| UNITEDSTATES                      |
|-----------------------------------|
| SECURITIESAND EXCHANGE COMMISSION |
| WASHINGTON,DC 20549               |
|                                   |
| **FORM10-K**                      |

(MarkOne)
| **ý** | **ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934** |
|--------------|----------------------------------------------------------------------------------------|

**For the fiscal year ended December 31,2003**
| o | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------|

**For the transition period from              to              **

**Commission file number0-18676**

****
| COMMERCIAL NATIONAL FINANCIALCORPORATION                |
|---------------------------------------------------------|
| *(Exactname of registrant as specified in its charter*) |
|                                                           | PENNSYLVANIA                          | 25-1623213 |   |
|----------------------------------------------------------------|---------------------------------------|------------|--------|
| *(Stateor other jurisdiction of incorporation ororganization)* | *(I.R.S.Employer Identification No.)* |
| 900LIGONIER STREET                        | 15650       |
|-------------------------------------------|-------------|
| *(Addressof principal executive offices)* | (*ZipCode)* |

Registrant's telephonenumber, including areacode:                                                   (724) 539-3501

Securities registeredpursuant to Section 12(b) of the Act:         None

Securitiesregistered pursuant to Section 12(g) of the Act:

CommonStock, $2 Par Value

(*Titleof Class*)

Indicate by checkmarkwhether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days. 

Yes[ X ]   No [   ]

Indicate by checkmark ifdisclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in  Part III of the Form10-K or any amendment to this Form 10-K. [  ]

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

  Yes [   ]No [X ]

The aggregate market valueof registrant’s common stock held by

non-affiliates computed byreference to the price at which the common

stock was last sold, as ofJune 30, 2003, the last business day

of the registrant’smost recently completed second fiscalquarter.                                                                        $65,648,860                                                                                                                                                                                                                                                     

                                                                                                                                                                                       

Number of shares of commonstock outstanding at March 24,2004                                                                          3,430,376

**DOCUMENTS INCORPORATED BYREFERENCE**

****

Portions of theregistrant’s proxy statement relating to its 2004 annualmeeting of shareholders to be held May 18, 2004 are incorporated byreference into Part III of this Form 10-K. In addition, portions ofthe registrant’s Annual Report to Shareholders for the fiscalyear ended December 31, 2003 are incorporated by reference intoPart II of this Form 10-K.

| CommercialNational Financial Corporation |
|------------------------------------------|
|                                          |
| Form10-K                                 |
|                                          |
| INDEX                                    |
|                                          |
| Part I                                   |  | PAGE |
| ITEM 1.  | Business                                                                                    | 4 |
|----------|---------------------------------------------------------------------------------------------|---|
| ITEM 2.  | Properties                                                                                  | 7 |
| ITEM 3.  | LegalProceedings                                                                            | 7 |
| ITEM 4.  | Submission of Matters to aVote of Security Holders                                          | 7 |
|          |                                                                                             |   |
| PART II  |                                                                                             |   |
| ITEM 5.  | Market for Registrant'sCommon Stock Equity and Related

  StockholderMatters           | 7 |
| ITEM 6.  | Selected FinancialData                                                                      | 7 |
| ITEM 7.  | Management's Discussionand Analysis of Financial

  Condition andResults of Operation  | 7 |
| ITEM 7A. | Quantitative andQualitative Disclosures About Market Risk                                   | 7 |
| ITEM 8.  | Financial Statements andSupplementary Data                                                  | 7 |
| ITEM 9.  | Changes in andDisagreements with Accountants on Accounting

  and FinancialDisclosures | 8 |
| ITEM 9A. | Controls andProcedures                                                                      | 8 |
|          |                                                                                             |   |
| PART III |                                                                                             |   |
| ITEM 10. | Directors and ExecutiveOfficers of the Registrant                                           | 8 |
| ITEM 11. | ExecutiveCompensation                                                                       | 8 |
| ITEM 12. | Security Ownership ofCertain Beneficial Owners and

 Management                        | 8 |
| ITEM 13. | Certain Relationships andRelated Transactions                                               | 9 |
| ITEM 14. | Principal Accountant Feesand Services                                                       | 9 |
|          |                                                                                             |   |
| PART IV  |                                                                                             |   |
| ITEM 15. | Exhibits, FinancialStatement Schedules and Reports

  On Form8-K                       | 9 |
|          |                                                                                             |   |

# **PARTI**

**Item1. ****Business**

**Description ofBusiness**

Commercial NationalFinancial Corporation (the “Corporation”) is aPennsylvania corporation and is registered as a bank holdingcompany under the Bank Holding Company Act of 1956, as amended, andas a financial holding company under the Gramm Leach Bliley Act of1999 (“GLB”).  Through its subsidiaries theCorporation is engaged in banking, trust and insurance agencyoperations.

**The BankSubsidiary**

The Corporation is ownerof 100% of the outstanding shares of common stock of CommercialBank of Pennsylvania (the “Bank”). The Bank has beenproviding banking services since 1934. At the present time, two (2)banking offices are in operation in Latrobe, Pennsylvania, two (2)in Unity Township, Pennsylvania and one (1) each in Ligonier, WestNewton, Greensburg, Norwin and Hempfield Township, Pennsylvania.All of these offices are within the boundaries of WestmorelandCounty, Pennsylvania. In addition, the building that houses theBank’s downtown Latrobe banking office is the location of theCorporation's and the Bank's executive and administrative offices.The institution's operations center is located at the Latrobe Plazain downtown Latrobe. This operations center also houses an in-housedata processing system.

Each of the bankingoffices, except for downtown Latrobe and Greensburg, is equippedwith 24 hour a day automatic teller machines (ATM).  Bank ATMunits are also located on the campuses of Saint Vincent College inUnity Township and the University of Pittsburgh at Greensburg, theterminal of the Westmoreland County Airport in Unity Township, thereception lobby of the Latrobe Area Hospital in Latrobe, and anin-store machine in the Norvelt Open Pantry. A separatefreestanding drive-up teller staffed banking facility is attachedto the Lincoln Road office in downtown Latrobe. This facility alsoprovides ATM service.

The Bank offers the fullrange of banking services normally associated with a generalcommercial banking business. Services include extending credit,providing deposit services, marketing non-deposit investments andoffering financial counseling. The ATM system described above is apart of the Cirrus, Honor, Plus and Star networks, which providesthe Bank's customers access to an extensive regional and nationalnetwork. The Bank also has implemented a comprehensive electronicOnline Banking system. By using a personal computer with internetaccess, customers can access their Commercial Bank accounts,perform common banking tasks and pay bills 24 hours a day, sevendays a week, 365 days a year.

**The FinancialServices Subsidiaries**

In December 2002, theCorporation completed the acquisition of two insurance agencies,Gooder Agency, Inc., (“Gooder Agency”) and Gooder &Mary, Inc., which owned a 50% interest in Commercial NationalInsurance Services, thus giving the Corporation full ownership ofCommercial National Insurance Services, which is now operated aspart of Gooder Agency.  Gooder Agency was acquired as a whollyowned subsidiary of Commercial National Investment Corporation,which has changed its name to Commercial National InsuranceServices, Inc (“CNIS”). 

Gooder Agency, located inLigonier, Pennsylvania, is a full service provider of insuranceproducts for individuals and businesses. Gooder Agency representsfifteen national, regional and mutual insurance companies thatallows it to provide new and existing customers with products andprograms needed at competitive prices.

On October 1, 2003, theCorporation formed a trust company subsidiary and the Banktransferred its trust operations to such subsidiary. Thissubsidiary, Highview Trust Company (“HTC”), enables theCorporation to offer more investment products to itscustomers.  HTC provides a full range of trust services to itscustomers.

###### **Competition**

All aspects of theCorporation’s business are highly competitive. TheCorporation’s subsidiaries compete with major financialinstitutions, several national and state banks, thriftinstitutions, credit unions, mortgage brokers, finance companies,insurance companies, investment companies and mutualfunds.

Customers are generallyinfluenced by convenience of location, quality of service, price ofservices and availability of products. The Corporation believesthat its subsidiaries effectively compete with other financialservice providers within its market area.

**Supervision andRegulation**

***Introduction***

The Corporation, the Bankand its non-banking subsidiaries are subject to extensiveregulation by federal and state agencies.  The primary focusof these regulations is for the protection of depositors, federaldeposit insurance funds and the banking system, not for theprotection of security holders.  Set forth below is a briefdescription of certain laws which relate to the regulation of theCorporation and its subsidiaries.  The description is notmeant to be complete and is qualified by reference to applicablelaws and regulations.

***RegulatoryAgencies***

HoldingCompany.  TheCorporation, as a bank holding company and as a financial holdingcompany is subject to regulation by the Federal Reserve Board(FRB), the Securities and Exchange Commission, and the FederalDeposit Insurance Corporation (FDIC).  The nature of thesupervision extends to such areas as safety and soundness,truth-in-lending, truth-in-savings, rate restrictions, consumerprotection, permissible loan and securities activities, merger andacquisition limitations, reserve requirements, dividend paymentsand regulations concerning activities by corporate officers anddirectors.  No regulatory restrictions or actions arecurrently pending against the Corporation.
```

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Subsidiary Bank.  The Bank is subject to regulation and examination primarily by the FDIC and Pennsylvania Department of Banking (the “PDB”) and the FDIC. No regulatory restrictions or actions are currently pending against the Bank.
```

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Financial Services Subsidiaries. CNIS, a non-banking subsidiary of the Corporation, is a licensed insurance agency and is subject to Pennsylvania laws and regulations of the Pennsylvania Department of Insurance.  HTC, the Corporation’s trust company subsidiary, is regulated by the PDB and FRB. No regulatory restrictions or actions are currently pending against CNIS or HTC.
```

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***Holding Company Activities***
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GLB permits bank holding companies with subsidiary banks meeting certain capital and management requirements to elect to become "financial holding companies".  Financial holding companies may engage in a full range of financial activities, including not only banking, insurance and securities activities, but also merchant banking and additional activities determined to be "financial in nature". GLB also provides for expansion of the list of permissible activities as necessary for a financial holding company to keep abreast of competitive and technological change. The Corporation was designated a financial holding company in March 2000 by the FRB.
```

