Consolidated Statements of
Financial Condition  Assets December
31,20022001  Cash and due
from banks on demand$ 
10,294,276$   9,512,523Interest
bearing deposits with banks20,633,629599,745Federal fund
sold14,650,000-Securities
available for sale144,726,216117,038,065Restricted
investments in bank stock3,618,2002,358,000Loans169,030,225202,335,164Allowance
for loan losses(2,707,323)(2,814,454)Net
Loans166,322,902199,520,710Premises and
equipment4,523,9205,707,705Accrued
interest receivable1,541,9611,800,883Other
assets14,026,6516,490,927  Total
Assets$380,337,755$343,028,558  Liabilities and Shareholders’
Equity Liabilities Deposits:Non-interest
bearing$ 
51,355,652$ 
47,942,276Interest bearing218,669,557207,044,496Total
Deposits270,025,209254,986,772Short-term
borrowings-4,275,000Other
liabilities4,108,0442,796,489Long-term
borrowings55,000,00035,000,000  Total
Liabilities329,133,253297,058,261  Shareholders’ Equity Common
stock, par value $2 per share; authorized 10,000,000 shares; issued
3,600,000 shares; outstanding 3,453,952 and 3,426,096 shares in
2002 and 2001, respectively7,200,0007,200,000Retained
earnings41,627,97739,736,355Accumulated
other comprehensive income, net of deferred taxes 2002 $2,514,488;
2001 $1,112,3994,881,0642,159,362Treasury
stock, at cost, 146,048 and 173,904 shares in 2002 and 2001,
respectively(2,504,539)(3,125,420)  Total
Shareholders’ Equity51,204,50245,970,297  Total
Liabilities and Shareholders’ Equity$380,337,755$343,028,558


Consolidated Statements of Income  Years
Ended December 31,200220012000  Interest
Income Interest and
fees on loans$13,532,996$16,665,093$17,513,408Interest and
dividends on securities:Taxable8,130,1976,161,1856,916,752Exempt from
federal income taxes1,057,262924,2501,504,099Interest on
deposits with banks48,879363,41816,498Interest on
federal funds sold173,219285,044105,030  Total
Interest Income22,942,55324,398,99026,055,787  Interest
Expense Deposits4,997,7958,065,0559,336,596Short-term
borrowings29,65095,446528,580Long-term
borrowings2,547,0551,555,4491,839,724  Total
Interest Expense7,574,5009,715,95011,704,900  Net
Interest Income15,368,05314,683,04014,350,887  Provision
for Loan Losses298,030540,3501,176,000  Net
Interest Income after Provision for Loan Losses15,070,02314,142,69013,174,887  Other
Operating Income Service
charges on deposit accounts737,426778,618716,231Other
service charges and fees691,240750,248677,756Net security
gains (losses)-7,093(691,700)Trust
department income475,115456,905388,254Income from
investment in life insurance474,286176,750-Gain on sale
of credit card loans--822,875Gain on sale
of branch469,782--Other
income327,438385,223391,048  Total
Other Operating Income3,175,2872,554,8372,304,464  Other
Operating Expenses Salaries and
employee benefits5,660,2285,497,8705,108,578Net
occupancy624,345603,150588,858Furniture
and equipment725,045723,698890,429Pennsylvania
shares tax456,409416,598381,829Automated
teller machine321,459304,159218,784Other
expenses3,240,6382,547,8272,240,091  Total
Other Operating Expenses11,028,12410,093,3029,428,569  Income
before Income Taxes7,217,1866,604,2256,050,782  Income
Tax Expense1,872,9701,699,3021,419,270  Net
Income$ 
5,344,216$ 
4,904,923$ 
4,631,512  Earnings
per Share, Basic$          
1.56$          
1.43$         
1.32


Consolidated Statements of Shareholders’
Equity Years
Ended December 31, 2002, 2001 and 2000  Common
 StockRetained
EarningsAccumulated
 Other Comprehensive Income (Loss)Treasury
 StockTotal
 Stockholders’
 Equity  Balance -
December 31, 1999$7,200,000$35,190,986$(1,807,660)$(1,179,433)$39,403,893Comprehensive
income:Net income-4,631,512--4,631,512Change in unrealized net gains on securities available for sale
of$2,445,420, net of reclassification adjustment for lossesincluded in net income of $456,522--2,901,942-2,901,942Total Comprehensive Income7,533,454Cash dividends declared, $0.68 per share-(2,383,528)--(2,383,528)Purchases of treasury stock---(1,416,902)(1,416,902)Balance -
December 31, 20007,200,00037,438,9701,094,282(2,596,335)43,136,917Comprehensive
income:Net income-4,904,923--4,904,923Change in unrealized net gains on securities available for sale
