9792009
            
            
            18,7122010
            
            
            6,8142011
            
            
            3,2612012
            
            
            2,869





$
            140,635





Note
      9 - Short-Term Borrowings




Short-term
borrowings at December 31, 2007 consisted of federal funds purchased of
$3,175,000 and $10,000,000 of FHLB borrowings. The December 31, 2006 borrowings
consisted of $5,000,000 of federal funds purchased.




The
      outstanding balances and related informationof short-term
      borrowingsaresummarized as
      follows:




Years
      Ended December 31,2007
            
            2006(Dollars
      in Thousands)





Average
      balance during the year
            
            $6,171
            
            $2,533Average
      interest rate during the year
            
            5.07%
            
            5.37%Maximum
      month-end balance
            
            $15,000
            
            $10,000Weighted
      average interest rate at end of the year
            
            4.32%
            
            5.38%





At
December 31, 2007, the Corporation had approved but unused funding
availability from lines of credit of $26,000,000.












29




Notes
to Consolidated Fincial Statements







Note
      10 - Long-Term Borrowings




Long-term
borrowings outstanding at December 31, 2007 and 2006 were $20,000,000 and
$-0- respectively.  The $20,000,000 outstanding as of December 31,
2007, is one advance with an interest rate of 4.53% and a maturity date of
September 13, 2009.  Advances from the FHLB of Pittsburgh are secured
by the Bank’s stock in the FHLB of Pittsburgh, qualifying residential mortgage
loans and mortgage-backed securities. The maximum remaining borrowing capacity
from the FHLB at December 31, 2007 is $185,000,000.




Note
      11 - Employee Benefit Plans




The
Corporation sponsors an employee profit sharing plan available to all employees
with at least one year of service.  The Corporation contributes to the
plan, as determined by the Board of Directors, in an amount not to exceed 15% of
compensation of eligible participants.  For the years ended December
31, 2007 and 2006, the amount was 5% of compensation of eligible
participants.  The Corporation also has a supplemental retirement plan
for certain retired employees.  The expense for the employee benefit
plans was $228,000 and $235,000, for the years ended December 31, 2007 and
2006, respectively.




Note
      12 - Comprehensive Income




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




The
components of other comprehensive income (loss) and related tax effects for the
years ended December 31, 2007 and 2006 are as follows:









2007
            
            2006(In
      Thousands)





Unrealized
      gains (losses)
              on
      securities available for sale
            
            $1,320
            
            $(52)Less
      reclassification adjustment for gains realized in income
            
            -
            
            (25)Net
      Unrealized Gains (Losses)
            
            1,320
            
            (77)Tax
      effect
            
            449
            
            (26)Net
      of Tax Amount
            
            $  871
            
            $(51)















30







Notes
to Consolidated Fincial Statements







Note
      13 - Lease Commitments




The
Corporation rents offices under operating leases that expire through
2016.  Lease expense amounted to $101,000 and $98,000 in 2007 and
2006, respectively. Operating lease obligations at December 31, 2007 are as
follows (in thousands):




2008
            $1052009
            1052010
            962011
            832012
            33Thereafter
            107







Note
      14 - Income Taxes




The
components of the net deferred tax liability at December 31, 2007 and 2006
are as follows:




2007
            
            2006(In
      Thousands)





Allowance
      for loan losses
            
            $
            335
            
            
            $
            305Accrued
      benefits
            
            
            58
            
            
            
            68Intangible
      assets
            
            
            64
            
            
            
            -Other
            
            
            7
            
            
            
            2Total
      Deferred Tax Assets
            
            
            464
            
            
            
            375Deferred
      loan fees
            
            
            71
            
            
            
            68Securities
      accretion
            
            
            34
            
            
            
            13Unrealized
      net gain on securities available for sale
            
            
            740
            
            
            
            291Depreciation
            
            
            331
            
            
            
            189Total
      Deferred Tax Liabilities
            
            
            1,176
            
            
            
            561Net
      Deferred Tax Liability
            
            $
            (712
            )
            
            $
            (186
            )





The
income tax provision for the years ended December 31, 2007 and
2006  is summarized as follows:




2007
            
            2006(In
      Thousands)





Current
            
            $
            995
            
            
            $
            1,058Deferred
            
            
            77
            
            
            
            (52
            )$
            1,072
            
            
            $
            1,006


















31







Notes
to Consolidated Fincial Statements




Note
      14 - Income Taxes (Continued)




The tax
provision for financial reporting purposes differs from the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes.  The differences for the years ended December 31, 2007 and
2006 are as follows:




2007
            
            2006(In
      Thousands)





Tax
      at statutory rates
            
            $
            1,407
            
            
            $
            1,348Increase
      (decrease) resulting from:Tax-exempt income
            
            
            (192
            )
            
            
            (214
            )Non-deductible interest
      expense
            
            
            22
            
            
            
            21Increase in investment in life
      insurance
            
            
            (170
            )
            
            
            (158
            )Other
            
            
            5
            
            
            
            9$
            1,072
            
            
            $
            1,006





On
January 1, 2007, the Company adopted FASB Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.
109.”  The Company had no unrecognized tax positions at December 31,
2007 and 2006. Consequently, the adoption of FIN 48 had no material effect on
the operating results or financial position of the Company.