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Although it preserved the FRB as the umbrella supervisor of financial holding companies, GLB adopted an administrative approach to regulation that defers to the approval and supervisory requirements of the functional regulators of insurers and insurance agents, broker-dealers, investment companies, and banks. Thus, the various state and federal regulators of a financial holding company's operating subsidiaries would retain their jurisdiction and authority over the operating entities. As the umbrella supervisor, however, the FRB has the potential to affect the operations and activities of financial holding companies' subsidiaries through its power over the financial holding company. In addition, GLB contains numerous trigger points related to legal noncompliance and other serious problems affecting bank affiliates that could lead to direct FRB involvement and to the possible exercise of remedial authority affecting both financial holding companies and their affiliated operating companies.
```

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****
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In 2002, the Sarbanes Oxley Act of 2002 (SOX) became law. The goals of this law are to protect investors in publicly traded companies by improving accuracy and reliability of corporate disclosures under the federal securities laws.  Some of the provisions included in SOX govern the services provided by a publicly held entity’s independent auditors and procedures for approving such services, chief executive officer and chief financial officer certifications relating to the public company’s filings under the Securities Exchange Act of 1934 (“Exchange Act”), expedited filings of reports by insiders of their securities transactions and disclosure requirements relating to critical accounting policies and their application.
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**CapitalRequirements**

Bank holding companies arerequired to be in compliance with the FRB’s risk-basedcapital standards. These standards require that (1) at least 50% oftotal capital must be “Tier 1 capital”. This consistsprimarily of common and certain other “core” equitycapital; (2) assets and off-balance sheet items must be weightedaccording to risk; (3) the total capital to risk-weighted assetratio must be at least 8%; and (4) a minimum 4% leverage ratio ofTier 1 capital to average assets must be maintained. The PDBrequires state chartered banks to maintain a 6% leverage capitaland 10% risk based capital, defined substantially the same as thefederal regulations. The Bank is subject to almost identicalcapital requirements adopted by the FDIC.
```

```

**Effects ofGovernmental Policies**

In addition to regulatoryrequirements, the Corporation and its subsidiary Bank are affectedby the national economy and the influence on that economy exertedby governmental bodies through monetary and fiscal policies andtheir efforts to implement such policies.  In particular, theimpact of the open market operations on interest rates, theestablishment of reserve requirements and the setting of thediscount rate will continue to affect business volumes andearnings. The exact nature or the full extent of this impact isalmost impossible to predict; however, management continues tomonitor these activities on a regular basis and seeks to modify itspolicies and procedures accordingly.

**Employees**

As of December 31, 2003,the Corporation, the Bank and other subsidiaries of the Corporationhad a total of 151 full-time-equivalent employees.

**Executive Officersof the Corporation**

The following table showsthe names and ages of the current executive officers and thepresent and previous positions held by them for at least the pastfive years.
| Name              | Age | Present and PreviousPositions                                               |
|-------------------|-----|-----------------------------------------------------------------------------|
|                   |     |                                                                             |
|                   |     |                                                                             |
| Gregg E. Hunter   | 45  | Vice chairman, presidentand chief executive officer (February 2004 -        |
|                   |     | present), Vice chairmanand chief financial officer                          |
|                   |     | (December 1995 to January2004)                                              |
|                   |     |                                                                             |
| Ryan M. Glista    | 36  | Senior vice president andchief financial officer (February 2004 -           |
|                   |     | present), Vicepresident/comptroller (December 1997                          |
|                   |     | to January 2004),assistant vice president/                                  |
|                   |     | controller (December 1995to November 1997)                                  |
|                   |     |                                                                             |
| Wendy S.Schmucker | 35  | Secretary/treasurer andsenior vice president, division manager              |
|                   |     | corporate administration(February 2004 – present) Secretary/treasurer |
|                   |     | and vice president,manager corporate administration (November               |
|                   |     | 1997 to January2004)                                                        |
|                   |     |                                                                             |
| Susan R.Skoloda   | 29  | Vice president, corporatecontrols and community relations officer           |
|                   |     | (March 2004 to present);assistant vice president (April 2001 to             |
|                   |     | February 2004); assistantsecretary/treasurer (April 1998 to present)        |
|                   |     |                                                                             |
|                   |     |                                                                             |

****

**Item2. ****Properties**

All of theCorporation’s facilities are owned with the exception of theLincoln Road banking office and adjacent drive-up facility, theNorwin Hills banking office and the facility that houses GooderAgency, which are leased. The lease agreement for the Gooder Agencyproperty gives the Corporation a right of first refusal to purchasethe property in the event it is available for sale. All of theproperties are used in their entirety for banking and insuranceagency purposes. In each case, the properties have been maintainedin good repair, are well suited for their present use and appear tobe adequate for the immediate needs of the Corporation and itssubsidiaries. The locations of the Corporation’s realproperties can be found in the Annual Report toShareholders.

**Item3. ****LegalProceedings**

Other than proceedingsthat occur in the normal conduct of business, there are no legalproceedings to which either the Corporation or the subsidiaries isa party that will have any material effect on the financialposition of the Corporation or its subsidiaries.

**Item4. ****Submissionof Matters to a Vote of Security Holders**

No matters were submittedto a vote of the Corporation’s security holders during thelast quarter of its fiscal year ended December 31, 2003.

**PARTII**

**Item 5.****Market for Registrant's CommonEquity and Related Stockholder Matters**

Information appearing inthe Annual Report to Shareholders for the fiscal year endedDecember 31, 2003 (the Annual Report) in the section titled“Common Stock Information” is incorporated herein byreference in response to this item.  As of March 24, 2004there were 512 shareholders of record of the Corporation's commonstock. The number of beneficial shareholders is approximately864. 

We have historically paidquarterly dividends on our common stock and currently intend tocontinue to do so in the foreseeable future. Our ability to paydividends depends on a number of factors, however, includingrestrictions on the ability of the Corporation to pay dividendsunder federal laws and regulations, and as a result there can be noassurance that dividends will be paid in the future

****

**Item 6.****Selected FinancialData**

Information appearing inthe Annual Report in the section titled “Selected FinancialData” is incorporated herein by reference.

**Item7.           ****Management's Discussion andAnalysis of Financial Condition and Results ofOperation******

Information appearing inthe Annual Report in the section titled “Management’sDiscussion and Analysis of Financial Condition and Results ofOperation” is incorporated herein by reference.

**Item7A.        ****Quantitative and QualitativeDisclosures About Market Risk**

       

Information appearing inthe Annual Report on in the section titled “InterestSensitivity and Market Risk” is incorporated herein byreference.

**Item8.           ****Financial Statements andSupplementary Data**

The Corporation’sconsolidated financial statements, the notes thereto and the reportof the independent certified public accountants of the AnnualReport and are incorporated herein by reference.  In addition,a quarterly summary of financial data is in the section titled“Quarterly Summary of Financial Data” of the AnnualReport and is incorporated herein by reference.

**Item9.          ****Changes in and Disagreementswith Accountants on Accounting and FinancialDisclosure**

None

**Item9A.        ****Controls andProcedures**

**Evaluation andDisclosure Controls and Procedures**

The Corporation carriedout an evaluation under the supervision and with the participationof the Chief Executive Officer and Chief Financial Officer of theeffectiveness of the design and operation of its disclosurecontrols and procedures (as defined in Rules 13a-15 and 15d-15under the Exchange Act), as of December 31, 2003 (the“Evaluation Date”).  Based on that evaluation, theChief Executive Officer and Chief Financial Officer have concludedthat, as of the Evaluation Date, the Corporation’s disclosurecontrols and procedures are effective to ensure that informationrequired to be disclosed by the Corporation in reports that itfiles or submits under the Exchange Act is recorded, processed,summarized and reported within the applicable timeperiod.

**Changes in InternalControls**

There has not been anysignificant change in the Corporation’s internal control overfinancial reporting that has materially affected, or is reasonablylikely to materially affect the Corporation’s internalcontrol over financial reporting.  There were no significantdeficiencies or material weakness identified in the internalcontrol over financial reporting, and therefore no correctiveactions were taken.

**PARTIII**

**Item10.        ****Directors and ExecutiveOfficers of the Registrant**

Information concerning (i)directors, appearing under the captions “Election ofDirectors” and “Director’s Meetings andCommittees” in the Corporation’s Proxy Statement,related to the Annual Meeting of Shareholders to be held May 18,2004 (the “Proxy Statement”) (ii) informationconcerning executive officers, appearing under the caption“Executive Officers of the Company” in Part I of thisForm 10-K, and (iii) information contained under the section“Section 16(a) Beneficial Ownership ReportingCompliance”, in the Proxy Statement, are incorporated hereinby reference to this Item 10.

The Corporation hasadopted a Code of Ethics for Senior Financial Officers which isapplicable to the Corporation’s principal executive officerand principal financial and accounting officer. A copy of such Codeof Ethics has been filed as an exhibit to this Form10-K.

**Item11.        ****ExecutiveCompensation**

The information containedin:  (i) the section titled “Executive Officer’sCompensation” in the Proxy Statement, with respect toexecutive compensation, (ii) the section titled “Compensationof Directors” in the Proxy Statement, with respect todirector compensation, (iii) the information contained in thesection titled “Executive Compensation CommitteeReport” in the Proxy Statement, (iv) the informationcontained in the section titled “Compensation CommitteeInterlocks and Insider Participation” in the Proxy Statement,and (v) the information contained in the section titled“Performance Graph,” in the Proxy Statement, withrespect to shareholder returns, are incorporated hereby byreference to this Item 11.  The stock performance graph andthe Compensation Committee Report shall not be deemed to be“filed.”

**Item 12.       ****Security Ownership of CertainBeneficial Owners and Management**

The information containedin the sections titled “Beneficial Ownership of CommonStock” and “Beneficial Ownership by Officers, Directorsand Nominees” in the Proxy Statement is incorporated hereinby reference to this Item 12.

Thefollowing table provides information as of December 31, 2003with respect to compensation plans under which equity securities ofthe Company are authorized for issuance.

**Equity Compensation PlanInformation**
|                                                                      |  | **(a)**                                                                                       |  | **(b)**                                                                        |  | **(c)**                                                                                                                                       |
|----------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------|
| **Plan category**                                                    |  | **Number of securities to be issued uponexercise of outstanding options, warrants andrights** |  | **Weighted-average exercise price ofoutstanding options, warrants and rights** |  | **Number of securities remaining available forfuture issuance under equity compensation plans (excludingsecurities reflected in column (a))** |
| **Equity compensation plans approved bysecurity holders**            |  | ____                                                                                          |  | **____**                                                                       |  | ________                                                                                                                                      |
| **Equity compensation plans not approved bysecurity holders****(1)** |  | **-**                                                                                         |  | **-**                                                                          |  | -                                                                                                                                             |
| **Total**                                                            |  | -                                                                                             |  | -                                                                              |  | -                                                                                                                                             |
|                                                                      |  |                                                                                               |  |                                                                                |  |                                                                                                                                               |

**(1)** A Directors CallProgram was established by the Bank in 2002 as an opportunity fordirectors to earn shares of common stock of the Corporation.Directors are awarded shares of common stock based on the numberand type of referrals given to the Bank to increase its businessvolumes. The program is open to independent directors only. Thefollowing two directors were awarded shares of common stock underthe program in 2003: John T. Babilya, one

  share; George V.Welty, seven shares.

**Item 13.       ****Certain Relationships and RelatedTransactions**

The information containedin the section titled “Transactions with Directors, Nominees,Officers and Associates” in the Proxy Statement isincorporated herein by reference to this Item 13.

**Item14.         ****Principal Accountant Fees andServices**

The information containedin the section titled “Auditor and Audit Fees” in theProxy Statement is incorporated by reference to this Item14.

**PARTIV**

****

**Item 15.       ****Exhibits, Financial Statement Schedulesand Reports on Form 8-K**

(a)   Theconsolidated financial statements and exhibits listed below arefiled as part of this report.  Financial statement schedulesare omitted as they are not applicable.

(1)   TheCorporation’s consolidated financial statements, the notesthereto and the report of the independent public accountants of theAnnual Report and are incorporated herein by reference.
|                                                                                                                           |                                                                                                           | Page Numberor                                                     |
|---------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|
|                    Exhibit |                                                                                                           | Incorporated by                                                   |
|                    Number  | Description                                                                                               | Reference to                                                      |
|                                                                                                                           |                                                                                                           |                                                                   |
| 3.1                                                                                                                       | Articles ofIncorporation                                                                                  | Exhibit C to FormS-4                                              |
|                                                                                                                           |                                                                                                           | RegistrationStatement                                             |
|                                                                                                                           |                                                                                                           | Filed April 9,1990                                                |
|                                                                                                                           |                                                                                                           |                                                                   |
| 3.2                                                                                                                       | By-laws ofRegistrant                                                                                      | Exhibit D to FormS-4                                              |
|                                                                                                                           |                                                                                                           | RegistrationStatement                                             |
|                                                                                                                           |                                                                                                           | Filed April 9,1990                                                |
|                                                                                                                           |                                                                                                           |                                                                   |
| 3.3                                                                                                                       | Amendment to Articlesof                                                                                   | Exhibit A todefinitive                                            |
|                                                                                                                           | Incorporation                                                                                             | Proxy Statement filedfor                                          |
|                                                                                                                           |                                                                                                           | the special meetingof                                             |
|                                                                                                                           |                                                                                                           | shareholdersheld                                                  |
|                                                                                                                           |                                                                                                           | September 18,1990                                                 |
|                                                                                                                           |                                                                                                           |                                                                   |
| 3.4                                                                                                                       | Amendment to Articlesof                                                                                   | Exhibit A todefinitive                                            |
|                                                                                                                           | Incorporation                                                                                             | Proxy Statement filedfor                                          |
|                                                                                                                           |                                                                                                           | the meeting of                                                    |
|                                                                                                                           |                                                                                                           | shareholders heldon                                               |
|                                                                                                                           |                                                                                                           | April 15, 1997                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 10.1                                                                                                                      | Employment agreementbetween Gregg E. Hunter and Commercial Bank ofPennsylvania                            | Exhibit 10.1 to Form 10-Qfor the Quarter ended September 30, 2003 |
|                                                                                                                           |                                                                                                           |                                                                   |
| 10.2                                                                                                                      | Employment agreementbetween Louis T. Steiner and Commercial Bank ofPennsylvania                           | Exhibit 10.2 to Form 10-Qfor the Quarter ended September 30, 2003 |
|                                                                                                                           |                                                                                                           |                                                                   |
| 10.3                                                                                                                      | Mutual Release andNon-Disparagement Agreement between Commercial Bank of Pennsylvaniaand Louis T. Steiner | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 13                                                                                                                        | Portions of the AnnualReport to Shareholders for the Fiscal year Ended December 31,2003                   | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 14                                                                                                                        | Code of Ethics for SeniorFinancial Officers                                                               | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 21                                                                                                                        | Subsidiaries of theRegistrant                                                                             | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 31.1                                                                                                                      | Rule 13a-14(a)/15d-14(a)Certification of Chief Executive Officer                                          | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 31.2                                                                                                                      | Rule 13a-14(a)/15d-14(a)Certification of Chief Financial Officer                                          | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 32.1                                                                                                                      | Section 1350 Certificationof Chief Executive Officer                                                      | Filed herewith                                                    |
|                                                                                                                           |                                                                                                           |                                                                   |
| 32.2                                                                                                                      | Section 1350 Certificationof Chief Financial Officer                                                      | Filed herewith                                                    |

  Reports on Form8-K

A Report on Form 8-K wasfiled on October 1, 2003 announcing the creation of astate-chartered trust company subsidiary, Highview TrustCompany.

A Report on Form 8-K wasfiled on October 30, 2003 reporting the Corporation’searnings release for the quarter ending September 30,2003.

A Report on Form 8-K wasfiled on November 3, 2003 announcing growth expectations for2004.
| **SIGNATURES**                                                               |
|------------------------------------------------------------------------------|
|                                                                              |
| Pursuant to therequirements of Section 13 or 15(d) of the SecuritiesExchange |
| Act of 1934, theregistrant has duly caused this report to be signed onits    |
| behalf by the undersigned,thereunto duly authorized.                         |
|                                                                              |
|                                                                              |
|                                                                              |
|                                                                              | **COMMERCIAL NATIONALFINANCIAL CORPORATION** |
|                                                                              | (Registrant) |
|                                                                              |  |
|                                                                              |  |
|                                                                              |  |
|                                                                              | **By:/s/ Gregg E.Hunter** |   |
|                                                                              | **Gregg E. Hunter, ViceChairman, President** |
|                                                                              | **and Chief ExecutiveOfficer** |
|                                                                              |  |
| March 26, 2004                                                               |

Pursuant to therequirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of theregistrant and in the capacities and on the datesindicated.
| **SIGNATURE ANDCAPACITY**                                                                                     | **DATE** |
|---------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                               |          |
| /s/ George V.Welty                                                                                            |          | March 16, 2004 |
| George V. Welty, Chairmanof the Board and Director                                                            |          |
| /s/ Gregg E.Hunter                                                                                            |          | March 16, 2004 |
| Gregg E. Hunter, ViceChairman of the Board, Director, Chief Executive Officer

(principal executiveofficer)   |          |
| /s/ Ryan M.Glista                                                                                             |          | March 16, 2004 |
| Ryan M. Glista, SeniorVice President and Chief Financial Officer

(principal financial andaccounting officer) |          |
| /s/ Wendy S.Schmucker                                                                                         |          | March 16, 2004 |
| Wendy S. Schmucker,Secretary/Treasurer                                                                        |          |
| /s/ John T.Babilya                                                                                            |          | March 16, 2004 |
| John T. Babilya,Director                                                                                      |          |
| /s/ George A. Conti,Jr.                                                                                       |          | March 16, 2004 |
| George A. Conti Jr.,Director                                                                                  |          |
| /s/ Richmond H.Ferguson                                                                                       |          | March 16, 2004 |
| Richmond H. Ferguson,Director                                                                                 |          |
| /s/ Dorothy S.Hunter                                                                                          |          | March 16, 2004 |
| Dorothy S. Hunter,Director                                                                                    |          |
| /s/ Frank E.Jobe                                                                                              |          | March 16, 2004 |
| Frank E. Jobe,Director                                                                                        |          |
|                                                                                                               |          | March 16, 2004 |
| Roy M. Landers,Director                                                                                       |          |
| /s/ John C.McClatchey                                                                                         |          | March 16, 2004 |
| John C. McClatchey,Director                                                                                   |          |
| /s/ Joseph A.Mosso                                                                                            |          | March 16, 2004 |
| Joseph A. Mosso,Director                                                                                      |          |
| /s/ Joedda M.Sampson                                                                                          |          | March 16, 2004 |
| Joedda M. Sampson,Director                                                                                    |          |
|                                                                                                               |          |
| /s/ Debra L.Spatola                                                                                           |          | March 16, 2004 |
| Debra L. Spatola,Director                                                                                     |          |
| /s/ C. EdwardWible                                                                                            |          | March 16, 2004 |
| C. Edward Wible,Director                                                                                      |          |  |

| EXHIBIT TABLE OFCONTENTS |
|--------------------------|
|                          |
|                          |
| Exhibit                  |  |
| Number                   | Description |
|                          |  |
|                          |  |
| 10.3                     | Mutual Release andNon-Disparagement Agreement between Commercial Bank of Pennsylvaniaand Louis T. Steiner |
|                          |  |
| 13                       | Portions of the AnnualReport to Shareholders for the Fiscal Year Ended December 31,2003 |
| 14                       | Code of Ethics for SeniorFinancial Officers |
| 21                       | Subsidiaries of theRegistrant |
| 31.1                     | Rule 13a-14(a)/15d-14(a)Certification of Chief Executive Officer |
| 31.2                     | Rule 13a-14(a)/15d-14(a)Certification of Chief Financial Officer |
| 32.1                     | Section 1350 Certificationof Chief Executive Officer |
|                          |  |
| 32.2                     | Section 1350 Certificationof Chief Financial Officer |

 

Exhibit 21  - Subsidiaries of Commercial National FinancialCorporation
|                                                                                                                                    | State orJurisdiction |
|------------------------------------------------------------------------------------------------------------------------------------|----------------------|
|                     Subsidiary | ofIncorporation      |
|                                                                                                                                    |                      |
| Commercial Bank ofPennsylvania                                                                                                     | Pennsylvania         |
|                                                                                                                                    |                      |
| Commercial NationalInsurance Services, Inc.                                                                                        | Pennsylvania         |
|                                                                                                                                    |                      |
| Gooder Agency,Inc.                                                                                                                 | Pennsylvania         |
|                                                                                                                                    |                      |
| Highview TrustCompany                                                                                                              | Pennsylvania         |