of$1,069,761, net of reclassification adjustment for gainsincluded in net loss of $(4,681)--1,065,080-1,065,080Total Comprehensive Income5,970,003Cash dividends declared, $0.76 per share-(2,607,538)--(2,607,538)Purchases of treasury stock---(529,085)(529,085)Balance -
December 31, 20017,200,00039,736,3552,159,362(3,125,420)45,970,297Comprehensive
income:Net income-5,344,216--5,344,216Change in unrealized net gains on securities available for
sale--2,721,702-2,721,702Total Comprehensive Income8,065,918Cash dividends declared, $1.00 per share-(3,424,008)--(3,424,008)Issuance of treasury stock-(28,586)-785,818757,232Purchases of treasury stock---(164,937)(164,937)Balance -
December 31, 2002$7,200,000$41,627,977$4,881,064$(2,504,539)$51,204,502


Consolidated Statements of Cash Flows  Years
Ended December 31,200220012000  Cash
Flows from Operating Activities Net
income$5,344,216$4,904,923$4,631,512Adjustments
to reconcile net income to net cash provided byoperating activities:Depreciation and amortization636,402691,674793,492Provision for loan losses298,030540,3501,176,000Net (accretion) amortization of securities and loan fees(812,971)(567,498)(297,449)Net security (gains) losses-(7,093)691,700Issuance of treasury stock for compensation1,069--Gain on sale of credit card loans--(822,875)Gain on sale of branch(469,782)--(Gain) loss on sale of foreclosed real estate(29,185)10,704-Income from investments in life insurance(474,286)(176,750)-Deferred tax (benefit) expense82,14073,391(78,687)(Increase) decrease in assets:Accrued interest receivable258,922140,888116,154Income taxes receivable(104,597)93,272869,947Other assets284,140452,497(108,064)Increase (decrease) in liabilities:Interest payable(23,961)(425,298)(130,519)Income taxes payable(265,519)265,519-Other liabilities116,80688,427(274,339)  Net Cash
Provided by Operating Activities4,841,4246,085,0066,566,872  Cash
Flows from Investing Activities Net
(increase) decrease in deposits with other banks(20,033,884)(315,609)274,645(Increase)
decrease in federal funds sold(14,650,000)-5,750,000Purchases of
securities available for sale(75,003,218)(64,248,987)(58,047,132)Maturities,
calls and principal repayments of securities
 available for sale52,152,64419,568,84715,524,813Proceeds
from sales of securities available for sale-31,176,89866,509,684Net cash
used in acquisitions(1,140,769)--Net
(increase) decrease in restricted bank stock(1,260,200)1,004,700-Net
(increase) decrease in loans32,485,1765,076,603(8,946,824)Proceeds
from sale of credit card loans--6,323,491Net proceeds
from sale of branch469,782--Purchases of
premises and equipment(594,365)(372,242)(516,175)Proceeds
from sale of premises and equipment1,141,748--Proceeds
from sale of foreclosed real estate198,92366,000-Purchase of
bank owned life insurance(5,000,000)(5,000,000)-  Net Cash
Provided by (Used in) Investing Activities(31,234,163)(13,043,790)26,872,502  Consolidated Statements of Cash Flows
(Continued)  Years
Ended December 31,200220012000  Cash
Flows from Financing Activities Net increase
(decrease) in deposits$15,038,437$(11,624,598)$(6,336,033)Net decrease
in short-term borrowings(4,275,000)(3,300,000)(7,425,000)Proceeds
from issuance of long-term borrowings20,000,00025,000,000-Repayments
of long-term borrowings--(15,000,000)Dividends
paid(3,424,008)(2,607,538)(2,383,528)Purchase of
treasury stock(164,937)(529,085)(1,416,902)  Net Cash
Provided by (Used in) Financing Activities27,174,4926,938,779(32,561,463)  Increase
(Decrease) in Cash and Cash Equivalents781,753(20,005)877,911  Cash and
Cash Equivalents - Beginning9,512,5239,532,5288,654,617  Cash and
Cash Equivalents - Ending$10,294,276$  
9,512,523$ 
9,532,528  Supplementary Cash Flows Information Interest
paid$ 
7,598,461$10,141,248$11,835,419  Income taxes
paid$ 
2,160,743$ 
1,264,040$ 
1,442,900  Supplementary Disclosures of Noncash Investing
and
        Financing
Activities Loans
transferred to foreclosed real estate$     513,787$      76,704$               
-


Notes to
Consolidated Financial Statements  Note 1 -
Significant Accounting Policies General The
accompanying consolidated financial statements include the accounts
of Commercial National Financial Corporation (Corporation) and its
wholly-owned subsidiaries, Commercial National Bank of Pennsylvania
(Bank) and Commercial National Insurance Services, Inc. (CNIS)
formerly known as Commercial National Investment Corporation. 