The
Company recognizes accrued interest and penalties assessed as a result of an
Internal Revenue Services (IRS) examination through income tax
expense.  During 2007, the IRS completed an examination of the
Company’s federal income tax return for December 31, 2002, 2004 and
2005.  As a result of the exam, the Company paid $48,000.




Note
15 - Fair Value of Financial Instruments




Below are
various estimated fair values at December 31, 2007 and 2006, as required by
Statement of Financial Accounting Standards No. 107 (FAS 107).  Such
information, which pertains to the Corporation’s financial instruments, is based
on the requirements set forth in FAS 107 and does not purport to represent the
aggregate net fair value of the Corporation.  It is the Corporation’s
general practice and intent to hold its financial instruments to maturity,
except for certain securities designated as securities available for sale, and
not to engage in trading activities.  Many of the financial
instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction.  Therefore, the
Corporation had to use significant estimations and present value calculations to
prepare this disclosure.




Changes
in the assumptions or methodologies used to estimate fair values may materially
affect the estimated amounts.  Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and the methodologies in absence of active
markets.  This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.




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




Cash
and Short-Term Investments




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







32






Notes
to Consolidated Fincial Statements




Note
15 - Fair Value of Financial Instruments (Continued)




Securities




Fair
values for securities available for sale are based on quoted market prices, if
available.  If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.




Restricted
Investments in Bank Stock




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




Loans
Receivable




Fair
values of variable rate loans subject to frequent repricing and which entail no
significant credit risk are based on the carrying values.  The
estimated fair values of other loans are estimated by discounting the future
cash flows using interest rates currently offered for loans with similar terms
to borrowers of similar credit quality.




Deposits




For
deposits which are payable on demand at the reporting date, representing all
deposits other than time deposits, management estimated that the carrying value
of such deposits is a reasonable estimate of fair value.  Fair values
of time deposits are estimated by discounting the future cash flows using
interest rates currently being offered and a schedule of aggregate expected
maturities.




Short-Term
Borrowings




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




Long
Term Borrowings




Fair
values of long-term borrowings are estimated by discounting the future cash
flows using interest rates currently available for borrowings with similar terms
and maturity.




Accrued
Interest Receivable and Payable




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









33




Notes
to Consolidated Fincial Statements




Note
15 - Fair Value of Financial Instruments (Continued)




Off-Balance
Sheet Instruments




The fair
value of commitments to extend credit and for outstanding letters of credit is
estimated using the fees currently charged to enter into similar agreements,
taking into account market interest rates, the remaining terms and present
credit worthiness of the counterparties.




The
carrying amounts and fair values of the Corporation’s financial instruments as
of December 31 are presented in the following table:









December
      31, 2007
            
            
            December
      31, 2006Carrying
      Amount
            
            
            Fair
                Value
            
            
            Carrying
      Amount
            
            
            Fair
                Value(In
      Thousands)Financial
      assets:Cash and short-term
      investments
            
            $
            9,929
            
            
            $
            9,929
            
            
            $
            10,156
            
            
            $
            10,156Securities available for
      sale
            
            
            109,960
            
            
            
            109,960
            
            
            
            78,996
            
            
            
            78,996Restricted investments in bank
      stock
            
            
            2,375
            
            
            
            2,375
            
            
            
            1,180
            
            
            
            1,180Net loans
    receivable
            
            
            225,136
            
            
            
            220,083
            
            
            
            227,722
            
            
            
            224,513Accrued interest
      receivable
            
            
            1,174
            
            
            
            1,174
            
            
            
            1,044
            
            
            
            1,044Financial
      liabilities:Deposits
            
            $
            293,519
            
            
            $
            293,444
            
            
            $
            293,920
            
            
            $
            292,178Short-term
    borrowings
            
            
            13,175
            
            
            
            13,175
            
            
            
            5,000
            
            
            
            5,000Long-term
    borrowings
            
            
            20,000
            
            
            
            20,022
            
            
            
            -
            
            
            
            -Accrued interest
      payable
            
            
            1,291
            
            
            
            1,291
            
            
            
            1,240
            
            
            
            1,240Off-balance
      sheet financial instruments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -





Note
      16 - Related Party Transactions




Some of
the Corporation's or the Bank’s directors, principal officers, and their related
interests had transactions with the Bank in the ordinary course of
business.  All loans and loan commitments in such transactions were
made on substantially the same terms, including collateral and interest rates,
as those prevailing at the time for comparable transactions with
others.  In the opinion of management, these transactions with related
parties do not involve more than normal risk of collectibility or present other
unfavorable features.  It is anticipated that further such extensions
of credit will be made in the future.  The aggregate amount
outstanding to these directors and principal officers was approximately $661,000
and $742,000 at December 31, 2007 and 2006, respectively.  During
2007, advances totaled $115,000 and repayments were $196,000.