|                                                                                                                                    |                      |

The Corporation willprovide without charge to any shareholder a copy of its 2003 annualreport on form 10-K as required to be filed with the Securities andExchange Commission. Requests should be made in writingto:

COMMERCIAL NATIONALFINANCIAL CORPORATION

STOCK TRANSFERDEPARTMENT

P.O. BOX 429

LATROBE, PA 15650

 

QuarterlySummary of Financial Data (Unaudited)

The unaudited quarterlyresults of operations for the years ended December 31, 2003 andDecember 31, 2002 are as follows:

                                                                       
|                                                                                                               | (Dollars inThousands, Except per Share Amounts)                                                                                                                      |
|---------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                               | 2003                                                                                                                                                                 |
|                                                                                                               |                                                                                                                                                                      |
|                                                                                                               | First                                                                                                                                                                | Second | Third | Fourth |
|                                                                                                               | Quarter                                                                                                                                                              | Quarter | Quarter | Quarter |
|                                                                                                               |                                                                                                                                                                      |  |  |  |
| Interest income                                                                                               | $                  5,313                                                   | $                5,028 | $                4,703 | $                4,751 |
| Interestexpense                                                                                               |                     1,717                                        |                    1,650 |                    1,562 |                   1,596 |
|        Net interestincome                                                       |                     3,596                                        |                   3,378 |                   3,141 |                   3,155 |
| Provision for loanlosses                                                                                      |                             - |                           - |                           - |                        39 |
|                                                                                                               |                                                                                                                                                                      |  |  |  |
|        Net interestincome after                                                 |                                                                                                                                                                      |  |  |  |
|               provision for loan losses |                     3,596                                        |                   3,378 |                   3,141 |                   3,116 |
|                                                                                                               |                                                                                                                                                                      |  |  |  |
| Other income (includingsecurity                                                                               |                                                                                                                                                                      |  |  |  |
|       transactions)                                                             |                        906                        |                   1,070 |                      982 |                   1,031 |
|                                                                                                               |                                                                                                                                                                      |  |  |  |
| Other expenses                                                                                                |                     3,037                                        |                   3,068 |                   3,107 |                   3,235 |
|                                                                                                               |                                                                                                                                                                      |  |  |  |
|        Incomebefore income taxes                                                |                     1,465                                        |                   1,380 |                   1,016 |                      912 |
| Income taxexpense                                                                                             |                        322                        |                      275 |                      146 |                        94 |
|        Netincome                                                                | $                  1,143                                                   | $                1,105 | $                   870 | $                   818 |
| Earnings per share,basic                                                                                      | $                     ..33                                  | $                   ..32 | $                   ..25 | $                   ..24 |
|                                                                                                               |                                                                                                                                                                      |  |  |  |
|                                                                                                               |                                                                                                                                                           |
|---------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                               | 2002                                                                                                                                                      |
|                                                                                                               |                                                                                                                                                           |
|                                                                                                               | First                                                                                                                                                     | Second | Third | Fourth |
|                                                                                                               | Quarter                                                                                                                                                   | Quarter | Quarter | Quarter |
|                                                                                                               |                                                                                                                                                           |  |  |  |
| Interest income                                                                                               | $                  5,782                                        | $                5,701 | $                5,874 | $                5,586 |
| Interestexpense                                                                                               |                     1,802                             |                   1,933 |                   1,993 |                   1,847 |
|        Net interestincome                                                       |                     3,980                             |                   3,768 |                   3,881 |                   3,739 |
| Provision for loanlosses                                                                                      |                           39 |                      163 |                        96 |                          - |
|                                                                                                               |                                                                                                                                                           |  |  |  |
|        Net interestincome after                                                 |                                                                                                                                                           |  |  |  |
|               provision for loan losses |                     3,941                             |                   3,605 |                   3,785 |                   3,739 |
|                                                                                                               |                                                                                                                                                           |  |  |  |
| Other income (includingsecurity                                                                               |                                                                                                                                                           |  |  |  |
|       transactions)                                                             |                        688             |                      672 |                   1,228 |                      745 |
|                                                                                                               |                                                                                                                                                           |  |  |  |
| Other expenses                                                                                                |                     2,697                             |                    2,630 |                   2,805 |                   3,054 |
|                                                                                                               |                                                                                                                                                           |  |  |  |
|        Incomebefore income taxes                                                |                     1,932                             |                   1,647 |                   2,208 |                   1,430 |
| Income taxexpense                                                                                             |                        536             |                      449 |                      478 |                      410 |
|        Netincome                                                                | $                  1,396                                        | $                1,198 | $                1,730 | $                1,020 |
| Earnings per share,basic                                                                                      | $                     ..41                       | $                   ..35 | $                   ..50 | $                   ..30 |
|                                                                                                               |                                                                                                                                                           |  |  |  |

Common StockInformation

The following table setsforth the high and low sales prices for the common stock, asreported by The Nasdaq Stock Market, Inc., and the cash dividendsdeclared per share on the common stock for the periodsindicated.
|                                              |  |                                                                         |  |                                                                         |  | CashDividends                                                                            |
|----------------------------------------------|--|-------------------------------------------------------------------------|--|-------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------|
|                                              |  | High                                                                    |  | Low                                                                     |  | PerShare                                                                                 |
| 2003                                         |  |                                                                         |  |                                                                         |  |                                                                                          |
|       FirstQuarter  |  | $         27.00            |  | $         21.31            |  | $            ..25            |
|       SecondQuarter |  |            34.19 |  |            25.25 |  |               ..25 |
|       ThirdQuarter  |  |            26.18 |  |            23.01 |  |               ..25 |
|       FourthQuarter |  |            26.51 |  |            23.10 |  |               ..25 |
|                                              |  |                                                                         |  |                                                                         |  |                                                                                          |
| 2002                                         |  |                                                                         |  |                                                                         |  |                                                                                          |
|       FirstQuarter  |  | $         18.75            |  | $         16.65            |  | $            ..25            |
|       SecondQuarter |  |            22.00 |  |            18.05 |  |               ..25 |
|       ThirdQuarter  |  |            23.37 |  |            20.35 |  |               ..25 |
|       FourthQuarter |  |            24.10 |  |            21.00 |  |               ..25 |
|                                              |  |                                                                         |  |                                                                         |  |                                                                                          |

Commercial NationalFinancial Corporation common stock is traded on The Nasdaq NationalMarket under the trading symbol “CNAF” with anadditional descriptive listing of “CmclNat.”

Selected FinancialData

The following financialinformation is not covered by the auditor's report and must be readin conjunction with the consolidated financial statements andrelated notes along with management's discussion and analysis offinancial condition and results of operations.
|                                                                                                                                                                              | Years EndedDecember 31, (Dollars in Thousands, Except per Share Data)                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
|                                                                                                                                                                              | 2003                                                                                                | 2002 | 2001 | 2000 | 1999 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
| Total interestincome                                                                                                                                                         | $        19,795                                             | $        22,943 | $        24,399 | $        26,056 | $          24,303 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
| Total interestexpense                                                                                                                                                        |             6,525                            |             7,575 |             9,716 |           11,705 |             10,013 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
|       Net interestincome                                                                                                                            |           13,270                                  |           15,368 |           14,683 |           14,351 |             14,290 |   |
| Provision for loanlosses                                                                                                                                                     |                  39 |                298 |                540 |             1,176 |             3,290 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
|       Net interestincome after                                                                                                                      |                                                                                                     |  |  |  |  |   |
|            provision for loan losses                                                                                  |           13,231                                  |           15,070 |           14,143 |           13,175 |             11,000 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
| Other operatingincome                                                                                                                                                        |             3,989                       |             3,333 |             2,555 |             2,305 |               1,936 |   |
| Other operatingexpenses                                                                                                                                                      |           12,447                                       |           11,186 |           10,094 |             9,429 |               9,245 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
|       Income beforeincome taxes                                                                                                                     |             4,773                       |             7,217 |             6,604 |             6,051 |               3,691 |   |
| Income taxexpense                                                                                                                                                            |                837            |             1,873 |             1,699 |             1,419 |                  487 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
|       Netincome                                                                                                                                     | $          3,936                                  | $          5,344 | $          4,905 | $          4,632 | $            3,204 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
| Per Share Data                                                                                                                                                               |                                                                                                     |  |  |  |  |   |
|       Netincome                                                                                                                                     | $          1.14                                   | $          1.56 | $          1.43 | $          1.32 | $              ..90 |   |
|       Dividendsdeclared                                                                                                                             | $          1.00                                   | $          1.00 | $            ..76 | $            ..68 | $              ..60 |   |
|       Average sharesoutstanding                                                                                                                     |      3,441,556                                                             |      3,425,858 |      3,432,389 |      3,511,603 |        3,578,894 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
| At End ofPeriod                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
|       Totalassets                                                                                                                                   | $      385,028                                                        | $      380,338 | $      343,029 | $      329,865 | $        355,298 |   |
|      Securities                                                                                                                                     |         168,685                                             |         148,344 |         119,396 |         104,703 |           124,743 |   |
|       Loans and leases,net of unearned                                                                                                              |                                                                                                     |  |  |  |  |   |
|            income                                                                                                     |         187,382                                             |         169,030 |         202,335 |         207,022 |           204,839 |   |
|       Allowance for loanlosses                                                                                                                      |             2,462                       |             2,707 |             2,814 |             2,737 |               1,919 |   |
|      Deposits                                                                                                                                       |         259,216                                             |         270,025 |         254,986 |         266,611 |           272,947 |   |
|       Long-termborrowings                                                                                                                           |           55,000                                  |           55,000 |           35,000 |           10,000 |             25,000 |   |
|       Shareholders'equity                                                                                                                           |           49,912                                  |           51,205 |           45,970 |           43,137 |             39,404 |   |
|                                                                                                                                                                              |                                                                                                     |  |  |  |  |   |
| Key Ratios                                                                                                                                                                   |                                                                                                     |  |  |  |  |   |
|       Return on averageassets                                                                                                                       |              1.05%                 |              1.46% |              1.43% |              1.32% | .95% |   |
|       Return on averageequity                                                                                                                       |               7.73                 |            11.02 |            10.90 |            11.21 | 7.50 |   |
|       Netloans-to-deposit ratio                                                                                                                     |            71.34                             |            61.59 |            78.25 |            78.00 | 74.34 |   |
|       Dividend payoutratio (dividends                                                                                                               |                                                                                                     |  |  |  |  |   |
|            declared divided by net income)                                                                            |            87.45                             |            64.07 |            53.16 |            51.46 | 66.98 |   |
|       Equity-to-assetsratio (average                                                                                                                |                                                                                                     |  |  |  |  |   |
|            equity divided by average total

           assets) |            13.63                             |            13.27 |            13.12 |            11.82 | 12.68 |   |

**Management’s Discussion andAnalysis**

**of**

**Financial Condition and Results ofOperations**

**Safe HarborStatement**

*Forward-lookingstatements (statements which are not historical facts) in thisAnnual Report on Form 10-K are made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.For this purpose, any statements contained herein that are notstatements of historical fact may be deemed to be forward-lookingstatements. Without limiting the generality of the foregoing, wordssuch as “may,” “will,” “to,”“expect,” “believe,”“anticipate,” “intend,”“could,” “would,” “estimate,”or “continue” or the negative or other variationsthereof or comparable terminology are intended to identifyforward-looking statements. These statements are based oninformation currently available to Commercial National FinancialCorporation (the Corporation), and the Corporation assumes noobligation to update these statements as circumstances change.Investors are cautioned that all forward-looking statements involverisk and uncertainties, including changes in general economic andfinancial market conditions, unforeseen credit problems, and theCorporation’s ability to execute its business plans. Theactual results of future events could differ materially from thosestated in any forward-looking statements herein.*

**Critical AccountingPolicies**

Disclosure of theCorporation's significant accounting policies is included inNote 1 to the consolidated financial statements. Certain ofthese policies are particularly sensitive requiring significantjudgments, estimates and assumptions to be made by management.Additional information is contained in management's discussion andanalysis for the most sensitive of these issues, including theprovision and allowance for loan losses.

In determining theallowance for loan losses, management makes significant estimates.Consideration is given to a variety of factors in establishing thisestimate. In estimating the allowance for loan losses, managementconsiders current economic conditions, diversification of the loanportfolio, delinquency statistics, results of internal loanreviews, its borrowers' perceived financial and managerialstrengths, the adequacy of the underlying collateral, if collateraldependent, or present value of future cash flows and other relevantfactors.

**Overview**

The purpose of thisdiscussion and the accompanying financial data is to provide aid inunderstanding and evaluating the financial condition and results ofoperations of the Corporation for the years ended December 31,2003, 2002 and 2001. This information should be read in conjunctionwith the consolidated financial statements and related footnotesfor the years under review.

The Corporation is afinancial holding company with wholly-owned subsidiaries,Commercial Bank of Pennsylvania (the Bank), Commercial NationalInsurance Services, Inc. (CNIS) and Highview Trust Company(HTC).

All material intercompanytransactions have been eliminated in consolidation.

The Corporation reportednet income of $3.9 million or $1.14 per share for the year ended2003 compared to $5.3 million or $1.56 per share for the year ended2002. The Corporation’s return on average assets for 2003 and2002 were 1.05% and 1.46%, respectively. Return on average equityfor the same two periods were 7.73% and 11.02%,respectively.

The decrease in net incomewas due to higher net operating expense and a decline in netinterest income. A more detailed discussion of the net interestincome decline is included below under the heading Net InterestIncome.

The Corporation’slargest segment of operating results is dependent upon net interestincome. Net interest income is calculated by what is earned oninterest-earning assets less interest paid on interest-bearingliabilities. For the years ended 2003 and 2002, net interestincome was $13.3 and $15.4 million, respectively. The relatedtax-equivalent net interest margin for these two years was 4.19%and 4.81%, respectively. The decline in the margin is mostly due tothe decrease in yield earned on interest-earning assets. Otherfactors that can affect the Corporation’s operating resultsare activity in the loan loss provision and components ofnon-interest income and non-interest expense.

The year 2003 marked somechanges with the Corporation’s subsidiaries. In July, theCorporation’s banking subsidiary changed from a national to astate banking charter. This change will allow the Bank to competeon a more equal basis with most of its local competition and reducesemi-annual regulatory assessments. In October, the Corporationformed HTC as a state-chartered trust company subsidiary, and thentransferred the Bank’s trust operations to HTC. The creationof this new subsidiary was intended to enable each of theCorporation’s subsidiaries to offer customers a moreconcentrated focus in its particular financial services sector(banking, insurance and trust).

With its recent changes inmanagement, the Corporation now intends to focus on Bank operationsand growing the Corporation through traditional loans and depositssupplemented by offering trust products to customers in itsmarketplace. Management anticipates continued pressure on netinterest income. Loans and deposits will continue to becompetitively priced by the Corporation with the intention ofacquiring profitable market share. Operating expenses will bescrutinized more closely for the purpose of offsetting a potentialdecline in net interest income.

Total assets of theCorporation were $385.0 million on December 31, 2003 compared to$380.3 million on December 31, 2002. Increases in investments andloans offset the decrease in cash and interest bearing depositaccounts (IBDs). The decline in IBDs provided the necessary fundingfor investment and loan growth.

**FinancialCondition**

The Corporation’stotal assets at December 31, 2003 increased $4.7 million, or 1.23%since the end of 2002. The increases were primarily in securitiesand loans. These increases were offset by decreases in cash andIBDs.

The loan portfolio iscomprised mostly of residential and commercial real-estate securedloans. These loans consist of residential mortgages, commercialmortgages and home equity term and lines of credit. Additionally,the loan portfolio includes commercial, tax-free and other consumerloans.

The total loan portfolioincreased $18.4 million in 2003 over the total of $169.0 million atthe end of 2002. This increase was due largely to a residentialloan promotion that commenced during the fourth quarter of2002.  This promotion resulted in an increase of $20.2 millionin residential mortgage loans. Total commercial and commercialmortgage loans decreased $1.5 million due to the lingering effectsof the sluggish economy in the Corporation’s marketarea.

Total investmentsecurities increased $20.3 million during 2003. All of theCorporation’s securities are held as available for sale.These securities consist of mortgage-backed securities, tax-freemunicipal bonds, U.S. government agency securities, Federal HomeLoan Bank stock and individual bank stocks. Depending upon marketfluctuations or other circumstances that may arise, such as changesin prepayment rates, the Corporation may sell securities forasset/liability management and liquidity purposes.

At December 31, 2003,total deposits decreased $10.8 million from December 31, 2002 to$259.2 million. This decrease is partly due to theCorporation’s reluctance to match competitor pricing of moneymarket and certificate of deposit accounts. In an effort tomitigate this decline in deposits, the Corporation elected, inOctober 2003 to offer competitive certificate of deposit rates toattract more deposits. To that end, the Corporation experienceddeposit growth of $1.9 million in the fourth quarter of2003.

Total short-termborrowings increased $17.5 million in 2003. The additionalshort-term borrowings consisted of $15.0 million in a 30 dayadvance from the Federal Home Loan Bank (FHLB) and $2.5 million infederal funds purchased. These borrowings funded purchases ofsecurities during the fourth quarter of 2003. TheCorporation’s intent is to reduce its short-term borrowingsover time with monthly cash flow from securities and loanpayments.

Long-term borrowings were$55.0 million at year-end 2003 and unchanged from year-end 2002.These borrowings include fixed and convertible rate advances fromthe FHLB. For more detail on these borrowings, see Note 11 to theNotes to Consolidated Financial Statements.

Shareholders’ equitywas $49.9 million on December 31, 2003 compared to $51.2 milliononDecember 31, 2002, adecrease of $1.3 million. The change in shareholders’ equityconsists of net income of $3.9 million being offset by unrealizedlosses in securities of $1.1 million, dividends declared of $3.4million and treasury stock purchases of $0.7 million.  Bookvalue per common share at year-end 2003 decreased by 1.9% to $14.55from $14.82 at year-end 2002.

**Results ofOperations**

Net income decreased $1.4million, or 26%, to $3.9 million for the year ended December31,2003 from $5.3 millionforthe yearended December 31, 2002. The decrease reflects adecline in net interest income of $2.1 million and higher operatingexpenses of $1.3 million. Partially offsetting these two factorswas an increase in other operating income of $656,000.

Net income increased$439,000, or 9%, to $5.3 million for the year ended December 31,2002 from $4.9 million for the year ended December 31, 2001. Theincrease in net income for 2002 was due to higher other operatingincome, which included a gain of $470,000 on the sale of theBank’s Murrysville community office in September2002.

**Net InterestIncome**

In 2003, interest incomewas $19.8 million compared to $22.9 million in 2002, a decrease of$3.1 million.  Part of this decrease was due to theCorporation’s inability to increase interest income fromloans even though total loans grew by more than 10% in 2003. Thiswas the direct result of lower interest rates at which the newloans were added to the balance sheet.

The low loan interest rateenvironment also impacted investment income as nationwiderefinancing activity produced heavy prepayments on theCorporation’s mortgage backed securities portfolio. TheCorporation reinvested the proceeds of these prepayments into loweryielding investments, which included federal funds sold andmunicipal and mortgage-backed securities.

For 2003, total depositsdeclined by $10.8 million to $259.2 million from $270.0 million atthe end of 2002. This decline, combined with lower interest rates,resulted in a $1.0 million decrease in interest expense for2003.