All material intercompany transactions have been eliminated. The Bank
operates under a national bank charter and provides full banking
services.  The Corporation is subject to regulation by the
Federal Reserve Board and the Bank is subject to regulation by the
Office of the Comptroller of the Currency.  The Bank’s
primary business consists of taking deposits and granting loans to
customers who generally do business in the area of Westmoreland
County, Pennsylvania. CNIS holds
the investment in the wholly-owned Gooder Agency, Inc. (Gooder),
which is a full service provider of insurance products to
individuals and businesses.  The agency represents fifteen
national, regional and mutual insurance companies. The
following summary of accounting and reporting policies is presented
to aid the reader in obtaining a better understanding of the
consolidated financial statements and related financial data of the
Corporation and its wholly-owned subsidiaries contained in this
report.  Such policies conform to generally accepted
accounting principles (GAAP) and to general practice within the
banking industry.  In preparing consolidated financial
statements in conformity with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements,
and income and expenses during the reporting period.  Actual
results could differ from those estimates. Certain
items of the consolidated financial statements for the years ended
December 31, 2001 and 2000 have been reclassified to conform
with the December 31, 2002 presentation.  None of these
reclassifications affected net income. Securities Debt
securities that the Corporation has the positive intent and ability
to hold to maturity are classified as “securities held to
maturity” and are reported at amortized cost.  Debt and
equity securities not classified as held to maturity securities are
classified as “securities available for sale” and
reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of
shareholders’ equity.  Premiums and discounts are
recognized as interest income using the interest method over the
terms of the securities. Net gain or
loss on the sale of securities is determined using the specific
identification method. Federal law
requires the Bank, a member institution of the Federal Home Loan
Bank system, to hold stock of its district Federal Home Loan Bank
according to a predetermined formula.  This restricted stock
is carried at cost.


Note 1 -
Significant Accounting Policies (Continued) Loans Loans
receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are stated at
their outstanding unpaid principal balances. Interest income is
accrued on the unpaid principal balance.  Loan origination
fees, net of associated direct costs, are deferred and recognized
as an adjustment of the yield (interest income) of the related
loans. The Corporation is generally amortizing these amounts over
the contractual life of the loan. The accrual
of interest is generally discontinued when the contractual payment
of principal or interest has become 90 days past due or management
has serious doubts about further collectibility of principal or
interest, even though the loan is currently performing.  A
loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured.  When a
loan is placed on nonaccrual status, unpaid interest credited to
income in the current year is reversed and unpaid interest accrued
in prior years is charged against the allowance for loan
losses.  Interest received on nonaccrual loans generally is
either applied against principal or reported as interest income,
according to management’s judgment as to the collectibility
of principal.  Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance
with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and
interest is no longer in doubt. Foreclosed Real Estate Foreclosed
real estate is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure and loans
classified as in-substance foreclosure.  A loan is classified
as in-substance foreclosure when the Bank has taken possession of
the collateral regardless of whether formal foreclosure proceedings
take place. Foreclosed
assets initially are recorded at fair value, net of estimated
selling costs, at the date of foreclosure establishing a new cost
basis.  After foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of
cost or fair value minus estimated costs to sell.  Revenues
and expenses from operations and changes in the valuation allowance
are included in other expenses.  Foreclosed real estate at
December 31, 2002 and 2001 was $344,048 and $-0-,
respectively, and is included in other assets. Allowance
for Loan Losses The
allowance for loan losses is established through provisions for
loan losses charged against income.  Loans deemed to be
uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the
allowance.    Note 1 -
Significant Accounting Policies (Continued) Allowance
for Loan Losses (Continued) The
allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably
anticipated.  Management’s periodic evaluation of the
adequacy of the allowance is based on the Corporation’s past
loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower’s ability to
repay, the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and
other relevant factors.  This evaluation is inherently
subjective as it requires material estimates that may be
susceptible to significant change, including the amounts and timing
of future cash flows expected to be received on impaired
loans. A loan is
considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement.  Factors
considered by management in determining impairment include payment
status, collateral value and the probability of collecting
scheduled principal and interest payments when due.  Loans
that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired.  Management
determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all
of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the
borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. 