Note
      17 - Capital Requirements and Regulatory
  Restrictions




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









34





Notes
to Consolidated Fincial Statements







Note
17 – Capital Requirements and Regulatory Restrictions (Continued)




The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies.  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 consolidated financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices.  The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weighting and other factors.




Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the tables below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 Capital (as defined) to average assets (as
defined).  Management believes, as of December 31, 2007, that the
Bank meets all capital adequacy requirements to which it is
subject.




As of
December 31, 2007, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action.  To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table below.  There are no
conditions or events since those notifications that management believes have
changed those categories.




The
following table presents the risk-based and leverage capital amounts and ratios
at December 31, 2007 and 2006 for Commercial Bank & Trust of
PA:




Actual
            
            For
      Capital Adequacy Purposes
            
            To
      be Well Capitalized Under Prompt Corrective Action
      ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio(Dollars
      in Thousands)





As
      of December 31, 2007Total
      capital (to risk-weighted assets)
            
            $
            38,425
            
            
            
            17.6
            %
            
            $
            317,414
            
            
            
            38.0
            %
            
            $
            321,767
            
            
            
            310.0
            %Tier
      1 capital (to risk-weighted assets)
            
            
            36,556
            
            
            
            16.8
            
            
            
            3 8,707
            
            
            
            34.0
            
            
            
            313,060
            
            
            
            3 6.0Tier
      1 capital (to average assets)
            
            
            36,556
            
            
            
            9.9
            
            
            
            314,688
            
            
            
            34.0
            
            
            
            318,360
            
            
            
            3 5.0








As
      of December 31, 2006Total
      capital (to risk-weighted assets)
            
            $
            37,879
            
            
            
            17.8
            %
            
            $
            317,050
            
            
            
            38.0
            %
            
            $
            321,312
            
            
            
            310.0
            %Tier
      1 capital (to risk-weighted assets)
            
            
            36,073
            
            
            
            16.9
            
            
            
            3 8,525
            
            
            
            34.0
            
            
            
            312,787
            
            
            
            3 6.0Tier
      1 capital (to average assets)
            
            
            36,073
            
            
            
            10.8
            
            
            
            313,404
            
            
            
            34.0
            
            
            
            316,754
            
            
            
            3 5.0











35
 Notes
to Consolidated Financial Statements







Note
      18 - Condensed Financial Information of Commercial National Financial
      Corporation (Parent Only)




Statements
      of Financial Condition




December
      31,2007
            
            2006(In
      Thousands)





AssetsInvestment
      in bank subsidiary
            
            $
            38,432
            
            
            $
            37,199Investment
      in other subsidiaries
            
            
            32
            
            
            
            32Other
      assets
            
            
            27
            
            
            
            21Total
      Assets
            
            $
            38,491
            
            
            $
            37,252Liabilities
      and Shareholders’ EquityLiabilities
            
            $
            30
            
            
            $
            23Shareholders’
      equity
            
            
            38,461
            
            
            
            37,229Total
      Liabilities and Shareholders’ Equity
            
            $
            38,491
            
            
            $
            37,252





Statements
      of Income




Years
      Ended December 31,2007
            
            2006(In
      Thousands)





Dividends
      from bank subsidiary
            
            $
            2,704
            
            
            $
            9,339Fees
      from bank subsidiary
            
            
            494
            
            
            
            592Expenses
            
            
            (494
            )
            
            
            (561
            )2,704
            
            
            
            9,370Income
      taxes
            
            
            -
            
            
            
            112,704
            
            
            
            9,359Equity
      in (excess of) undistributed earnings of subsidiaries
            
            
            361
            
            
            
            (6,401
            )Net
      Income
            
            $
            3,065
            
            
            $
            2,958


36
 Notes
to Consolidated Financial Statements







Note
      18 - Condensed Financial Information of Commercial National Financial
      Corporation (Parent Only)
(Continued)




Statements
      of Cash Flows




Years
      Ended December 31,2007
            
            2006(In
      Thousands)





Cash
      Flows from Operating ActivitiesNet income
            
            $
            3,065
            
            
            $
            2,958Adjustments to reconcile net
      income to
              net cash provided by
      operating
              activities:(Equity in) excess of
      undistributedearnings of subsidiaries
            
            
            (361
            )
            
            
            6,401Increase in other
      assets
            
            
            (6
            )
            
            
            -Increase (decrease) in
      liabilities
            
            
            6
            
            
            
            (20
            )Net
      Cash Provided by Operating Activities
            
            
            2,704
            
            
            
            9,339Cash
      Flows from Financing ActivitiesDividends paid
            
            
            (2,429
            )
            
            
            (2,511
            )Purchase of treasury
      stock
            
            
            (275
            )
            
            
            (6,828
            )Net
      Cash Used in Financing Activities
            
            
            (2,704
            )
            
            
            (9,339
            )Net
      Increase (Decrease) in Cash
            
            
            -
            
            
            
            -Cash
      - Beginning
            
            
            -
            
            
            
            -Cash
      - Ending
            
            $
            -
            
            
            $
            -





37