As a result of thesefactors, net interest income in 2003 was $13.3 million compared to$15.4 million in 2002, a decrease of $2.1 million.

In 2002, net interestincome was $15.4 million compared to $14.7 million in 2001. Theincrease was attributable to a $2.1 million decrease in interestexpense, which more than offset a $1.4 million decrease in interestincome. This was due to the Corporation’s ability to repriceliabilities at a faster rate than assets.

The following tabledisplays the Corporation’s average balance sheet, annualinterest earned and paid, and annual yields on interest earningassets and interest-bearing liabilities for 2003, 2002 and2001.
| COMMERCIALNATIONAL FINANCIAL CORPORATION                             |
|----------------------------------------------------------------------|
|                                                                      |
| FinancialComparisons                                                 |
| Consolidated Average Balance Sheet, InterestIncome/Expense and Rates |
| (Dollars inThousands)                                                |
|                                                                                                                                            | 2003                                                                                                                                                                                  | 2002                                                                                                                                    | 2001                                                   |                                                                                                                                                                                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                 |                                                                                                                                                                                       | Interest                                                                                                                                |                                                        |                                                                                                                                                                                                                                                                            | Interest |  |  | Interest |  |
|                                                                                                                                                 | Average                                                                                                                                                                               | Income/                                                                                                                                 | Yield or                                               | Average                                                                                                                                                                                                                                                                    | Income/ | Yield or | Average | Income/ | Yield or |
|                                                                                                                                                 | Balance                                                                                                                                                                               | Expense                                                                                                                                 | Rate(a)                                                | Balance                                                                                                                                                                                                                                                                    | Expense | Rate(a) | Balance | Expense | Rate (a) |
| Interest-earningassets                                                                                                                          |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|     Loans(b)(c) net of

       unearned income                                                |                    

$    183,628                                  |                  

$    11,390 |    6.36%                                |                  

$  187,428                                                                                                                                               |                

$  13,533 |    7.38% |                  

$  206,681 | $      16,665 |    8.23% |
|     Taxablesecurities                                                                                                            |       108,162                                                                                                                                           |         6,835                                                                                   |     6.32                                |     111,966                                                                                                                                                                                                                                            |       8,130 |     7.26 |       80,777 |          6,161 |     7.63 |
|    Non-taxable securities                                                                                                        |         34,611                                                                                                                                |         1,400                                                                                   |    6.13                                 |       21,063                                                                                                                                                                                                                                 |       1,058 |    7.61 |       18,077 |             924 |    7.75 |
|    Interest-bearing deposits

        withbanks                                               |                    

          2,172 |              41                                                        |      

   1.89 |                  

        5,278                                                                                                              |                

           49 |      

   0.93 |         9,592 |             364 |    3.79 |
|     Federalfunds sold                                                                                                            |         12,330                                                                                                                                |            129                                                                   |    1.05                                 |       11,147                                                                                                                                                                                                                                 |          173 |    1.55 |         6,613 |             285 |    4.31 |
|         Totalearning assets                                                                                  |       340,903                                                                                                                                           |       19,795                                                                                              |    6.10                                 |     336,882                                                                                                                                                                                                                                            |     22,943 |    7.06 |     321,740 |        24,399 |    7.84 |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
| Non-interest-earningassets                                                                                                                      |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|    Cash                                                                                                                          |           7,879                                                                                                                     |                                                                                                                                         |                                                        |         8,007                                                                                                                                                                                                                      |  |  |         7,695 |  |  |
|    Allowance for loan

       losses                                                          |         (2,685)                                                                                                                               |                                                                                                                                         |                                                        |        (2,879)                                                                                                                                                                                                                               |  |  |        (2,671) |  |  |
|     Otherassets                                                                                                                  |         27,399                                                                                                                                |                                                                                                                                         |                                                        |       23,394                                                                                                                                                                                                                                 |  |  |       16,044 |  |  |
|         Totalnon-interest-

           earning assets |        32,593                                                                                                                                      |                                                                                                                                         |                                                        |       28,522                                                                                                                                                                                                                                 |  |  |       21,068 |  |  |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|         Totalassets                                                                                          | $     373,496                                                                                                                                                     |                                                                                                                                         |                                                        | $  365,404                                                                                                                                                                                                                                                       |  |  | $  342,808 |  |  |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
| Liabilities andShareholders’ Equity                                                                                                       |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
| Interest-bearingdeposits                                                                                                                        |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|     NOWaccounts                                                                                                                  |   $    24,151                                                                                                                                                |              35                                                        |    0.14                                 | $    22,952                                                                                                                                                                                                                                                 |            99 |    0.43 | $    20,480 |             140 |    0.68 |
|     Moneymarket accounts                                                                                                         |         43,948                                                                                                                                |            327                                                                   |    0.74                                 |       46,793                                                                                                                                                                                                                                 |          717 |    1.53 |       38,500 |          1,154 |    3.00 |
|     Savingsdeposits                                                                                                              |         56,200                                                                                                                                |            412                                                                   |    0.73                                 |       55,369                                                                                                                                                                                                                                 |          801 |    1.45 |       46,003 |          1,101 |    2.39 |
|     Timedeposits                                                                                                                 |         86,059                                                                                                                                |         2,789                                                                                   |    3.24                                 |       89,490                                                                                                                                                                                                                                 |       3,381 |    3.78 |     108,841 |          5,670 |    5.21 |
|    Short-term borrowings                                                                                                         |           3,976                                                                                                                     |              49                                                        |    1.23                                 |         1,496                                                                                                                                                                                                                      |            30 |    1.98 |         2,917 |               95 |    3.27 |
|    Long-term borrowings                                                                                                          |         55,000                                                                                                                                |         2,913                                                                                   |    5.29                                 |       48,602                                                                                                                                                                                                                                 |       2,547 |    5.24 |       30,384 |          1,556 |    5.12 |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|         Totalinterest-bearing

           liabilities |                    

      269,334                       |         6,525                                                                                   |    2.42                                 |                  

    264,702                                                                                                                                    |       7,575 |      

   2.86 |                  

    247,125 |          9,716 |      

   3.93 |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
| Non-interest-bearing     deposits                                                                                                |         49,584                                                                                                                                |                                                                                                                                         |                                                        |       48,579                                                                                                                                                                                                                                 |  |  |       47,412 |  |  |
| Otherliabilities                                                                                                                                |           3,656                                                                                                                     |                                                                                                                                         |                                                        |         3,647                                                                                                                                                                                                                      |  |  |         3,283 |  |  |
| Shareholders'equity                                                                                                                             |         50,922                                                                                                                                |                                                                                                                                         |                                                        |       48,476                                                                                                                                                                                                                                 |  |  |       44,988 |  |  |
|         Totalnon-interest

           bearing funding |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|            sources                                                                       |       104,162                                                                                                                                           |                                                                                                                                         |                                                        |      100,702                                                                                                                                                                                                                                           |  |  |       95,683 |  |  |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|         Totalliabilities and                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|            shareholders' equity                                                          | $     373,496                                                                                                                                                     |                                                                                                                                         |                                                        | $  365,404                                       $342,807,943 |  |  | $  342,808 |  |  |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
| Net interest income andnet                                                                                                                      |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |
|     yieldon interest earning

   assets                                                                           |                                                                                                                                                                                       | $     13,270                                                                                                        |    4.19%                                |                                                                                                                                                                                                                                                                            | $  15,368 |    4.81% |  | $     14,683                          $14,350,887 |    4.82% |
|                                                                                                                                                 |                                                                                                                                                                                       |                                                                                                                                         |                                                        |                                                                                                                                                                                                                                                                            |  |  |  |  |  |

(a)  Yields oninterest earning assets have been computed on a tax-equivalentbasis using the 34% federal income tax statutory rate.(b)  Income on non-accrual loans is accounted for on the cashbasis, and the loan balances are included in interest earningassets. (c)  Loan income includes net loan fees/costs.

                             

The following tableillustrates the impact and interaction of rate and volume changesfor the years under review:
|                                                        |
|--------------------------------------------------------|
| Analysis of Year-to-Year Changes in Net InterestIncome |
| **(Dollars in Thousands)**                             |
|                                                                                                                                 | 2003 Change from2002                                                                                                  | 2002 Change from2001                                                                                                 |
|---------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                 | Total                                                                                                                 | ChangeDue                                                                                                            | Change Due | Total | ChangeDue | ChangeDue |
|                                                                                                                                 | Change                                                                                                                | ToVolume                                                                                                             | To Rate | Change | ToVolume | To Rate                                                               toVolume                                                               to Rate |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Interest-earningassets                                                                                                          |                                                                                                                       |                                                                                                                      |  |  |  |  |
|       Loans net ofunearned income                                                                      | $          (2,143)                                                       | $             (274)                                      | $       (1,869) | $          (3,132) | $          (1,552) | $       (1,580) |
|      Securities                                                                                        |                                                                                                                       |                                                                                                                      |  |  |  |  |
|           Taxable                                                             |              (1,295)                                      |                (276)                      |           (1,019) |                1,969 |               2,379 |              (410) |
|           Non-taxable                                                         |                  342             |                  681            |              (339) |                  134 |                  154 |                (20) |
|       Interest-bearingdeposits with

          banks |                    (8) |                  (29)           |                  21 |                (315) |                (164) |              (151) |
|       Federal fundssold                                                                                |                   (44)           |                    18 |                (62) |                 (112) |                  195 |              (307) |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
|           Total interest income                                               |             (3,148)                                       |                  120            |           (3,268) |             (1,456) |               1,012 |           (2,468) |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
| Interest-bearingliabilities                                                                                                     |                                                                                                                       |                                                                                                                      |  |  |  |  |
|      Deposits                                                                                          |             (1,435)                                       |                  (99)           |           (1,336) |             (3,067) |                    30 |           (3,097) |
|       Short-termborrowings                                                                             |                    19  |                    50 |                (31) |                  (65) |                  (46) |                (19) |
|       Long-termborrowings                                                                              |                  366             |                  341            |                  25 |                  991 |                  932 |                  59 |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
|           Total interest expense                                              |             (1,050)                                       |                  292            |           (1,342) |             (2,141) |                  916 |           (3,057) |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |
|           Net interest income                                                 | $          (2,098)                                                       | $             (172)                                      | $        (1,926) | $               685 | $                 96 | $             589 |
|                                                                                                                                 |                                                                                                                       |                                                                                                                      |  |  |  |  |

**Other OperatingIncome and Expense**

Total other operatingincome for 2003 was $4.0 million, an increase of $700,000 from $3.3million in 2002. Of this increase, $841,000 is attributable togross revenue generated by the Corporation’s wholly ownedinsurance agency subsidiary, Gooder Agency, which the Corporationacquired at the end of 2002. In 2003, trust income increased$169,000 over 2002 due to higher estate fees and income from thirdparty management fees. Income from service charges on depositaccounts increased $148,000 in 2003, due mostly to fees generatedfrom overdrafts. Other income increased $88,000 in 2003, of which$55,000 was realized from a life insurance policy. Other servicecharges and fees decreased $99,000 in 2003. This decrease is theresult of lower fees collected by the Bank on customer product andservice offerings. In 2002, the Corporation realized a gain of$470,000 on the sale of a branch office.

Total other operatingincome for 2002 was $3.3 million, an increase of $620,000 from $2.6million in 2001. The increase included a gain of $470,000 from thesale of one of the Bank’s branch offices. This branch,located in Murrysville, Pennsylvania, failed to reachmanagement’s performance expectations and was no longerwithin the geographic scope of the Corporation’s long-rangeplan. Income from bank-owned life insurance****increased $85,000due to an additional investment of $5.0 million during 2002. Assetmanagement and trust income during 2002 was $541,000, whichrepresented an increase of $84,000 over 2001. Service charges ondeposit accounts declined $41,000 to $737,000 for 2002. Lower feescollected from overdrawn accounts contributed to this revenuedecrease. Other service charges and fees decreased by $59,000 from2001’s level of $750,000.  The reasons for this decreasewere lower volumes of fees and commissions collected from variousloan and deposit product offerings by the Corporation.

Total other operatingexpense increased $1.2 million to $12.4 million for 2003 comparedto $11.2 million in 2002. Personnel expense increased $566,000 or10% in 2003. Factors contributing to this increase were the GooderAgency acquisition, wage increases, higher health insurancepremiums and payroll taxes. Net occupancy expense increased by$90,000 in 2003 due to increased depreciation of check imagingequipment and rental expense from the addition of the Norwin andGooder Agency offices for full year 2003. Other expenses increased$834,000 in 2003 to $3.5 million. Amortization of intangible assetsand expenses associated with the acquisition and operation ofGooder Agency were the primary reasons for this increase

Total other operatingexpense increased $1.1 million to $11.2 million for 2002 comparedto $10.1 million in 2001. Personnel expense increased only 3% or$162,000 in 2002. Legal and professional costs increased $239,000in 2002. This increase is mainly due to the work involved with thebranch acquisition, branch divestiture, Gooder Agency acquisitionand the continued collection efforts relating to a previouslycharged-off loan.

Other expense increased by$611,000 to $2.7 million. Increases in advertising, ATM/debitcards, stationary and printing, employee training and other realestate expenses along with the deposit premium amortization expenserelating to the newly acquired branch office led to this increasein other expenses.

Income tax expense was$837,000 in 2003, $1,873,000 in 2002 and $1,699,000 in 2001. Theeffective tax rate in those years was 17.54%, 25.95% and 25.73%,respectively. The effective tax rate for 2003 decreased due tohigher tax-free income in relation to lower taxable income whencompared to 2002. Due to the reasons stated above, the Corporationis now in an alternative minimum tax position. Management isattempting to rectify this position by reducing tax-free incomewhile increasing taxable income during 2004.

**Liquidity andCapital Resources**

Liquidity measurementsevaluate the Corporation’s ability to meet the cash-flowneeds of its depositors and borrowers. The most desirable source ofliquidity is deposit growth. Additional liquidity is provided bythe maturity of investments in loans and securities and theprincipal and interest received from those earning assets. Anothersource of liquidity is represented by the Corporation’sability to sell both loans and available-for-sale securities. TheBank is a member of the FHLB system. The FHLB provides anadditional source for liquidity for long- and short-term funding.Additional sources of funding from financial institutions have beenestablished for short-term funding needs.

As of December 31, 2003,the Corporation had available funding of approximately $105.0million at the FHLB with an additional $30.0 million of short-termfunding available through federal funds lines of credit.

Cash flows from operatingactivities in 2003 decreased by $1.4 million to $3.4 million, from$4.8 million in 2002. The decrease is due to the decline in netincome in 2003 when compared to 2002.

Cash flows used forinvesting activities totaled $27.3 million in 2003 compared to cashused in 2002 of $11.2 million. Increases in net loans to customersand net securities purchases in 2003 were offset by a decrease infederal funds sold and an increase in securitiesprepayments.

Cash flows from financingactivities decreased $24.6 million in 2003 due mostly to noissuance of long-term debt in 2003. An increase in short-termborrowings offset by a decrease in total deposits made up theremaining difference in financing activity.

In the first quarter of2004, the Corporation repositioned the investment portfolio toaddress its alternative minimum tax position.

**AggregateContractual Obligations**

The following tablepresents contractual obligation payments due by specific timeperiods:
|                            | (Dollars inthousands)                                                                                           |
|----------------------------|-----------------------------------------------------------------------------------------------------------------|
|                            | < 1 year                                                                                                     | 1 – 3years | 3 – 5years | > 5 years | Total |
|                            |                                                                                                                 |  |  |  |  |
| Long-term debt             |               $     - |         $10,000 |                 $   - |           $45,000 |          $55,000 |
|                            |                                                                                                                 |  |  |  |  |
| Capital leaseobligations   |               $  49                  |         $       61 |                 $   - |           $         -          |          $     110 |
|                            |                                                                                                                 |  |  |  |  |
| Operating leaseobligations |               $119                        |         $     139 |                 $58 |           $     228 |          $     544 |

**Off-Balance SheetArrangements**

The Corporation hasoutstanding commitments to fund loans that are made in the normalcourse of business. At December 31, 2003, the commitments stood at$34.2 million.