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future
cash flows discounted at the loan’s effective interest rate,
the loan’s obtainable market price or the fair value of the
collateral if the loan is collateral dependent. Large groups
of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment
disclosures. Goodwill
and Intangible Assets Goodwill
represents the excess of the purchase price over the fair market
value of net assets acquired.  The Corporation has recorded
goodwill of $410,000 as of December 31, 2002 related to the
acquisition of two insurance agencies in December 2002. 
Commencing January 1, 2002, the effect of applying Financial
Accounting Standards Board (FASB) No. 142, “Goodwill and
Other Intangible Assets,” is that goodwill is no longer
amortized, but would be reviewed annually for impairment.  Any
impairment of goodwill results in a charge to income.  The
goodwill is not deductible for tax purposes. The
Corporation has amortizable intangible assets related to covenants
not-to-compete and customer lists acquired in 2002 through the
acquisition of the insurance agencies.  These intangible
assets are being amortized on a straight-line basis over five and
fifteen years, respectively.  The Bank has total amortizable
intangible assets of $439,000.  No amortization expense was
recorded for the year ended December 31, 2002. 
Amortization expense is estimated to be $34,000 per year for the
next five years. Premises
and Equipment Premises and
equipment are carried at cost less accumulated depreciation and
amortization.  For financial statement reporting and income
tax purposes, depreciation is computed both on straight-line and
accelerated methods over the estimated useful life of the premises
and equipment. Charges for maintenance and repairs are expensed as
incurred. Amortization is charged over the term of the respective
lease or the estimated useful life of the asset, whichever is
shorter. Note 1 -
Significant Accounting Policies (Continued) Advertising Costs The
Corporation follows the policy of charging the costs of advertising
to expense as incurred.  Total advertising expense for the
years ended December 31, 2002, 2001 and 2000 was $233,000,
$149,000 and $72,000, respectively. Off-Balance Sheet Financial
Instruments In the
ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend
credit and letters of credit.  Such financial instruments are
recorded in the balance sheet when they are funded. Trust
Operations Trust income
is recorded on a cash basis, which approximates the accrual
basis.  Securities and other property held by the Corporation
in a fiduciary or agency capacity for customers of the Trust
Department are not assets of the Corporation and, accordingly, are
not included in the accompanying consolidated financial
statements. Income
Taxes Certain
income and expense items are accounted for in different years for
financial reporting purposes than for income tax purposes. 
Deferred taxes are provided to recognize these temporary
differences.  The principal items involved are investment
securities, employee benefit plans, provision for loan losses, net
deferred loan fees and costs and depreciation. The effect on
deferred taxes of a change in tax rates is recognized in earnings
in the period that includes the enactment date.  Income tax
expense is not proportionate to earnings before taxes, principally
because a portion of revenues from obligations of states and
political subdivisions are nontaxable. Earnings
per Share Earnings per
share have been calculated on the weighted average number of shares
outstanding of 3,425,858 in 2002, 3,432,389 in 2001 and 3,511,603
in 2000. The
Corporation currently maintains a simple capital structure, thus
there are no dilutive effects on earnings per share. Note 1 -
Significant Accounting Policies (Continued) Treasury
Stock The
acquisition of treasury stock is recorded under the cost
method.  At the date of subsequent reissue, the treasury stock
is reduced by the cost of such stock on the average cost basis,
with any excess proceeds being credited to additional paid-in
capital. Cash and
Cash Equivalents For purposes
of reporting cash flows, the Corporation has defined cash and cash
equivalents as those amounts included in the balance sheet caption,
"Cash and due from banks on demand". Recently
Issued Accounting Standards In July
2001, the Financial Accounting Standards Board issued Statement No.
143, “Accounting for Asset Retirement Obligations,”
which addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs.  This
Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. 
The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset.  This Statement
became effective for the Corporation on January 1, 2003, but
is not expected to have a significant impact on the financial
condition or results of operations. In July
2002, the Financial Accounting Standards Board issued Statement No.