The Corporation’sfinancial statements do not reflect various off-balance sheetarrangements that are made in the normal course of business, whichmay involve some liquidity risk, credit risk and interest raterisk.  These commitments consist mainly of loans approved butnot yet funded, unused lines of credit and letters of credit madeunder the same standards as on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customeras long as there is no violation of any condition established inthe contract.  Standby letters of credit are conditionalcommitments issued to guarantee the financial or performanceobligation of a customer to a third party.  Unused commitmentsat December 31, 2003 were $34.8 million.  Because theseinstruments have fixed maturity dates, and because many of themwill expire without being drawn upon, they do not generally presentany significant liquidity risk to the Corporation.  Managementbelieves that any amounts actually drawn upon can be funded in thenormal course of operations.

The Corporation has noinvestment in or financial relationship with any unconsolidatedentities that are reasonably likely to have a material effect onliquidity or the availability of capital resources.

Time deposits of $100,000or more at December 31, 2003 are as follows:
|                                                   | Amount                                                                            | Percent                                                              |
|---------------------------------------------------|-----------------------------------------------------------------------------------|----------------------------------------------------------------------|
| Remainingmaturity:                                |                                                                                   |                                                                      |
|                                                   |                                                                                   |                                                                      |
|     3months or less                | $       4,127                                  |          19%            |
|     Over 3through 6 months         |              616 |             3 |
|     Over 6months through 12 months |           1,213                 |             6 |
|     Over 12months                  |         15,152                            |          72                  |
|                                                   |                                                                                   |                                                                      |
|                                                   |                                                                                   |                                                                      |
|        Total   | $   21,108                                                         |      100%                                   |
|                                                   |                                                                                   |                                                                      |

The following table showsfinal loan maturities excluding consumer installment and mortgageloans and before unearned income at December 31, 2003 (inthousands):
|                                                  | Within                                                                                    | One-Five | After                                                                                                                                 |                                                                                                                                             |                                                                           |
|--------------------------------------------------|-------------------------------------------------------------------------------------------|----------|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
|                                                  | OneYear                                                                                   | Years    | FiveYears                                                                                                                             | **Total**                                                                                                                                   |                                                                           |
|                                                  |                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                           |
| Commercial andindustrial                         | $            4,422                 |          | $           5,773                                                              | $              3,735                                                       | $       13,930                              |
| Realestate-construction                          |               1,108 |          |                       - |                        - |              1,108 |
| Other                                            |               2,584 | *        |                   714                       |                 9,503                                       |            12,801            |
|                                                  |                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                |
|        Totals | $           8,114                  |          | $             6,487                                                       | $            13,238                                                                  | $       27,839                              |
|                                                  |                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                |
|                                                  |                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                |
| Loans at fixed interestrates                     |                                                                            |          | $             3,845                                                       | $            13,138                                                                  |                                                                                |
| Loans at variable interestrates                  |                                                                                           |          |                2,642                                       |                    100                       |                                                                                |
|                                                  |                                                                                           |          |                                                                                                                                       |                                                                                                                                             |                                                                                |
|                                                  |                                                                                           |          | $             6,487                                                       | $            13,238                                                                  |                                                                                |

  *    Includes $1.0million Pennsylvania Higher Education Assistance Agency loans withno fixed maturity date.

The following tablespresent a five-year summary of loan classifications and thematurity distribution of securities at December 31,2003.
| Loans byClassification at December 31,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Dollars inThousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 2003 | 2002 | 2001 | 2000 | 1999 |
|                                                                                       Cent                                           Amount                                           Cent                                           Amount                                           Cent                                           Amount                                           Cent                                           Amount                                           Cent |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| Commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | $  14,802 |      8% | $  12,725 |      7% | $  17,251 |      9% | $  25,802 |   12% | $  23,069 |   11% |
| Real estate -commercial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 51,006 |    27 | 54,618 |    32 | 71,699 |    35 | 66,052 |    32 | 59,387 |    29 |
| Real estate -construction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 1,108 |     1 | 976 |     1 | 1,629 |     1 | 2,381 |     1 | 4,276 |     2 |
| Real estate -other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 106,121 |    57 | 86,048 |    51 | 95,796 |    47 | 100,347 |    48 | 99,770 |    49 |
| Consumer -installment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 1,405 |       1 | 1,922 |       1 | 2,486 |       1 | 3,434 |       2 | 4,396 |       2 |
| Municipal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 10,622 |       5 | 10,078 |       6 | 10,990 |       6 | 7,114 |       4 | 4,290 |       2 |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      2,179 |       1 |      2,635 |       2 |       2,555 |       1 |       2,892 |       1 |      9,772 |       5 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
|     Total loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 187,243 | 100% | 169,002 | 100% | 202,406 | 100% | 208,022 | 100% | 204,960 | 100% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| Net unamortized                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
|     costs/(fees)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |         139 |  |           28 |  |           (71) |  |          (65) |  |        (121) |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
|     Total loans, net of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  |  |  |  |  |  |  |  |
|           costs/(fees)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $187,382 |  | $169,030 |  | $202,335 |  | $207,957 |  | $204,839 |  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |
| MaturityDistribution of Securities at December 31, 2003 |
|---------------------------------------------------------|
| (InThousands)                                           |
|                                                         |
|                                                         |  | Stateand |  | Total | Weighted |
|                                                         | U.S.Govt. | Political | Other | Amortized | Average |
|                                                         | Agencies& Corp. | Subdivisions (1) | Securities | Cost | Yield |
|                                                         |  |  |  |  |  |
| Within 1 year                                           | $  3,037 | $  1,384 | $        - | $   4,421 | 2.44% |
| After 1 but within 5years                               | 8,588 | 10,642 | - | 19,230 | 3.27 |
| After 5 but within 10years                              | - | 9,927 | - | 9,927 | 5.76 |
| After 10 years                                          | 101,970 | 22,318 | - | 124,288 | 6.10 |
| Equity securitiesand                                    |  |  |  |  |  |
| restricted bankstock                                    |              - |            - |   5,144 |      5,144 | 2.17 |
|                                                         |  |  |  |  |  |
|                                                         | $113,595 | $44,271 | $5,144 | $163,010 | 5.52% |
|                                                         |  |  |  |  |  |
|                                                         |

(1) Yield on tax-exemptobligations has been computed on a fully tax-equivalent basis(using statutory federal income tax rate of 34%)

Included in U.S.Government Agencies are mortgage-backed securities. Thesesecurities carry an amortized cost of $102.0 million and maturebased upon their estimated contractual maturities. Expectedmaturities will differ from contractual maturities becauseborrowers may have the right to prepay with or without prepaymentpenalties.

**Interest Sensitivityand Market Risk**

The Corporation’smarket risk is primarily interest rate risk. Interest rate riskarises due to timing differences between interest sensitive assetsand liabilities. Management monitors its interest sensitivityposition with the intent on structuring the balance sheet so thatmovements of interest rates on assets and liabilities produce arelatively constant net interest margin. The Corporation’sinterest rate risk management is the responsibility of theAsset/Liability Management Committee, which reports to the Board ofDirectors. This Committee establishes policies for monitoring andcoordinating the Corporation’s sources, uses and pricing offunds.

The following table liststhe amounts and ratio of assets and liabilities subject to changeas of December 31, 2003.
|                                                                                                                                               | InterestSensitivity Analysis (In Thousands) |                                                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                                                                                                                               |                                             |                                                                                              |
|                                                                                                                                               |                                             |                                                                                              |
|                                                                                                                                                    |                                             | 0-30Days                                                                                          |  | 31-90Days |  | 91-180Days |  | 181-365Days |  | 1-5Years |  | Over 5Years |
| Interest-earningassets                                                                                                                             |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|      Securities                                                                                                           |                                             | $      2,933                                                        |  | $      5,405 |  | $      7,397 |  | $      15,712 |  | $      75,031 |  | $   51,387 |
|       Federal funds soldand                                                                                               |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|           other deposits with

          banks |                                             |            764                             |  |                - |  |                 - |  |                  - |  |                 - |  | - |
|       Loans                                                                                                               |                                             |        23,548                                                       |  |         3,386 |  |         4,549 |  |         11,469 |  |        80,961 |  |          60,614 |
|           Total interest-sensitive                                                               |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|              assets                                                               |                                             |       27,245                                                             |  |         8,791 |  |        11,946 |  |         27,181 |  |      155,992 |  |         112,001 |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
| Interest-bearingliabilities                                                                                                                        |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|       Certificates ofdeposit                                                                                              |                                             |         5,476                                             |  |         8,817 |  |         9,321 |  |         12,242 |  |        38,863 |  |          13,591 |
|       Otherinterest-bearing           liabilities                       |                                             |                 - |  |         4,752 |  |         4,752 |  |           6,776 |  |        23,550 |  |          33,360 |
|       Other termborrowings                                                                                                |                                             |      17,450                                                              | - |         5,000 |  |                - |  |                 - |  |        25,000 |  |          25,000 |
|           Total interest-sensitive                                                               |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|                 liabilities                                             |                                             |       22,926                                                             |  |        18,569 |  |        14,073 |  |          19,018 |                                                                                   |        87,413 |  |          71,951 |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
| Interest sensitivitygap                                                                                                                            |                                             | $      4,319                                                             |  | $   (9,778) |  | $     (2,127) |  | $       8,163 |  | $     68,579 |  | $       40,050 |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
| Cumulative gap                                                                                                                                     |                                             | $      4,319                                                             |  | $   (5,459) |  | $     (7,586) |  | $           577 |  | $     69,156 |  | $     109,206 |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
| Ratio of cumulative gapto                                                                                                                          |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |
|           earning assets                                                                         |                                             |        1.26%                                                   |  |      (1.59)% |  |         (2.21)% |  |          0.17% |  |      20.15% |  |         31.82% |
|                                                                                                                                                    |                                             |                                                                                                   |  |  |  |  |  |  |  |  |  |  |

Loan and securityassumptions are based upon contractual maturity and prepaymentestimates. Included in interest-bearing liabilities are savings,money market and interest-bearing transaction accounts. Theseaccounts are subject to immediate withdrawal. However, based uponhistorical performance, management considers a certain portion ofthe accounts to be stable core deposits.

Although useful, there arecertain deficiencies in this static gap model. Assets andliabilities are subject to competitive pressures throughout theCorporations’ market area. Additionally, the timing anddegree of repricing on assets and liabilities may varysignificantly as interest rates change. As a result of thesedeficiencies, the Corporation supplements this analysis withcomputer simulations that project the impact of changing interestrates on earnings.

This simulation modelingprocess projects a baseline net interest income (assuming nochanges in interest rate levels) and estimates changes to thatbaseline net interest income resulting from changes in interestrate levels. The Corporation utilizes the results of this model inevaluating its interest rate risk. This model incorporates a numberof additional factors. These factors include: (1) the expectedexercise of call features on various assets and liabilities; (2)the expected rates at which various rate sensitive assets andliabilities will reprice; (3) the expected relative movements indifferent interest rate indexes that are used as the basis forpricing or repricing various assets and liabilities; (4) expectedchanges in administered rates on interest-bearing transaction,savings, money market and time deposit accounts and the expectedimpact of competition on the pricing or repricing of such accounts;and (5) other factors. Inclusion of these factors in the model isintended to more accurately project the Corporation’s changesin net interest income resulting from an immediate and sustainedparallel shift in interest rates of up 100 basis points (bps), up200 bps, down 100 bps and down 200 bps. While the Corporationbelieves this model provides a useful projection of its interestrate risk, the model includes a number of assumptions andpredictions that are subject to continual refinement. Theseassumptions and predictions include inputs to compute baseline netinterest income, growth rates, competition and a variety of otherfactors that are difficult to accurately predict. Accordingly,there can be no assurance the simulation model will reflect futureresults.

The Corporation hasestablished the following guidelines as acceptable ranges forinterest rate risk:

During a +/- 200 basispoint parallel shift in interest rates, net interest income may notchange by more than 20% for a twelve month period.

During a +/- 200 basispoint change in interest rates, balance sheet impact on economicvalue of capital may not change by more than 20% for a twelve monthperiod.

The following tablepresents the simulation model's projected impact of an immediateand sustained parallel shift in interest rates on the projectedbaseline net interest income for a twelve-month period commencingJanuary 1, 2004.
|                  | % Change inProjected | % Change inProjected |
|------------------|----------------------|----------------------|
| Changein         | Baseline             | Economic             |
| InterestRates    | NetInterest Income   | Value ofCapital      |
|                  |                      |                      |
| +200 basispoints | (2.8%)               |   (8.9%)        |
| +100 basispoints |   (3.6%)        |   (2.0%)        |
|                  |                      |                      |
| -100 basispoints | (5.2%)               | (8.2%)               |
| -200 basispoints | (12.9%)              | (12.9%)              |

In the event of a shift ininterest rates, management may take certain actions intended tomitigate the negative impact to net interest income or to maximizethe positive impact to net interest income. These actions mayinclude, but are not limited to, restructuring of earning assetsand interest-bearing liabilities, seeking alternative fundingsources or investment opportunities and modifying the pricing orterms of loans and deposits.

**Allowance for LoanLosses and Credit Review**

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

The Corporation’scredit culture fosters and actively supports the extension ofcredit on sound, fundamental lending policies. Each credit is to belogical, legal, constructive and acceptable within policyguidelines. Credit is only to be granted to reputable borrowersbelieved to be reputable and only when supported by acceptablefinancial information consistent with underwritingstandards.

The allowance for loanlosses is a valuation reserve that is intended to account forcredit losses which may be expected in the Corporation’s loanportfolio as a result of the credit risk involved in the normalgranting of credit. Adequate management of the allowance is anintegral part of the credit risk management process. The risksdirectly associated with the maintenance of the allowance arecompliance risk and reputation risk. The Corporation will maintainan adequate allowance in anticipation of losses reflected as of theevaluation date. Management is cognizant of the subjective natureof decisions regarding loan portfolio factors and the variabilityover time of internal and external factors affecting portfolioquality, and realizes that an effective asset review system isessential to establishing the basis for an adequate allowance. Toimprove the accuracy of determining the allowance, management willcontinuously monitor all factors and current conditions that mayaffect loss recognition.

The amount of theprovision for loan losses was $39,000 in 2003, $298,000 in 2002 and$540,000 in 2001. The decrease in the provision is due to thereduction in “impaired” loans and management’sassessment of the risk inherent in the remaining loan portfolio.For each of the same years, the net charge-off against theallowance for loan losses was $284,000, $405,000 and $462,000,respectively.

The allowance for loanlosses is maintained at a level that represents management’sbest estimates of losses in the loan portfolio at the balance sheetdate. However, there can be no assurance that the allowance forloan losses will be adequate to cover losses which may be realizedin the future, or that additional provisions for losses on loanswill not be required.

The table below providesan analysis of the allowance for loan losses for the five yearsended December 31, 2003:
|                                                                                                                        | December31, (Dollars in Thousands)                                                                       |                                                                                                           |
|------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                                                                                                                        | 2003                                                                                                     | 2002                                                                                                           | 2001 | 2000 | 1999 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
| Loans outstanding atbeginning of year,                                                                                 |                                                                                                          |                                                                                                                |  |  |  |
|         net ofunearned income                                                       | $      169,030                                                             | $      202,335                                                                   | $      207,957 | $     204,839 | $     192,115 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
| Average loansoutstanding                                                                                               | $      183,628                                                             | $      187,428                                                                   | $      206,681 | $     207,343 | $     194,664 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
| Allowance for loanlosses                                                                                               |                                                                                                          |                                                                                                                |  |  |  |
|        Balance, beginning of year                                                   | $          2,707                                            | $          2,814                                                  | $          2,737 | $        1,919 | $        1,914 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
|         Loanscharged off                                                            |                                                                                                          |                                                                                                                |  |  |  |
|                Commercial and tax free      |                  29 |                180                  |                  90 |                 70 |           2,678 |
|                Consumer                     |                  32 |                  31       |                  55 |               233 |              617 |
|                Real estate                  |                 272           |                 238                 |                 355 |                 92 |                13 |
|                Total loans charged off      |                333            |                449                  |                500 |               395 |           3,308 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
|        Recoveries                                                                   |                                                                                                          |                                                                                                                |  |  |  |
|                Commercial and tax free      |                  21 |                  17       |                    3 |                   2 |                   - |
|                Consumer                     |                  13 |                  24       |                  29 |                 34 |                23 |
|                Real estate                  |                  15      |                    3 |                    5 |                   1 |                   - |
|                Total recoveries             |                  49 |                  44       |                  37 |                 37 |                23 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
|         Netloans charged off                                                        |                284            |                405                  |                463 |               358 |           3,285 |
|        Provision charged to expense                                                 |                  39 |                298                  |                540 |            1,176 |           3,290 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
|        Balance, end of year                                                         | $          2,462                                            | $          2,707                                                  | $          2,814 | $        2,737 | $       1,919 |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
| Ratios                                                                                                                 |                                                                                                          |                                                                                                                |  |  |  |
|         Netcharge-offs as a percentage                                              |                                                                                                          |                                                                                                                |  |  |  |
|                of average loans outstanding |              ..15%                      |              ..22%                            |              ..22% |             ..17% |          1.69% |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |
|        Allowance for loan losses as a                                               |                                                                                                          |                                                                                                                |  |  |  |
|                percentage of averageloans        |                                                                                                          |                                                                                                                |  |  |  |
|                outstanding                  |            1.34%                                  |            1.44%                                        |            1.36% |           1.32% |            ..99% |
|                                                                                                                        |                                                                                                          |                                                                                                                |  |  |  |

Management’s reviewand evaluation of loan loss experience and loan loss potential onoutstanding loans occurs on a quarterly basis and includes a reviewof such factors as charge-off history, delinquent loans, loancollateral value, financial condition of the borrower, currenteconomic conditions and the current requirements of the appropriateregulatory agencies. As a result of this on-going study, managementbelieves that the allowance amount shown for December 31, 2003 isadequate to offset the losses which may exist as a result of undercollateralization or uncollectibility.

The following tablesummarizes the allocation of the allowance for loan losses for thepast five years.

|                                           | 2003                                                    | 2002    | 2001                                                    | 2000    | 1999                                  |
|-------------------------------------------|---------------------------------------------------------|---------|---------------------------------------------------------|---------|---------------------------------------|
| (Dollars inthousands)                     |
|                                           |                                                         | Percent |                                                         | Percent |                                       | **Percent** |  | **Percent** |  | Percent |
|                                           |                                                         | of Loan |                                                         | of Loan |                                       | of Loan |  | of Loan |  | of Loan |
|                                           | Amount                                                  | Type    | Amount                                                  | Type    | Amount                                | Type | Amount | Type | Amount | Type |
|                                           |                                                         |         |                                                         |         |                                       |  |  |  |  |  |
| Commercial                                | $2,371                                                  | 13%     | $2,617                                                  | 15%     |       $2,564 | 15% | $1,894 | 16% | $    397 | 13% |
| Residential                               | 69                                                      | 85      | 63                                                      | 84      | 63                                    | 83 | 195 | 81 | 65 | 80 |
| Consumer                                  | 22                                                      | 2       | 27                                                      | 1       | 31                                    | 1 | 235 | 2 | 1,069 | 2 |
| Unallocated                               |          - |         |          - |         |      156          | 1 |      413 | 1 |       388 | 5 |
|                                           |                                                         |         |                                                         |         |                                       |  |  |  |  |  |
|       Total | $2,462                                                  |         | $2,707                                                  |         | $2,814                                |  | $2,737 |  | $1,919 |  |

The following tabledetails, for each of the most recent five years, the year end loanamounts which were accounted for on a non-accrual basis or werepast due 90 days or more:
| December 31,2003                                                                           |                                                          |
|--------------------------------------------------------------------------------------------|----------------------------------------------------------|
|           Loans on non-accrual basis     | $2,332                                                   |
|           Loans past due 90 days or more | 5                                                        |
|           Renegotiated loans             |           - |
|           Total                          | $2,337                                                   |
|                                                                                            |                                                          |
| December 31,2002                                                                           |                                                          |
|           Loans on non-accrual basis     | $2,679                                                   |
|           Loans past due 90 days or more | 3                                                        |
|           Renegotiated loans             |           - |
|           Total                          | $2,682                                                   |
|                                                                                            |                                                          |
| December 31,2001                                                                           |                                                          |
|           Loans on non-accrual basis     | $2,492                                                   |
|           Loans past due 90 days or more | 123                                                      |
|           Renegotiated loans             |        60                  |
|           Total                          | $2,675                                                   |
|                                                                                            |                                                          |
| December 31,2000                                                                           |                                                          |
|           Loans on non-accrual basis     | $   358                                        |
|           Loans past due 90 days or more | 208                                                      |
|           Renegotiated loans             |       171                            |
|           Total                          | $   737                                        |
|                                                                                            |                                                          |
| December 31,1999                                                                           |                                                          |
|           Loans on non-accrual basis     | $   518                                        |
|           Loans past due 90 days or more | 187                                                      |
|           Renegotiated loans             |       493                            |
|           Total                          | $1,198                                                   |
|                                                                                            |                                                          |

Loans that were past due90 days or more, or were on non-accrual represented 1.25% of totalloans on December 31, 2003, 1.59% on December 31, 2002 and 1.29% onDecember 31, 2001. The Corporation’s policy is to place aloan on non-accrual basis when it becomes 90 days past due providedthat the loan is well collateralized and evidence indicates areasonable likelihood for collection. Also, a loan is placed onnon-accrual in the event of a material decline in business activitythat may hinder the borrower’s ability to repay theloan.

As of December 31, 2003,$867,000 of non-accrual loans were paying principal or principaland interest with payments recognized on a cash basis. At present,no other outstanding loans present a serious doubt in regard to theborrower's ability to comply with the current loan repayment terms.As of December 31, 2003, the Corporation had $1.0 million inforeclosed real estate.

**Capital**

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

The Federal ReserveBoard’s risk-based capital adequacy standards are designedprincipally as a measure of credit risk. These standards requirethat (1) at least 50% of total capital must be common and certainother “core” equity capital (“Tier ICapital”); (2) assets and off-balance sheet items mustbe weighted according to risk; (3) the total capital torisk-weighted asset ratio must be at least 8%; and (4) a minimum 4%leverage ratio of Tier I Capital to average total assets must bemaintained.

As of December 31, 2003,the Corporation had Tier I and total equity capital to riskadjusted asset ratios of 23.52% and 24.78%, respectively. AtDecember 31, 2003, the leverage ratio was 11.97%. At December31, 2002, the Corporation had Tier I and total equity capital torisk adjusted assets ratios of 23.51% and 24.77%,respectively.

The table below presentsthe Corporation’s capital position at December 31,2003.

**(DollarAmounts in Thousands)**
|                                                                                                                      |                                                                                                       | Percent                                                                                                          |
|----------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                                                                                                                      |                                                                                                       | ofAdjusted                                                                                                       |
|                                                                                                                      | Amount                                                                                                | Assets                                                                                                           |
|                                                                                                                      |                                                                                                       |                                                                                                                  |
|                Tier I Capital             |           $  44,513                            |                 23.52%           |
|                Tier I Capital Requirement |                 7,570 |                   4.00 |
|                                                                                                                      |                                                                                                       |                                                                                                                  |
|                Total Equity Capital       |           $  46,901                            |                 24.78%           |
|                Risk-Based Requirement     |               15,140            |                   8.00 |
|                                                                                                                      |                                                                                                       |                                                                                                                  |
|                Leverage Capital           |           $  44,513                            |                 11.97%           |
|                Leverage Requirement       |               14,872            |                   4.00 |

**Inflation andChanging Prices**

Inflation can besignificant to a banking institution because of its implication forthe interest rate environment and its influence on personnelexpenses and the costs of supplies and materials needed for dailyoperations. However, such a large portion of theCorporation’s assets and liabilities are represented bymonetary investments, inflationary impact tends to be dampenedexcept for the differences caused by maturity variances. Managementefforts to gauge and control these variances have been discussedearlier under rate sensitivity. The inflationary effect onnon-interest expenses is monitored closely by management andconsistent attention is given to controlling these cost areas in anattempt to limit their increase to levels which are lower than therate of asset growth.

Certain interest ratemovements will continue to influence ongoing earnings levels. Eventhough the exact impact of these factors cannot be predicted, theCorporation believes that given its financial strength andstability, it will be able to meet these situations in a positivemanner.

**MarketMakers**

****

The following firms havecommitted to make a market in the stock of Commercial NationalFinancial Corporation. Inquiries concerning their services shouldbe directed to:
| Ferris BakerWatts                 | KnightSecurities        |
|-----------------------------------|-------------------------|
| 100 LightStreet                   | 525 WashingtonBoulevard |
| Baltimore, MD21202                | Jersey City, NJ07310    |
| 800-638-7411                      | 201-222-9400            |
|                                   |                         |
|                                   |                         |
| F.J. Morrissey &Company, Inc. | Ryan, Beck &Co.     |
| Suite 420                         | 80 Main Street          |
| 1700 MarketStreet                 | West Orange, NJ07052    |
| Philadelphia, PA19103-3913        | 973-597-6020            |
| 800-842-8928                      |                         |
|                                   |                         |

**TransferAgent**

****

Should you need assistanceregarding changes in the registration of certificates or inreporting lost certificates please contact:

Commercial NationalFinancial Corporation

Stock TransferDepartment

P.O. Box 429

Latrobe, PA15650

(724)537-9923

(724)539-1137(fax)

**Form10-K**

The Corporation willprovide, without charge to any shareholder, a copy of its 2003Annual Report on Form 10-K as required to be filed with theSecurities and Exchange Commission. Requests should be made inwriting to:

Commercial NationalFinancial Corporation

P.O. Box 429

Latrobe, PA15650

IndependentAuditor’s Report

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

We haveaudited the accompanying consolidated statements of financialcondition of Commercial National Financial Corporation and itswholly-owned subsidiaries as of December 31, 2003 and 2002,and the related consolidated statements of income,shareholders’ equity and cash flows for each of the threeyears in the period ended December 31, 2003.  Theseconsolidated financial statements are the responsibility of theCorporation's management.  Our responsibility is to express anopinion on these consolidated financial statements based on ouraudits. 

We conductedour audits in accordance with auditing standards generally acceptedin the United States of America.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of materialmisstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, aswell as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonablebasis for our opinion.
|  |
|--|
|  |

Beard Miller CompanyLLP

Pittsburgh, PennsylvaniaJanuary 23, 2004

**Consolidated Statements of FinancialCondition**

**
|  | **December31,**                                  |
|--|--------------------------------------------------|
|  | **2003**                                         |  | **2002** |
|  | **(Dollarsin Thousands, Except per Share Data)** |

**Assets**
| Cash and duefrom banks              | **$    8,877** |  | $ 10,294 |
|-------------------------------------|-------------------------------|--|---------------|
| Interestbearing deposits with banks | **764**                       |  | 20,634        |
|                                     |                               |  |               |
| **Cash andCash Equivalents**        | **9,641**                     |  | 30,928        |
| Federal fundsold                    | **-**                         |  | 14,650        |
| Securitiesavailable for sale        | **164,340**                   |  | 144,726       |
| Restrictedinvestments in bank stock | **4,345**                     |  | 3,618         |
|                                     |                               |  |               |
| Loans                               | **187,382**                   |  | 169,030       |
| Allowancefor loan losses            | **(2,462)**                   |  | (2,707)       |
|                                     |                               |  |               |
| **NetLoans**                        | **184,920**                   |  | 166,323       |
|                                     |                               |  |               |
| Premises andequipment               | **5,005**                     |  | 4,524         |
| Accruedinterest receivable          | **1,573**                     |  | 1,542         |
| Otherassets                         | **15,204**                    |  | 14,027        |
| **TotalAssets** | **$385,028** |  | $380,338 |
|-----------------|--------------|--|----------|

**Liabilities and Shareholders’Equity**

**Liabilities**
| Deposits:                                                                        |                   |  |               |
|----------------------------------------------------------------------------------|-------------------|--|---------------|
|           Non-interest bearing | **$ 51,344** |  | $ 51,356 |
|           Interest bearing     | **207,872**       |  | 218,669       |
|                                                                                  |                   |  |               |
| **TotalDeposits**                                                                | **259,216**       |  | 270,025       |
| Short-termborrowings                                                             | **17,450**        |  | -             |
| Otherliabilities                                                                 | **3,450**         |  | 4,108         |
| Long-termborrowings                                                              | **55,000**        |  | 55,000        |
| **TotalLiabilities** | **335,116** |  | 329,133 |
|----------------------|-------------|--|---------|

**Shareholders’ Equity**
| Commonstock, par value $2 per share; authorized 10,000,000 shares; issued3,600,000 shares; outstanding 3,430,376 and 3,453,952 shares in2003 and 2002 | **7,200**   |  | 7,200   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|--|---------|
| Retainedearnings                                                                                                                                      | **42,123**  |  | 41,628  |
| Accumulatedother comprehensive income                                                                                                                 | **3,746**   |  | 4,881   |
| Treasurystock, at cost, 169,624 and 146,048 shares in 2003 and2002                                                                                    | **(3,157)** |  | (2,504) |
| **TotalShareholders’ Equity** | **49,912** |  | 51,205 |
|-------------------------------------|------------|--|--------|
| **TotalLiabilities and Shareholders’ Equity** | **$385,028** |  | $380,338 |
|-----------------------------------------------------|--------------|--|----------|

**Consolidated Statements ofIncome**

**
|  | **YearsEnded December 31,**                 |
|--|---------------------------------------------|
|  | **2003**                                    |  | **2002** |  | **2001** |
|  | **(InThousands, Except per Share Amounts)** |

**InterestIncome**
| Interest andfees on loans                                                                                            | **$ 11,390** |  | $13,533 |  | $16,665 |
|----------------------------------------------------------------------------------------------------------------------|-------------------|--|---------|--|---------|
| Interest anddividends on securities:                                                                                 |                   |  |         |  |         |
|               Taxable                          | **6,835**         |  | 8,130   |  | 6,161   |
|               Exempt from federal income taxes | **1,400**         |  | 1,058   |  | 924     |
| Other                                                                                                                | **170**           |  | 222     |  | 649     |
| **TotalInterest Income** | **19,795** |  | 22,943 |  | 24,399 |
|--------------------------|------------|--|--------|--|--------|

**InterestExpense**
| Deposits             | **3,563** |  | 4,998 |  | 8,065 |
|----------------------|-----------|--|-------|--|-------|
| Short-termborrowings | **49**    |  | 30    |  | 95    |
| Long-termborrowings  | **2,913** |  | 2,547 |  | 1,556 |
| **TotalInterest Expense** | **6,525** |  | 7,575 |  | 9,716 |
|---------------------------|-----------|--|-------|--|-------|
| **NetInterest Income** | **13,270** |  | 15,368 |  | 14,683 |
|------------------------|------------|--|--------|--|--------|
| **Provisionfor Loan Losses** | **39** |  | 298 |  | 540 |
|------------------------------|--------|--|-----|--|-----|
| **NetInterest Income after Provision for Loan Losses** | **13,231** |  | 15,070 |  | 14,143 |
|--------------------------------------------------------|------------|--|--------|--|--------|

**OtherOperating Income**
| Servicecharges on deposit accounts       | **859** |  | 737 |  | 779 |
|------------------------------------------|---------|--|-----|--|-----|
| Otherservice charges and fees            | **618** |  | 691 |  | 750 |
| Net securitygains                        | **9**   |  | -   |  | 7   |
| Trustdepartment income                   | **710** |  | 541 |  | 457 |
| Income frominvestment in life insurance  | **559** |  | 474 |  | 177 |
| Commissionsand fees from insurance sales | **841** |  | 115 |  | -   |
| Gain on saleof branch                    | **-**   |  | 470 |  | -   |
| Otherincome                              | **393** |  | 305 |  | 385 |
| **TotalOther Operating Income** | **3,989** |  | 3,333 |  | 2,555 |
|---------------------------------|-----------|--|-------|--|-------|

**OtherOperating Expenses**
| Salaries andemployee benefits | **6,226** |  | 5,660 |  | 5,498 |
|-------------------------------|-----------|--|-------|--|-------|
| Netoccupancy                  | **714**   |  | 624   |  | 603   |
| Furnitureand equipment        | **747**   |  | 725   |  | 724   |
| Professionalfees              | **741**   |  | 683   |  | 444   |
| Pennsylvaniashares tax        | **500**   |  | 457   |  | 417   |
| Automatedteller machine       | **297**   |  | 322   |  | 304   |
| Otherexpenses                 | **3,222** |  | 2,715 |  | 2,104 |
| **TotalOther Operating Expenses** | **12,447** |  | 11,186 |  | 10,094 |
|-----------------------------------|------------|--|--------|--|--------|
| **Incomebefore Income Taxes** | **4,773** |  | 7,217 |  | 6,604 |
|-------------------------------|-----------|--|-------|--|-------|
| **IncomeTax Expense** | **837** |  | 1,873 |  | 1,699 |
|-----------------------|---------|--|-------|--|-------|
| **NetIncome** | **$3,936** |  | $ 5,344 |  | $ 4,905 |
|---------------|------------|--|--------------|--|--------------|
| **Earningsper Share, Basic** | **$ 1.14** |  | $    1.56 |  | $    1.43 |
|------------------------------|-----------------|--|--------------------------|--|--------------------------|

**Consolidated**Statements of Shareholders’ Equity

**Years Ended December 31,2003, 2002 and 2001**

**
|  |  | **Common Stock**                            |  | **RetainedEarnings** |  | **Accumulated Other Comprehensive Income** |  | **Treasury Stock** |  | **Total Shareholders’ Equity** |
|--|--|---------------------------------------------|--|----------------------|--|--------------------------------------------|--|--------------------|--|--------------------------------------|
|  |  | **(InThousands, Except per Share Amounts)** |
| **Balance -December 31, 2000**                                                                                                                                                                                                                                                                       |  | $7,200     |  | $37,439     |  | $1,094      |  | $(2,596)     |  | $43,137     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------|--|-------------|--|-------------|--|--------------|--|-------------|
|       Comprehensiveincome:                                                                                                                                                                                                                                                  |  |            |  |             |  |             |  |              |  |             |
|            Net income                                                                                                                                                                                                                         |  | -          |  | 4,905       |  | -           |  | -            |  | 4,905       |
|            Change in unrealized net gains on securities available forsale,                  net of reclassification adjustment and deferred incometaxes  |  | -          |  | -           |  | 1,065       |  | -            |  | 1,065       |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
| **                 Total Comprehensive Income**                                                                                                                                                                 |  |            |  |             |  |             |  |              |  | 5,970       |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
|            Cash dividends declared, $0.76 per share                                                                                                                                                                                           |  | -          |  | (2,607)     |  | -           |  | -            |  | (2,607)     |
|            Purchases of treasury stock                                                                                                                                                                                                        |  | -          |  | -           |  | -           |  | (529)        |  | (529)       |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
| **Balance -December 31, 2001**                                                                                                                                                                                                                                                                       |  | 7,200      |  | 39,737      |  | 2,159       |  | (3,125)      |  | 45,971      |
|       Comprehensiveincome:                                                                                                                                                                                                                                                  |  |            |  |             |  |             |  |              |  |             |
|            Net income                                                                                                                                                                                                                         |  | -          |  | 5,344       |  | -           |  | -            |  | 5,344       |
|            Change in unrealized net gains on securities available forsale,                  net of deferred income taxes                                 |  | -          |  | -           |  | 2,722       |  | -            |  | 2,722       |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
| **                 Total Comprehensive Income**                                                                                                                                                                 |  |            |  |             |  |             |  |              |  | 8,066       |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
|            Cash dividends declared, $1.00 per share                                                                                                                                                                                           |  | -          |  | (3,424)     |  | -           |  | -            |  | (3,424)     |
|            Issuance of treasury stock                                                                                                                                                                                                         |  | -          |  | (29)        |  | -           |  | 786          |  | 757         |
|            Purchases of treasury stock                                                                                                                                                                                                        |  | -          |  | -           |  | -           |  | (165)        |  | (165)       |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
| **Balance -December 31, 2002**                                                                                                                                                                                                                                                                       |  | 7,200      |  | 41,628      |  | 4,881       |  | (2,504)      |  | 51,205      |
|       Comprehensiveincome:                                                                                                                                                                                                                                                  |  |            |  |             |  |             |  |              |  |             |
|            Net income                                                                                                                                                                                                                         |  | **-**      |  | **3,936**   |  | **-**       |  | **-**        |  | **3,936**   |
|            Change in unrealized net gains on securities available forsale,

                 net of reclassification adjustment and deferred incometaxes |  | **-**      |  | **-**       |  | **(1,135)** |  | **-**        |  | **(1,135)** |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
| **                 Total Comprehensive Income**                                                                                                                                                                 |  |            |  |             |  |             |  |              |  | **2,801**   |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
|            Cash dividends declared, $1.00 per share                                                                                                                                                                                           |  | **-**      |  | **(3,441)** |  | **-**       |  | **-**        |  | **(3,441)** |
|            Issuance of treasury stock                                                                                                                                                                                                         |  | **-**      |  | **-**       |  | **-**       |  | **4**        |  | **4**       |
|            Purchases of treasury stock                                                                                                                                                                                                        |  | **-**      |  | **-**       |  | **-**       |  | **(657)**    |  | **(657)**   |
|                                                                                                                                                                                                                                                                                                      |  |            |  |             |  |             |  |              |  |             |
| **Balance -December 31, 2003**                                                                                                                                                                                                                                                                  |  | **$7,200** |  | **$42,123** |  | **$3,746**  |  | **$(3,157)** |  | **$49,912** |

**Consolidated Statements of CashFlows**

**
|  | **YearsEnded December 31,** |
|--|-----------------------------|
|  | **2003**                    |  | **2002** |  | **2001** |
|  | **(InThousands)**           |

****

**CashFlows from Operating Activities**
| Netincome                                                                                                                                                                                                                                                                                                                              | **$3,936** |  | $ 5,344 |  | $ 4,905 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--|--------------|--|--------------|
| Adjustmentsto reconcile net income to net cash provided by

            operating activities:                                                                                                                                                                              |            |  |              |  |              |
|                   Depreciation and amortization                                                                                                                                                                                              | **885**    |  | 675          |  | 692          |
|                   Provision for loan losses                                                                                                                                                                                                  | **39**     |  | 298          |  | 540          |
|                   Net accretion of securities and loan fees                                                                                                                                                                                  | **(674)**  |  | (813)        |  | (567)        |
|                   Net security gains                                                                                                                                                                                                         | **(9)**    |  | -            |  | (7)          |
|                   Issuance of treasury stock for compensation                                                                                                                                                                                | **4**      |  | 1            |  | -            |
|                   Gain on sale of branch                                                                                                                                                                                                     | **-**      |  | (470)        |  | -            |
|                   (Gain) loss on sale of foreclosed real estate                                                                                                                                                                              | **(4)**    |  | (29)         |  | 11           |
|                   Income from investments in life insurance                                                                                                                                                                                  | **(559)**  |  | (474)        |  | (177)        |
|                   Deferred tax expense                                                                                                                                                                                                       | **285**    |  | 82           |  | 73           |
|                   (Increase) decrease in accrued interest receivable and

                         other assets | **(146)**  |  | 400          |  | 686          |
|                   Decrease in other liabilities                                                                                                                                                                                              | **(281)**  |  | (173)        |  | (71)         |
| **Net CashProvided by Operating Activities** | **3,476** |  | 4,841 |  | 6,085 |
|----------------------------------------------|-----------|--|-------|--|-------|

**CashFlows from Investing Activities**
| (Increase)decrease in federal funds sold                                   | **14,650**   |  | (14,650) |  | -        |
|----------------------------------------------------------------------------|--------------|--|----------|--|----------|
| Purchases ofsecurities available for sale                                  | **(90,557)** |  | (75,003) |  | (64,249) |
| Maturities,calls and principal repayments of securities available for sale | **69,753**   |  | 52,153   |  | 19,569   |
| Proceedsfrom sales of securities available for sale                        | **43**       |  | -        |  | 31,177   |
| Net cashused in acquisitions                                               | **(100)**    |  | (1,141)  |  | -        |
| Net(increase) decrease in restricted bank stock                            | **(727)**    |  | (1,260)  |  | 1,005    |
| Net(increase) decrease in loans                                            | **(19,248)** |  | 32,485   |  | 5,077    |
| Net proceedsfrom sale of assets                                            | **44**       |  | 1,811    |  | 66       |
| Purchases ofpremises and equipment                                         | **(1,164)**  |  | (594)    |  | (372)    |
| Purchase ofbank owned life insurance                                       | **-**        |  | (5,000)  |  | (5,000)  |
| **Net CashUsed in Investing Activities** | **(27,306)** |  | (11,199) |  | (12,727) |
|------------------------------------------|--------------|--|----------|--|----------|

**Consolidated Statements of Cash Flows(Continued)**

**
|  | **YearsEnded December 31,** |
|--|-----------------------------|
|  | **2003**                    |  | **2002** |  | **2001** |
|  | **(InThousands)**           |

**CashFlows from Financing Activities**
| Net increase(decrease) in deposits              | **$(10,809)** |  | $15,038 |  | $(11,626) |
|-------------------------------------------------|---------------|--|---------|--|-----------|
| Net increase(decrease) in short-term borrowings | **17,450**    |  | (4,275) |  | (3,300)   |
| Proceedsfrom issuance of long-term borrowings   | **-**         |  | 20,000  |  | 25,000    |
| Dividendspaid                                   | **(3,441)**   |  | (3,424) |  | (2,607)   |
| Purchase oftreasury stock                       | **(657)**     |  | (165)   |  | (529)     |
| **Net CashProvided by Financing Activities** | **2,543** |  | 27,174 |  | 6,938 |
|----------------------------------------------|-----------|--|--------|--|-------|
| **NetIncrease (Decrease) in Cash and Cash Equivalents** | **(21,287)** |  | 20,816 |  | 296 |
|---------------------------------------------------------|--------------|--|--------|--|-----|
| **Cash andCash Equivalents – Beginning** | **30,928** |  | 10,112 |  | 9,816 |
|------------------------------------------------|------------|--|--------|--|-------|
| **Cash andCash Equivalents – Ending** | **$   9,641** |  | $30,928 |  | $10,112 |
|---------------------------------------------|-------------------------|--|---------|--|---------|

**Supplementary Cash FlowsInformation**
| Interestpaid | **$   6,679** |  | $ 7,598 |  | $10,141 |
|--------------|-------------------------|--|--------------|--|---------|
| Income taxespaid | **$     608** |  | $ 2,161 |  | $ 1,264 |
|------------------|----------------------------------------|--|--------------|--|--------------|

**Supplementary Disclosures of Noncash Investingand        FinancingActivities**
| Loanstransferred to foreclosed real estate | **$     723** |  | $     514 |  | $      77 |
|--------------------------------------------|----------------------------------------|--|-------------------------------|--|-----------------------------------------|

**Notes to Consolidated FinancialStatements**

**

**Note 1 -Significant Accounting Policies**

**General**

Theaccompanying consolidated financial statements include the accountsof Commercial National Financial Corporation (the Corporation) andits wholly-owned subsidiaries, Commercial Bank of Pennsylvania (theBank), formerly known as Commercial National Bank of Pennsylvania,Commercial National Insurance Services, Inc. (CNIS) and HighviewTrust Company.  In December 2002, CNIS acquired The GooderAgency, Inc. (Gooder).  Gooder is a full service provider ofinsurance products to individuals and businesses and acts as anagent for fifteen national, regional and mutual insurancecompanies.  At its current level of operations, Gooder’sresults of operations are not material to the consolidatedfinancial statements.  In July 2003, the Bank’sapplication to convert to a Pennsylvania state chartered bank wasapproved by the Pennsylvania Department of Banking, and the Bankchanged its name to Commercial Bank of Pennsylvania.  InOctober 2003, the Corporation’s application to form a trustcompany subsidiary was approved.  This subsidiary, HighviewTrust Company (HTC), enables the Corporation to offer moreinvestment products and the Corporation’s current trustoperations were transferred to HTC from the Bank.  Allmaterial intercompany transactions have been eliminated.

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

Thefollowing summary of accounting and reporting policies is presentedto aid the reader in obtaining a better understanding of theconsolidated financial statements and related financial data of theCorporation and its wholly-owned subsidiaries contained in thisreport.  Such policies conform to generally acceptedaccounting principles (GAAP) and to general practice within thebanking industry. 

**Estimates**

Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of Americarequires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses duringthe reporting period.  Actual results could differ from thoseestimates.

Materialestimates that are particularly susceptible to significant changein the near term relate to the determination of the allowance forloan losses and the valuation of real estate acquired in connectionwith foreclosures or in satisfaction of loans.

**Significant Concentrations of CreditRisk**

Most of theCorporation’s activities are with customers located withinWestmoreland County of Pennsylvania.  Note 4 discussesthe types of securities that the Corporation invests in. Note 5 discusses the types of lending that the Corporationengages in.  The Corporation does not have any significantconcentrations to any one industry or customer.  Although theCorporation has a diversified loan portfolio, exposure to creditloss can be adversely impacted by downturns in local economic andemployment conditions. 

**Note 1 -Significant Accounting Policies (Continued)**

**Securities**

Debtsecurities that the Corporation has the positive intent and abilityto hold to maturity are classified as “securities held tomaturity” and are reported at amortized cost.  Debt andequity securities not classified as held to maturity securities areclassified as “securities available for sale” andreported at fair value, with unrealized gains and losses excludedfrom earnings and reported as a separate component ofshareholders’ equity, net of the related deferred income taxeffect.  Premiums and discounts are recognized as interestincome using the interest method over the terms of thesecurities.  Net gain or loss on the sale of securities isdetermined using the specific identification method.

**Restricted Investments in BankStock**

Federal lawrequires the Bank, a member institution of the Federal Home LoanBank system, to hold stock of its district Federal Home Loan Bankaccording to a predetermined formula.  This restricted stockis carried at cost. 

**Loans**

Loansreceivable that management has the intent and ability to hold forthe foreseeable future or until maturity or payoff are stated attheir outstanding unpaid principal balances. Interest income isaccrued on the unpaid principal balance.  Loan originationfees, net of associated direct costs, are deferred and recognizedas an adjustment of the yield (interest income) of the relatedloans. The Corporation is generally amortizing these amounts overthe contractual life of the loan. 

The accrualof interest is generally discontinued when the contractual paymentof principal or interest has become 90 days past due or managementhas serious doubts about further collectibility of principal orinterest, even though the loan is currently performing.  Aloan may remain on accrual status if it is in the process ofcollection and is either guaranteed or well secured.  When aloan is placed on nonaccrual status, unpaid interest credited toincome in the current year is reversed and unpaid interest accruedin prior years is charged against the allowance for loanlosses.  Interest received on nonaccrual loans generally iseither applied against principal or reported as interest income,according to management’s judgment as to the collectibilityof principal.  Generally, loans are restored to accrual statuswhen the obligation is brought current, has performed in accordancewith the contractual terms for a reasonable period of time and theultimate collectibility of the total contractual principal andinterest is no longer in doubt.

**Allowancefor Loan Losses**

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

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

**Note 1 -Significant Accounting Policies (Continued)**

**Allowancefor Loan Losses (Continued)**

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

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

Large groupsof smaller balance homogeneous loans are collectively evaluated forimpairment.  Accordingly, the Corporation does not separatelyidentify individual consumer and residential loans for impairmentdisclosures.

**Foreclosed Real Estate**

Foreclosedreal estate is comprised of property acquired through a foreclosureproceeding or acceptance of a deed in lieu of foreclosure and loansclassified as in-substance foreclosure.  A loan is classifiedas in-substance foreclosure when the Bank has taken possession ofthe collateral regardless of whether formal foreclosure proceedingstake place.  Foreclosed assets initially are recorded at fairvalue, net of estimated selling costs, at the date of foreclosureestablishing a new cost basis.  After foreclosure, valuationsare periodically performed by management and the assets are carriedat the lower of cost or fair value minus estimated costs tosell.  Revenues and expenses from operations and changes inthe valuation allowance are included in other expenses. Foreclosed real estate at December 31, 2003 and 2002 was$1,027,000 and $344,000, respectively, and is included in otherassets.

**Intangible Assets**

TheCorporation has amortizable intangible assets related to customerlists and core deposit intangibles acquired in 2002 and 2003through the acquisition of insurance agencies and a branchoffice.  These intangible assets are being amortized on astraight-line basis over a period of ten years.  TheCorporation has amortizable intangible assets at December 31,2003 of $1,683,000, net of accumulated amortization of $241,000,which are included in other assets.  Amortization expense of$202,000 and $39,000 was recorded for the years endedDecember 31, 2003 and 2002, respectively.  Amortizationexpense is estimated to be $193,000 per year for the next fiveyears.

**Note 1 -Significant Accounting Policies (Continued)**

**Premisesand Equipment**

Premises andequipment are carried at cost less accumulated depreciation andamortization.  For financial statement reporting and incometax purposes, depreciation is computed both on straight-line andaccelerated methods over the estimated useful life of the premisesand equipment. Charges for maintenance and repairs are expensed asincurred. Amortization is charged over the term of the respectivelease or the estimated useful life of the asset, whichever isshorter.

**BankOwned Life Insurance**

TheCorporation invests in bank owned life insurance (BOLI) as a sourceof funding for employee benefit expenses.  BOLI involves thepurchasing of life insurance by the Corporation on a chosen groupof employees.  The Corporation is the owner and beneficiary ofthe policies.  This life insurance investment is carried atthe cash surrender value of the underlying policies and is includedin other assets in the amount of $11,092,000 and $10,591,000 atDecember 31, 2003 and 2002, respectively.  Income fromthe investment in the policies is included in other income on theincome statement. 

**Advertising Costs**

TheCorporation follows the policy of charging the costs of advertisingto expense as incurred.  Total advertising expense for theyears ended December 31, 2003, 2002 and 2001 was $187,000,$233,000 and $149,000, respectively.

**Off-Balance Sheet FinancialInstruments**

In theordinary course of business, the Corporation has entered intooff-balance sheet financial instruments consisting of commitmentsto extend credit and letters of credit.  Such financialinstruments are recorded in the balance sheet when they arefunded.

**TrustOperations**

Trust incomeis recorded on the cash basis, which approximates the accrualbasis.  Securities and other property held by the Corporationin a fiduciary or agency capacity for customers of the TrustDepartment are not assets of the Corporation and, accordingly, arenot included in the accompanying consolidated financialstatements.

**IncomeTaxes**

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

**Earningsper Share**

Basicearnings per share have been calculated on the weighted averagenumber of shares outstanding of 3,441,556 in 2003, 3,425,858 in2002 and 3,432,389 in 2001.  The Corporation currentlymaintains a simple capital structure, thus there are no dilutiveeffects on earnings per share.

**Note 1 -Significant Accounting Policies (Continued)**

**TreasuryStock**

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

**Cash andCash Equivalents**

For purposesof reporting cash flows, the Corporation has defined cash and cashequivalents as those amounts included in the balance sheetcaptions, “Cash and due from banks” and “Interestbearing deposits with banks.”

**SegmentReporting**

TheCorporation acts as an independent community financial servicesprovider and offers traditional banking and related financialservices to individual, business and government customers. The Corporation offers a full array of commercial and retailfinancial services, including the taking of time, savings anddemand deposits, the making of commercial, consumer and mortgageloans and the providing of other financial services.

Managementdoes not separately allocate expenses, including the cost offunding loan demand, between the commercial and retail operationsof the Corporation.  As such, discrete information is notavailable and segment reporting would not be meaningful.

**Reclassifications**

Certainamounts in the 2002 and 2001 financial statements have beenreclassified to conform with the 2003 presentation format. These reclassifications had no effect on net income.

**NewAccounting Standards**

In November2002, the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others.”  ThisInterpretation expands the disclosures to be made by a guarantor inits financial statements about its obligations under certainguarantees and requires the guarantor to recognize a liability forthe fair value of an obligation assumed under certain specifiedguarantees.  Under FIN 45, the Corporation does not issueany guarantees that would require liability recognition ordisclosure, other than its standby letters of credit, as discussedin Note 7.  Adoption of FIN 45 did not have asignificant impact on the Company’s financial condition orresults of operations.

In January2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46, “Consolidation of VariableInterest Entities, an Interpretation of ARBNo. 51.”  FIN 46 was revised in December2003.  This Interpretation provides new guidance for theconsolidation of variable interest entities (VIEs) and requiressuch entities to be consolidated by their primary beneficiaries ifthe entities do not effectively disperse risk among partiesinvolved.  The Interpretation also adds disclosurerequirements for investors that are involved with unconsolidatedVIEs.  The disclosure requirements apply to all financialstatements issued after December 31, 2003.  Theconsolidation requirements apply to companies that have interestsin special purpose entities for periods ending afterDecember 15, 2003.  Consolidation of other types of VIEsis required in financial statements for periods ending afterMarch 15, 2004.  The adoption of this Interpretation didnot have and is not expected to have an impact on theCorporation’s financial condition or results ofoperations.

**Note 1 -Significant Accounting Policies (Continued**)

**NewAccounting Standards (Continued)**

In April2003, the Financial Accounting Standards Board (FASB) issuedStatement No. 149, “Amendment of Statement No. 133,Accounting for Derivative Instruments and HedgingActivities.”  This Statement clarifies the definition ofa derivative and incorporates certain decisions made by the Boardas part of the Derivatives Implementation Group process.  ThisStatement is effective for contracts entered into or modified andfor hedging relationships designated after June 30, 2003 andshould be applied prospectively.  The provisions of theStatement that relate to implementation issues addressed by theDerivatives Implementation Group that have been effective shouldcontinue to be applied in accordance with their respectivedates.  Adoption of this standard did not have an impact onthe Corporation’s financial condition or results ofoperations.

In May 2003,the Financial Accounting Standards Board issued Statement No. 150,“Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  ThisStatement requires that an issuer classify a financial instrumentthat is within its scope as a liability.  Many of theseinstruments were previously classified as equity.  ThisStatement was effective for financial instruments entered into ormodified after May 31, 2003 and otherwise was effectivebeginning July 1, 2003.  The adoption of this standarddid not have an impact on the Corporation’s financialcondition or results of operations. 

**Note 2 -Acquisitions And Divestitures**

OnJanuary 3, 2003, the Corporation acquired certain insuranceagency accounts from an employee of the Corporation’sinsurance agency subsidiary, Gooder.  The Corporation paidcash of $100,000 for the accounts.  The acquisition has beenaccounted for as a purchase and the $100,000 has been allocated toidentifiable intangible assets representing the fair value of theacquired customer list.  The results of operations areincluded in the consolidated financial statements since the date ofthe acquisition.  The impact of the acquisition on theCorporation’s results of operations for the year endedDecember 31, 2003 was not material. 

OnDecember 10, 2002, the Corporation completed its acquisitionof Gooder, an independent insurance agency and Gooder & Mary,Inc. (G&M), a 50% partner in CNIS.  The Corporation issued35,208 shares of its common stock with a value of $756,000 and paidcash of $235,000 in exchange for all of the shares of common stockof Gooder and G&M.  The acquisition has been accounted foras a purchase and the results of operations of Gooder  andG&M since the date of acquisition are included in theconsolidated financial statements.

The totalpurchase price of $991,000 has been allocated to the assetsacquired and liabilities assumed based upon fair value at the dateof acquisition, including identifiable intangible assets of$849,000 representing the fair value of the acquired customerlists.  The value of the 35,208 common shares issued wasdetermined based on the average market price of theCorporation’s common shares over the ten trading days endingon the date prior to the acquisition date.** ** The impactof the acquisition of Gooder and G&M on the results ofoperations of the Corporation in 2003 was not material.

OnSeptember 27, 2002, the Bank sold the bank premises, depositliabilities, equipment and loans outstanding of the Bank’sbranch office and Redstone office in Murrysville, Pennsylvania (theMurrysville Branch).  In the transaction, the Bank solddeposit liabilities of $7,709,000, loans of $5,821,000 andequipment of $10,000 resulting in a gain of $470,000.

**Note 2 -Acquisitions And Divestitures (Continued)**

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

**Note 3 -Cash and Due from Banks**

Regulationsof the Board of Governors of the Federal Reserve System imposeuniform reserve requirements on all depository institutions withtransaction accounts (checking accounts, NOW accounts, etc.) andnon-personal time deposits (deposits with original maturities of 14days or more).  Reserves are maintained in the form of vaultcash or a non-interest bearing balance held with the FederalReserve Bank.  The Bank also maintains deposits with theFederal Reserve Bank and other banks for various services such ascheck clearing.  The average required reserve atDecember 31, 2003 and 2002 was approximately $3,858,000 and$4,050,000, respectively.

**Note 4 -Securities**

Theamortized cost and fair values of securities available for sale areas follows:
|  | **Amortized Cost** |  | **Gross Unrealized Gains** |  | **Gross Unrealized Losses** |  | **Fair Value** |
|--|--------------------|--|----------------------------|--|-----------------------------|--|----------------|
|  | **(InThousands)**  |
| **December31, 2003:**                                                                                                                                                                                                     |                   |  |                       |  |                 |  |                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|--|-----------------------|--|-----------------|--|-------------------|
|            Obligations of U.S. Government

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

                 subdivisions | **44,270**        |  | **1,275**             |  | **(462)**       |  | **45,083**        |
|            Mortgage-backed securities                                                                                                                              | **101,970**       |  | **4,732**             |  | **-**           |  | **106,702**       |
|            Equity securities                                                                                                                                       | **799**           |  | **54**                |  | **(8)**         |  | **845**           |
|  | **$158,665** |  | **$6,173** |  | **$(498)** |  | **$164,340** |
|--|--------------|--|------------|--|------------|--|--------------|
| **December31, 2002:**                                                                                                                                                                                                     |         |  |                              |  |                             |  |         |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|--|------------------------------|--|-----------------------------|--|---------|
|            Obligations of U.S. Government

                 agencies          | $10,756 |  | $     85 |  | $     - |  | $10,841 |
|            Obligations of states and political

                 subdivisions | 26,173  |  | 1,128                        |  | (9)                         |  | 27,292  |
|            Mortgage-backed securities                                                                                                                              | 100,310 |  | 6,192                        |  | -                           |  | 106,502 |
|            Equity securities                                                                                                                                       | 91      |  | -                            |  | -                           |  | 91      |
|  | $137,330 |  | $7,405 |  | $   (9) |  | $144,726 |
|--|----------|--|--------|--|-------------------|--|----------|

**Note 4 -Securities (Continued)**

Theamortized cost and fair values of securities at December 31,2003 by contractual maturity, are shown below. Mortgage-backed securities maturities are based upon theirestimated contractual maturities.  Expected maturities willdiffer from contractual maturities because borrowers may have theright to call or prepay obligations with or without call orprepayment penalties.
|  |  | **Amortized Cost** |  | **Fair Value** |
|--|--|--------------------|--|----------------|
|  |  | **(InThousands)**  |
|  | Due withinone year                    | **$    4,421** |  | **$    4,453** |
|--|---------------------------------------|-------------------------------|--|-------------------------------|
|  | Due afterone year through five years  | **19,230**                    |  | **19,259**                    |
|  | Due afterfive years through ten years | **9,927**                     |  | **10,486**                    |
|  | Due afterten years                    | **124,288**                   |  | **129,297**                   |
|  | Equitysecurities                      | **799**                       |  | **845**                       |
|  |  | **$158,665** |  | **$164,340** |
|--|--|--------------|--|--------------|

Securitieswith amortized cost and fair values of $16,420,000 and $17,164,000,respectively, at December 31, 2003 and $19,809,000 and$20,879,000, respectively, at December 31, 2002 were pledgedto secure public deposits and for other purposes required orpermitted by law.

Gross gainsof $9,000, $-0- and $78,000 and gross losses of $-0-, $-0- and$71,000 were realized on sales and calls of securities during 2003,2002 and 2001, respectively.

Thefollowing table shows the Corporation’s gross unrealizedlosses and fair value, aggregated by investment category and lengthof time that individual securities have been in a continuousunrealized loss position, at December 31, 2003:
|  | **Less than12 Months** |  | **12 Monthsor More**  |  | **Total**      |
|--|------------------------|--|-----------------------|--|----------------|
|  | **Fair Value**         |  | **Unrealized Losses** |  | **Fair Value** |  | **Unrealized Losses** |  | **Fair Value** |  | **Unrealized Losses** |
|  | **(InThousands)**      |
| Obligationsof U.S. Govern- ment agencies        | **$ 2,057** |  | **$ (28)** |  | **$     -** |  | **$   -** |  | **$ 2,057** |  | **$ (28)** |
|-------------------------------------------------|------------------|--|-----------------|--|---------------------------------|--|---------------------|--|------------------|--|-----------------|
| Obligationsof states and political subdivisions | **14,663**       |  | **(460)**       |  | **138**                         |  | **(2)**             |  | **14,801**       |  | **(462)**       |
| Equitysecurities                                | **140**          |  | **(8)**         |  | **-**                           |  | **-**               |  | **140**          |  | **(8)**         |
|  | **$16,860** |  | **$(496)** |  | **$138** |  | **$(2)** |  | **$16,998** |  | **$(498)** |
|--|-------------|--|------------|--|----------|--|----------|--|-------------|--|------------|

Unrealizedlosses in obligations of U.S. Government agencies and state andpolitical subdivisions are due to a change in interest ratessubsequent to when the securities were purchased.  Theunrealized loss in equity securities is also due to market timingdifferences.  At December 31, 2003, all debt securitieswith temporarily impaired losses have been rated by eitherMoody’s and/or S&P with an “A” or better debtrating.  Management believes the unrealized losses aretemporary and that the Corporation has the ability to hold thesecurities until maturity or market price recovery.

**Note 5 -Loans**

Loans aresummarized as follows:
|  |  |  | **December31,**   |
|--|--|--|-------------------|
|  |  |  | **2003**          |  | **2002** |
|  |  |  | **(InThousands)** |
|  | Commercialloans                                                                |  | **$ 14,802** |  | $ 12,725 |
|--|--------------------------------------------------------------------------------|--|-------------------|--|---------------|
|  | Real estateloans:                                                              |  |                   |  |               |
|  |            Commercial   |  | **51,006**        |  | 54,618        |
|  |            Construction |  | **1,108**         |  | 976           |
|  |            Residential  |  | **106,121**       |  | 86,048        |
|  | Municipalloans                                                                 |  | **10,622**        |  | 10,078        |
|  | Consumer andother loans                                                        |  | **3,584**         |  | 4,557         |
|  | Netunamortized costs                                                           |  | **139**           |  | 28            |
|  |  |  | **$187,382** |  | $169,030 |
|--|--|--|--------------|--|----------|

**Note 6 -Allowance for Loan Losses**

Transactionsin the allowance for loan losses are summarized asfollows:
|  |  |  | **YearsEnded December 31,** |
|--|--|--|-----------------------------|
|  |  |  | **2003**                    |  | **2002** |  | **2001** |
|  |  |  | **(InThousands)**           |
|  | Balance,January 1                                                                                                                                                                                                   |  | **$2,707** |  | $2,814 |  | $2,737 |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------|--|--------|--|--------|
|  |            Loans charged off                                                                                                                                 |  | **(333)**  |  | (449)  |  | (500)  |
|  |            Recoveries on previously charged off

                 loans |  | **49**     |  | 44     |  | 37     |
|  |            Provision for loan losses                                                                                                                         |  | **39**     |  | 298    |  | 540    |
|  | Balance atDecember 31 |  | **$2,462** |  | $2,707 |  | $2,814 |
|--|-----------------------|--|------------|--|--------|--|--------|

AtDecember 31, 2003 and 2002, the total recorded investment inloans considered to be impaired was $8,669,000 and $9,013,000,respectively.  The average recorded investment in impairedloans during 2003, 2002 and 2001 was $12,271,000, $12,323,000 and$12,731,000, respectively.  Impaired loans with balances of$2,847,000 and $3,085,000 at December 31, 2003 and 2002 hadrelated allowance for loan losses of $1,541,000 and $1,536,000,respectively.  Interest income on impaired loans of $723,000,$749,000 and $1,080,000 was recognized for cash payments receivedin 2003, 2002 and 2001, respectively. 

Loans onwhich the accrual of interest has been discontinued amounted to$2,331,000 and $2,679,000 at December 31, 2003 and 2002,respectively.  Loan balances past due 90 days or more andstill accruing interest, but which management expects willeventually be paid in full, amounted to $5,000 and $3,000 atDecember 31, 2003 and 2002, respectively.

**Note 7 -Financial Instruments with Off-Balance Sheet Risk**

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

TheCorporation's exposure to credit loss in the event ofnonperformance by the other party to the financial instrument forcommitments to extend credit, standby letters of credit andfinancial standby letters of credit written is represented by thecontract or notional amount of those instruments.  TheCorporation uses the same credit policies in making suchcommitments and conditional obligations as it does foron-balance-sheet instruments.  The following table identifiesthe contract or notional amount of those instruments:
|  |  |  | **December31,**   |   |
|--|--|--|-------------------|--------|
|  |  |  | **2003**          |        | **2002** |
|  |  |  | **(InThousands)** |
|  | Financialinstruments whose contract amounts represent creditrisk:                                     |  |             |  |         |
|--|-------------------------------------------------------------------------------------------------------|--|-------------|--|---------|
|  |            Commitments to extend credit        |  | **$30,767** |  | $45,229 |
|  |            Standby letters of credit           |  | **427**     |  | 533     |
|  |            Financial standby letters of credit |  | **3,000**   |  | 3,700   |

Commitmentsto extend credit are agreements to lend to a customer as long asthere is no violation of any condition established in thecontract.  Commitments generally have fixed expiration datesor other termination clauses and may require payment of afee.  Since many of the commitments are expected to expirewithout being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements.  TheCorporation evaluates each customer's credit worthiness on acase-by-case basis.  The amount of collateral obtained, ifdeemed necessary by the Corporation upon extension of credit, isbased on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable,inventory, property, plant and equipment and income-producingcommercial properties.

Outstandingletters of credit written are conditional commitments issued by theCorporation to secure the performance of a customer to a thirdparty.  The majority of these standby letters of credit expirewithin the next twelve months.  The credit risk involved inissuing letters of credit is essentially the same as that involvedin extending other loan commitments.  The Corporation requirescollateral supporting these letters of credit as deemednecessary.  The maximum undiscounted exposure related to thesecommitments at December 31, 2003 was $3,427,000 and theapproximate value of underlying collateral upon liquidation thatwould be expected to cover this maximum potential exposure was$3,196,000.  The current amount of the liability as ofDecember 31, 2003 for guarantees under standby letters ofcredit issued is not material. 

**Note 8 -Premises and Equipment**

Thecomposition of premises and equipment at December 31, 2003 and2002 is as follows:
|  |  |  | **2003**          |  | **2002** |
|--|--|--|-------------------|--|----------|
|  |  |  | **(InThousands)** |
|  | Land                                     |  | **$   437** |  | $   437 |
|--|------------------------------------------|--|-----------------------|--|-------------------|
|  | Premises                                 |  | **5,782**             |  | 5,509             |
|  | Leaseholdimprovements                    |  | **249**               |  | 243               |
|  | Furnitureand equipment                   |  | **6,130**             |  | 5,279             |
|  |                                          |  |                       |  |                   |
|  |                                          |  | **12,598**            |  | 11,468            |
|  | Accumulateddepreciation and amortization |  | **(7,593)**           |  | (6,944)           |
|  |  |  | **$5,005** |  | $4,524 |
|--|--|--|------------|--|--------|

Depreciationand amortization expense was $683,000, $636,000 and $692,000 forthe years ended December 31, 2003, 2002 and 2001,respectively.

**Note 9 -Interest Bearing Deposits**

Interestbearing deposits include time deposits issued in denominations of$100,000 or more which amounted to $21,108,000 and $21,812,000 atDecember 31, 2003 and 2002, respectively. 

Interestbearing deposits at December 31, 2003 and 2002 are detailed asfollows:
|  |  |  | **2003**          |  | **2002** |
|--|--|--|-------------------|--|----------|
|  |  |  | **(InThousands)** |
|  | Savingsaccounts      |  | **$ 54,395** |  | $ 55,616 |
|--|----------------------|--|-------------------|--|---------------|
|  | NOWaccounts          |  | **24,525**        |  | 24,550        |
|  | Money marketaccounts |  | **40,479**        |  | 46,599        |
|  | Timedeposits         |  | **88,473**        |  | 91,904        |
|  |  |  | **$207,872** |  | $218,669 |
|--|--|--|--------------|--|----------|

**Note 9 -Interest Bearing Deposits (Continued)**

Timedeposits at December 31, 2003 had the following scheduledmaturities (in thousands):
|  | 2004 |  | **$35,757** |
|--|------|--|-------------|
|  | 2005 |  | **14,527**  |
|  | 2006 |  | **6,710**   |
|  | 2007 |  | **17,747**  |
|  | 2008 |  | **13,732**  |
|  |  |  | **$88,473** |
|--|--|--|-------------|

**Note 10 -Short-Term Borrowings**

Short-termborrowings at December 31, 2003 and 2002 were asfollows:
|  |  |  | **December31,**   |   |
|--|--|--|-------------------|--------|
|  |  |  | **2003**          |        | **2002** |
|  |  |  | **(InThousands)** |
|  | Federalfunds purchased |  | **$ 2,450** |  | $     - |
|--|------------------------|--|------------------|--|-----------------------------|
|  | FHLBborrowings         |  | **15,000**       |  | -                           |
|  |                        |  |                  |  |                             |
|  |                        |  | **$17,450**      |  | $     - |

Theoutstanding balances and related information of short-termborrowings are summarized as follows:
|  |  |  | **YearsEnded December 31,** |   |
|--|--|--|-----------------------------|--------|
|  |  |  | **2003**                    |        | **2002** |
|  |  |  | **(Dollarsin Thousands)**   |
|  | Averagebalance during the year                   |  | **$ 3,977** |  | $ 1,495 |
|--|--------------------------------------------------|--|------------------|--|--------------|
|  | Averageinterest rate during the year             |  | **1.21%**        |  | 1.98%        |
|  | Maximummonth-end balance                         |  | **$19,750**      |  | $15,675      |
|  | Weightedaverage interest rate at end of the year |  | **1.23%**        |  | N/A          |

AtDecember 31, 2003, the Corporation had approved but unusedfunding availability from lines of credit of$30,000,000.

**Note 11 -Long-Term Borrowings**

Long-termborrowings consist of Federal Home Loan Bank (FHLB) advances whichare collateralized by certain mortgages and investmentsecurities.

Advancesfrom the FHLB at December 31, 2003 and 2002 consisted of thefollowing:
|                    |  | **2003**                  |  | **2002** |
|--------------------|--|---------------------------|--|----------|
| **StatedMaturity** |  | **Amount**                |  | **Rate** |  | **Amount** |  | **Rate** |
|                    |  | **(Dollarsin Thousands)** |
| November 25,2005    |  | **$ 5,000** |  | **4.82** | **%** | $ 5,000 |  | 4.82 | % |
|---------------------|--|------------------|--|----------|-------|--------------|--|------|---|
| March 1,2006        |  | **5,000**        |  | **4.85** |       | 5,000        |  | 4.85 |   |
| March 2,2009        |  | **5,000**        |  | **5.52** |       | 5,000        |  | 5.52 |   |
| April 30,2009 Fixed |  | **5,000**        |  | **5.36** |       | 5,000        |  | 5.36 |   |
| April 30,2010 Fixed |  | **5,000**        |  | **5.49** |       | 5,000        |  | 5.49 |   |
| March 1,2011        |  | **5,000**        |  | **4.28** |       | 5,000        |  | 4.28 |   |
| March 1,2011        |  | **5,000**        |  | **5.23** |       | 5,000        |  | 5.23 |   |
| March 21,2011       |  | **5,000**        |  | **5.37** |       | 5,000        |  | 5.37 |   |
| April 30,2011 Fixed |  | **5,000**        |  | **5.59** |       | 5,000        |  | 5.59 |   |
| April 30,2012 Fixed |  | **5,000**        |  | **5.68** |       | 5,000        |  | 5.68 |   |
| March 23,2016       |  | **5,000**        |  | **5.27** |       | 5,000        |  | 5.27 |   |
|                     |  |                  |  |          |       |              |  |      |   |
|                     |  | **$55,000**      |  | **5.22** | **%** | $55,000      |  | 5.22 | % |

Contractualmaturities of long-term debt at December 31, 2003 were asfollows (in thousands):
|  | 2004       |  | **$         -** |
|--|------------|--|--------------------------------------------------------------|
|  | 2005       |  | **5,000**                                                    |
|  | 2006       |  | **5,000**                                                    |
|  | 2007       |  | **-**                                                        |
|  | 2008       |  | **-**                                                        |
|  | Thereafter |  | **45,000**                                                   |
|  |  |  | **$55,000** |
|--|--|--|-------------|

Unlessnoted, outstanding advances are convertible rate notes which carryan option, at the interest rate change date, to repay the advancewithout incurring a prepayment penalty.

Advancesfrom the FHLB of Pittsburgh are secured by the Bank’s stockin the FHLB of Pittsburgh, qualifying residential mortgage loans,U.S. Government securities, U.S. agency securities andmortgage-backed securities.  The maximum remaining borrowingcapacity from the FHLB at December 31, 2003 is$105,000,000.

**Note 12 -Employee Benefit Plans**

TheCorporation sponsors an employee profit sharing plan available toall employees with at least one year of service.  TheCorporation contributes to the plan, as determined by the Board ofDirectors, in an amount not to exceed 15% of compensation ofeligible participants.  The Corporation also has asupplemental retirement plan for certain retired employees. The expense for the employee benefit plans was $628,000, $608,000and $595,000 for the years ended December 31, 2003, 2002 and2001, respectively.

**Note 13 -Comprehensive Income**

Accountingprinciples generally require that recognized revenue, expenses,gains and losses be included in net income.  Although certainchanges in assets and liabilities, such as unrealized gains andlosses on available for sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items,along with net income, are components of comprehensiveincome.

Thecomponents of other comprehensive income and related tax effectsfor the years ended December 31, 2003, 2002 and 2001 are asfollows:
|  |  |  | **2003**          |  | **2002** |  | **2001** |
|--|--|--|-------------------|--|----------|--|----------|
|  |  |  | **(InThousands)** |
|  | Gross changein unrealized gains (losses)

           on securities available for sale |  | **$(1,710)** |  | $4,124 |  | $1,621 |
|--|----------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|--|--------|--|--------|
|  | Lessreclassification adjustment for gains realized in income                                                                                 |  | **(9)**      |  | -      |  | (7)    |
|  |                                                                                                                                              |  |              |  |        |  |        |
|  | **NetUnrealized Gains (Losses)**                                                                                                             |  | **(1,719)**  |  | 4,124  |  | 1,614  |
|  |                                                                                                                                              |  |              |  |        |  |        |
|  | Taxeffect                                                                                                                                    |  | **(584)**    |  | 1,402  |  | 549    |
|  |                                                                                                                                              |  |              |  |        |  |        |
|  | **Net ofTax Amount**                                                                                                                         |  | **$(1,135)** |  | $2,722 |  | $1,065 |

**Note 14 -Lease Commitments**

The Bankrents offices under operating leases that expire from 2004 through2016.  Maturities of operating lease obligations atDecember 31, 2003 are as follows (in thousands):
|  | 2004       |  |  | **$119** |
|--|------------|--|--|----------|
|  | 2005       |  |  | **87**   |
|  | 2006       |  |  | **52**   |
|  | 2007       |  |  | **29**   |
|  | 2008       |  |  | **29**   |
|  | Thereafter |  |  | **228**  |

**Note 15 -Income Taxes**

Thecomponents of the net deferred tax liability at December 31,2003 and 2002 are as follows:
|  |  |  | **2003**          |  | **2002** |
|--|--|--|-------------------|--|----------|
|  |  |  | **(InThousands)** |
|  | Allowancefor loan losses                            |  | **$    558** |  | $     762 |
|--|-----------------------------------------------------|--|-----------------------------|--|-------------------------------|
|  | Accruedbenefits                                     |  | **97**                      |  | 111                           |
|  | Other                                               |  | **2**                       |  | 36                            |
|  | Alternativeminimum tax                              |  | **115**                     |  | -                             |
|  |                                                     |  |                             |  |                               |
|  | **TotalDeferred Tax Assets**                        |  | **772**                     |  | 909                           |
|  |                                                     |  |                             |  |                               |
|  | Deferredloan fees                                   |  | **47**                      |  | -                             |
|  | Securitiesaccretion                                 |  | **162**                     |  | 182                           |
|  | Unrealizednet gain on securities available for sale |  | **1,930**                   |  | 2,514                         |
|  | Depreciation                                        |  | **144**                     |  | 23                            |
|  |                                                     |  |                             |  |                               |
|  | **TotalDeferred Tax Liabilities**                   |  | **2,283**                   |  | 2,719                         |
|  |                                                     |  |                             |  |                               |
|  | **NetDeferred Tax Liability**                       |  | **$(1,511)**                |  | $(1,810)                      |

The incometax provision for the years ended December 31, 2003, 2002 and2001 is summarized as follows:
|  |  |  | **2003**          |  | **2002** |  | **2001** |
|--|--|--|-------------------|--|----------|--|----------|
|  |  |  | **(InThousands)** |
|  | Current  |  | **$552** |  | $1,791 |  | $1,626 |
|--|----------|--|----------|--|--------|--|--------|
|  | Deferred |  | **285**  |  | 82     |  | 73     |
|  |          |  |          |  |        |  |        |
|  |          |  | **$837** |  | $1,873 |  | $1,699 |

The taxprovision for financial reporting purposes differs from the amountcomputed by applying the statutory federal income tax rate of 34%to income before income taxes.  The differences for the yearsended December 31, 2003, 2002 and 2001 are asfollows:
|  |  |  | **2003**          |  | **2002** |  | **2001** |
|--|--|--|-------------------|--|----------|--|----------|
|  |  |  | **(InThousands)** |
|  | Tax atstatutory rates                                                                                      |  | **$1,623**     |  | $2,454 |  | $2,245 |
|--|------------------------------------------------------------------------------------------------------------|--|----------------|--|--------|--|--------|
|  | Increase(decrease) resulting from:                                                                         |  |                |  |        |  |        |
|  |            Tax-exempt income                        |  | **(663)**      |  | (562)  |  | (538)  |
|  |            Non-deductible interest expense          |  | **60**         |  | 46     |  | 58     |
|  |            Increase in investment in life insurance |  | **(170)**      |  | (147)  |  | (74)   |
|  |            Other                                    |  | **(13)**       |  | 82     |  | 8      |
|  |                                                                                                            |  |                |  |        |  |        |
|  |                                                                                                            |  | **$ 837** |  | $1,873 |  | $1,699 |

**Note 16 -Fair Value of Financial Instruments**

Below arevarious estimated fair values at December 31, 2003 and 2002,as required by Statement of Financial Accounting Standards No. 107(FAS 107).  Such information, which pertains to theCorporation’s financial instruments, is based on therequirements set forth in FAS 107 and does not purport to representthe aggregate net fair value of the Corporation.  It is theCorporation’s general practice and intent to hold itsfinancial instruments to maturity, except for certain securitiesdesignated as securities available for sale, and not to engage intrading activities.  Many of the financial instruments lack anavailable trading market, as characterized by a willing buyer andseller engaging in an exchange transaction.  Therefore, theCorporation had to use significant estimations and present valuecalculations to prepare this disclosure.

Changes inthe assumptions or methodologies used to estimate fair values maymaterially affect the estimated amounts.  Also, management isconcerned that there may not be reasonable comparability betweeninstitutions due to the wide range of permitted assumptions and themethodologies in absence of active markets.  This lack ofuniformity gives rise to a high degree of subjectivity inestimating financial instrument fair values.

Thefollowing methods and assumptions were used by the Corporation inestimating financial instrument fair values:

**Cash andShort Term Investments**

The carryingamounts for cash and short-term investments approximate theestimated fair values of such assets.

**Securities**

Fair valuesfor securities available for sale are based on quoted marketprices, if available.  If quoted market prices are notavailable, fair values are based on quoted market prices ofcomparable instruments.

**Restricted Investments in BankStock**

The carryingamounts of restricted investments in bank stock approximate theestimated fair value of such assets.

**LoansReceivable**

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

**Deposits**

For depositswhich are payable on demand at the reporting date, representing alldeposits other than time deposits, management estimated that thecarrying value of such deposits is a reasonable estimate of fairvalue.  Fair values of time deposits are estimated bydiscounting the future cash flows using interest rates currentlybeing offered and a schedule of aggregate expectedmaturities.

**Short-Term Borrowings**

The carryingamounts for short-term borrowings approximate the estimated fairvalue of such liabilities.

**Note 16 -Fair Value of Financial Instruments (Continued)**

**AccruedInterest Receivable and Payable**

The carryingamount of accrued interest receivable and payable is considered areasonable estimate of fair value.

**Long-TermBorrowings**

Fair valuesof fixed rate borrowings are estimated by discounting the futurecash flows using the Corporation’s estimated incrementalborrowing rate for similar types of borrowingarrangements.

**Off-Balance Sheet Instruments**

The fairvalue of commitments to extend credit and for outstanding lettersof credit is estimated using the fees currently charged to enterinto similar agreements, taking into account market interest rates,the remaining terms and present credit worthiness of thecounterparties.

The carryingamounts and fair values of the Corporation’s financialinstruments as of December 31 are presented in the followingtable:
|  | **December31, 2003** |  | **December31, 2002** |
|--|----------------------|--|----------------------|
|  | **CarryingAmount**   |  | **Fair Value**       |  | **CarryingAmount** |  | **Fair Value** |
|  | **(InThousands)**    |
| Financialassets:                                                                                       |                         |  |                  |  |               |  |               |
|--------------------------------------------------------------------------------------------------------|-------------------------|--|------------------|--|---------------|--|---------------|
|            Cash and short-term investments      | **$   9,641** |  | **$ 9,641** |  | $ 45,578 |  | $ 45,578 |
|            Securities available for sale        | **164,340**             |  | **164,340**      |  | 144,726       |  | 144,726       |
|            Restricted investments in bank stock | **4,345**               |  | **4,345**        |  | 3,618         |  | 3,618         |
|            Net loans receivable                 | **184,920**             |  | **186,761**      |  | 166,323       |  | 176,760       |
|            Accrued interest receivable          | **1,573**               |  | **1,573**        |  | 1,542         |  | 1,542         |
|                                                                                                        |                         |  |                  |  |               |  |               |
| Financialliabilities:                                                                                  |                         |  |                  |  |               |  |               |
|            Deposits                             | **259,216**             |  | **262,801**      |  | 270,025       |  | 275,138       |
|            Short-term borrowings                | **17,450**              |  | **17,450**       |  | -             |  | -             |
|            Accrued interest payable             | **870**                 |  | **870**          |  | 1,024         |  | 1,024         |
|            Long-term borrowings                 | **55,000**              |  | **57,996**       |  | 55,000        |  | 60,551        |
|                                                                                                        |                         |  |                  |  |               |  |               |
| Off-balancesheet financial instruments                                                                 | **-**                   |  | **-**            |  | -             |  | -             |

**Note 17 -R**elated Party Transactions

Some of theCorporation's or the Bank’s directors, principal officers,principal stockholders and their related interests had transactionswith the Bank in the ordinary course of business during 2003. All loans and loan commitments in such transactions were made onsubstantially the same terms, including collateral and interestrates, as those prevailing at the time for comparable transactionswith others.  In the opinion of management, these transactionswith others do not involve more than normal risk of collectibilityor present other unfavorable features.  It is anticipated thatfurther such extensions of credit will be made in the future. The aggregate amount of credit extended to these directors andprincipal officers was approximately $1,381,000 and $1,656,000 atDecember 31, 2003 and 2002, respectively.

Thefollowing is an analysis of loans to those parties whose loanbalances exceeded $60,000 during the year ended December 31,2003 (in thousands):
|  | Balances atJanuary 1                                                         |  |  |  | **$   929** |
|--|------------------------------------------------------------------------------|--|--|--|-----------------------|
|  |            Advances   |  |  |  | **572**               |
|  |            Repayments |  |  |  | **(189)**             |
|  |                                                                              |  |  |  |                       |
|  | Balances atDecember 31                                                       |  |  |  | **$1,312**            |

**Note 18 -Capital Requirements**

TheCorporation and the Bank are subject to various regulatory capitalrequirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effecton the consolidated financial statements.  Under capitaladequacy guidelines and the regulatory framework for promptcorrective action, the Corporation and the Bank must meet specificcapital guidelines that involve quantitative measures of theassets, liabilities and certain off-balance-sheet items ascalculated under regulatory accounting practices.  The capitalamounts and classification are also subject to qualitativejudgments by the regulators about components, risk-weighting andother factors.

Quantitativemeasures established by regulation to ensure capital adequacyrequire the maintenance of minimum amounts and ratios (set forth inthe tables below) of total and Tier 1 capital (as defined in theregulations) to risk-weighted assets (as defined) and of Tier 1Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that theCorporation and the Bank meet all capital adequacy requirements towhich they are subject.

**Note 18 -Capital Requirements (Continued)**

As ofDecember 31, 2003, the most recent notification from theregulatory agencies categorized the Bank as well capitalized underthe regulatory framework for prompt corrective action.  To becategorized as well capitalized, the Bank must maintain minimumtotal risk-based, Tier 1 risk-based and Tier 1 leverage ratios asset forth in the table below.  There are no conditions orevents since those notifications that management believes havechanged those categories.

Thefollowing table presents the risk-based and leverage capitalamounts and ratios at December 31, 2003 and 2002 for theCorporation and the Bank:
|  |  | **Actual**                |  | **For Capital Adequacy Purposes** |  | **To beWell Capitalized Under Prompt Corrective ActionProvisions** |  |
|--|--|---------------------------|--|-----------------------------------|--|--------------------------------------------------------------------|--|
|  |  | **Amount**                |  | **Ratio**                         |  | **Amount**                                                         |  | **Ratio** |  | **Amount** |  | **Ratio** |  |
|  |  | **(Dollarsin Thousands)** |  |
| **As of December 31,2003:**                                                                      |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|-------------------------------------------------------------------------------------------------------|--|-------------|--|----------|-------|------------------------|--|---------------|-------|-------------------|--|-------------------------|-------|
|       Total capital (torisk-weighted assets):                                |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|            Commercial National Financial Corp. |  | **$46,901** |  | **24.8** | **%** | **$**315,140      |  | **3**8.0 | **%** | **N/A**           |  |                         |       |
|            Commercial Bank                     |  | **44,748**  |  | **23.8** |       | **315,067**       |  | **3**8.0 |       | **$**318,834 |  | **3****10.0**      | **%** |
|       Tier 1 capital (torisk-weighted assets):                               |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|            Commercial National Financial Corp. |  | **44,513**  |  | **23.5** |       | **3  7,570** |  | **3**4.0 |       | **N/A**           |  |                         |       |
|            Commercial Bank                     |  | **42,392**  |  | **22.5** |       | **3  7,533** |  | **3**4.0 |       | **311,300**  |  | **3**** 6.0** |       |
|       Tier 1 capital (toaverage assets):                                     |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|            Commercial National Financial Corp. |  | **44,513**  |  | **12.0** |       | **314,872**       |  | **3**4.0 |       | **N/A**           |  |                         |       |
|            Commercial Bank                     |  | **42,392**  |  | **11.4** |       | **314,816**       |  | **3**4.0 |       | **318,520**  |  | **3**** 5.0** |       |
|                                                                                                       |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
| **As of December 31,2002:**                                                                      |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|       Total capital (torisk-weighted assets):                                |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|            Commercial National Financial Corp. |  | $46,868     |  | 25.2     | **%** | $314,875          |  | 38.0     | **%** | N/A               |  |
|            Commercial Bank                     |  | 46,693      |  | 25.2     |       | 314,865           |  | 38.0     |       | $318,582     |  | 310.0              | **%** |
|       Tier 1 capital (torisk-weighted assets):                               |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|            Commercial National Financial Corp. |  | 44,539      |  | 24.0     |       | 3 7,438      |  | 34.0     |       | N/A               |  |
|            Commercial Bank                     |  | 44,366      |  | 23.9     |       | 3 7,433      |  | 34.0     |       | 311,149      |  | 3  6.0        |       |
|       Tier 1 capital (toaverage assets):                                     |  |             |  |          |       |                        |  |               |       |                   |  |                         |       |
|            Commercial National Financial Corp. |  | 44,539      |  | 12.1     |       | 314,926           |  | 34.0     |       | **N/A**           |  |
|            Commercial Bank                     |  | 44,366      |  | 12.0     |       | 314,791           |  | 34.0     |       | 318,489      |  | 3  5.0        |       |

**Note 19 -Conde**nsed Financial Information of Commercial NationalFinancial Corporation (Parent Only)

**Statements of Financial Condition**
|  |  |  | **December31,**   |
|--|--|--|-------------------|
|  |  |  | **2003**          |  | **2002** |
|  |  |  | **(InThousands)** |
|  | **Assets**                                          |  |                                        |  |                                                    |
|--|-----------------------------------------------------|--|----------------------------------------|--|----------------------------------------------------|
|  | Cash andcash equivalents                            |  | **$      54** |  | $        5 |
|  | Securitiesavailable for sale                        |  | **845**                                |  | -                                                  |
|  | Investmentin bank subsidiary                        |  | **46,937**                             |  | 50,183                                             |
|  | Investmentin other subsidiaries                     |  | **2,129**                              |  | 1,031                                              |
|  |                                                     |  |                                        |  |                                                    |
|  | **TotalAssets**                                     |  | **$49,965**                            |  | $51,219                                            |
|  |                                                     |  |                                        |  |                                                    |
|  | **Liabilities and Shareholders’Equity**       |  |                                        |  |                                                    |
|  | Liabilities,accounts payable                        |  | **$      53** |  | $       14           |
|  | Shareholders’ equity                          |  | **49,912**                             |  | 51,205                                             |
|  |                                                     |  |                                        |  |                                                    |
|  | **TotalLiabilities and Shareholders’ Equity** |  | **$49,965**                            |  | $51,219                                            |

**Statements of Income**
|  |  |  | **YearsEnded December 31,** |
|--|--|--|-----------------------------|
|  |  |  | **2003**                    |  | **2002** |  | **2001** |
|  |  |  | **(InThousands)**           |
|  | Dividendsfrom bank subsidiary                               |  | **$6,025**  |  | $3,824 |  | $3,137 |
|--|-------------------------------------------------------------|--|-------------|--|--------|--|--------|
|  | Other                                                       |  | **14**      |  | -      |  | -      |
|  | Fees frombank subsidiary                                    |  | **278**     |  | 303    |  | 189    |
|  | Expenses                                                    |  | **(281)**   |  | (303)  |  | (189)  |
|  |                                                             |  |             |  |        |  |        |
|  |                                                             |  | **6,036**   |  | 3,824  |  | 3,137  |
|  | Incometaxes                                                 |  | **3**       |  | -      |  | -      |
|  |                                                             |  |             |  |        |  |        |
|  |                                                             |  | **6,033**   |  | 3,824  |  | 3,137  |
|  | Equity in(excess of) undistributed earnings of subsidiaries |  | **(2,097)** |  | 1,520  |  | 1,768  |
|  |                                                             |  |             |  |        |  |        |
|  | **NetIncome**                                               |  | **$3,936**  |  | $5,344 |  | $4,905 |

**Note 19 -Condensed Financial Information of Commercial National FinancialCorporation (Parent Only) (Continued)**

**Statements of Cash Flows**
|  |  |  | **YearsEnded December 31,** |
|--|--|--|-----------------------------|
|  |  |  | **2003**                    |  | **2002** |  | **2001** |
|  |  |  | **(InThousands)**           |
|  | **CashFlows from Operating Activities**                                                                                                                                                                                                                                                                                                                           |  |                                  |  |                                        |  |                                   |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|----------------------------------|--|----------------------------------------|--|-----------------------------------|
|  |            Net income                                                                                                                                                                                                                                                                                      |  | **$3,936**                       |  | $5,344                                 |  | $4,905                            |
|  |            Adjustments to reconcile net income to

                 net cash provided by operating

                 activities: |  |                                  |  |                                        |  |                                   |
|  |                  Net security gains                                                                                                                                                                                                                                          |  | **(9)**                          |  | -                                      |  | -                                 |
|  |                  Equity in undistributed earnings of

                       subsidiaries                                                                 |  | **2,097**                        |  | (1,520)                                |  | (1,768)                           |
|  |                  Issuance of treasury stock for

                       compensation                                                                      |  | **4**                            |  | 1                                      |  | -                                 |
|  |                  Decrease in other assets                                                                                                                                                                                                                                    |  | **-**                            |  | -                                      |  | 2                                 |
|  |                  Increase (decrease) in accounts payable                                                                                                                                                                                                                     |  | **23**                           |  | (1)                                    |  | -                                 |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **Net CashProvided by Operating Activities**                                                                                                                                                                                                                                                                                                                      |  | **6,051**                        |  | 3,824                                  |  | 3,139                             |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **CashFlows from Investing Activities**                                                                                                                                                                                                                                                                                                                           |  |                                  |  |                                        |  |                                   |
|  |            Purchase of investment securities                                                                                                                                                                                                                                                               |  | **(833)**                        |  | -                                      |  | -                                 |
|  |            Net cash used in acquisition                                                                                                                                                                                                                                                                    |  | **(100)**                        |  | (235)                                  |  | -                                 |
|  |            Proceeds from sale of securities                                                                                                                                                                                                                                                                |  | **43**                           |  | -                                      |  | -                                 |
|  |            Investment in subsidiaries                                                                                                                                                                                                                                                                      |  | **(1,014)**                      |  | -                                      |  | -                                 |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **Net CashUsed in Investing Activities**                                                                                                                                                                                                                                                                                                                          |  | **(1,904)**                      |  | (235)                                  |  | -                                 |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **CashFlows from Financing Activities**                                                                                                                                                                                                                                                                                                                           |  |                                  |  |                                        |  |                                   |
|  |            Dividends paid                                                                                                                                                                                                                                                                                  |  | **(3,441)**                      |  | (3,424)                                |  | (2,607)                           |
|  |            Purchase of treasury stock                                                                                                                                                                                                                                                                      |  | **(657)**                        |  | (165)                                  |  | (529)                             |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **Net CashUsed in Financing Activities**                                                                                                                                                                                                                                                                                                                          |  | **(4,098)**                      |  | (3,589)                                |  | (3,136)                           |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **NetIncrease in Cash**                                                                                                                                                                                                                                                                                                                                           |  | **49**                           |  | -                                      |  | 3                                 |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **Cash -Beginning**                                                                                                                                                                                                                                                                                                                                               |  | **5**                            |  | 5                                      |  | 2                                 |
|  |                                                                                                                                                                                                                                                                                                                                                                   |  |                                  |  |                                        |  |                                   |
|  | **Cash -Ending**                                                                                                                                                                                                                                                                                                                                                  |  | **$     54** |  | $      5 |  | $      5 |

******