146, “Accounting for Costs Associated with Exit or Disposal
Activities,” which nullifies EITF Issue 94-3,
“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring).”  This statement
delays recognition of these costs until liabilities are incurred,
rather than at the date of commitment to the plan, and requires
fair value measurement.  It does not impact the recognition of
liabilities incurred in connection with a business combination or
the disposal of long-lived assets.  The provisions of this
statement are effective for exit or disposal activities initiated
after December 31, 2002 and are not expected to have a
significant impact on the Corporation’s financial condition
or results of operations. In October
2002, the Financial Accounting Standards Board issued Statement No.
147, “Acquisitions of Certain Financial
Institutions.”  This statement provides guidance on
accounting for the acquisition of a financial institution,
including the acquisition of part of a financial institution. 
The statement defines criteria for determining whether the acquired
financial institution meets the conditions for a “business
combination”.  If the acquisition meets the conditions
of a “business combination”, the specialized accounting
guidance under Statement No. 72, “Accounting for Certain
Acquisitions of Banking or Thrift Institutions” will not
apply after September 30, 2002 and the amount of any
unidentifiable intangible asset will be reclassified to goodwill
upon adoption of Statement No. 147.  The transition provisions
were effective on October 1, 2002 and did not have a
significant impact on the Corporation’s financial condition
or results of operations.    Note 2
-  Acquisitions And Divestitures On
December 10, 2002, the Corporation completed its acquisition
of Gooder, an independent insurance agency and Gooder & Mary,
Inc. (G&M), a 50% partner in CNIS.  The Corporation issued
35,208 shares of its common stock with a value of $756,162 and paid
cash of $235,485 in exchange for all of the shares of common stock
of Gooder and G&M.  The acquisition has been accounted for
as a purchase and the results of operations of Gooder  and
G&M since the date of acquisition are included in the
consolidated financial statements.  The effect of these
acquisitions will enhance the Corporation’s ability to
provide customers of the Bank with a full array of financial
products and services. The total
purchase price of $991,647 has been allocated to the assets
acquired and liabilities assumed based upon fair value at the date
of acquisition, including identifiable intangible assets of
$406,000 and $33,000 representing the fair value of the acquired
customer lists and covenants not-to-compete, respectively. 
The value of the 35,208 common shares issued was determined based
on the average market price of the Corporation’s common
shares over the ten trading days ending on the date prior to the
acquisition date. The excess of the purchase price
over the fair value of the identifiable net assets acquired was
$410,000 and has been recorded as goodwill.  The allocation of
the purchase price is preliminary at this time.  The
Corporation expects to finalize the valuation in 2003.  The
impact of the acquisition of Gooder and G&M on the ongoing
operations of the Corporation in 2002 was not material. On
June 29, 2002, the Corporation’s principal subsidiary,
the Bank, pursuant to a Purchase and Assumption Agreement with
Great American Federal (GAF), acquired the deposit liabilities,
equipment and loans outstanding of GAF’s branch office in
Norwin, Pennsylvania (the Norwin Branch).  The transaction was
accounted for as a purchase.  In the transaction, the Bank
assumed deposit liabilities of $11,513,514, acquired loans of
$8,046,215 and equipment of $9,373. The premium
paid to acquire the Norwin Branch amounted to $905,284 and was
allocated to a core deposit intangible. On
September 27, 2002, the Bank, pursuant to a Purchase and
Assumption Agreement with Standard Bank, PaSB, sold the bank
premises, deposit liabilities, equipment and loans outstanding of
the Bank’s branch office and Redstone office in Murrysville,
Pennsylvania (the Murrysville Branch).  In the transaction,
the Bank sold deposit liabilities of $7,709,334, loans of
$5,820,661 and equipment of $9,500.  Note 3 -
Cash and Due from Banks on Demand Regulations
of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with
transaction accounts (checking accounts, NOW accounts, etc.) and
non-personal time deposits (deposits with original maturities of 14
days or more).  Reserves are maintained in the form of vault
cash or a non-interest bearing balance held with the Federal
Reserve Bank.  The Bank also maintains deposits with the
Federal Reserve Bank and other banks for various services such as
check clearing.  The average required reserve at
December 31, 2002 and 2001 was approximately $4,050,000 and
$3,571,000, respectively.   Note 4 -
Securities The
amortized cost and fair values of securities are as follows: Amortized
 CostGross
 Unrealized
 GainsGross
 Unrealized
 LossesFair
 Value  Available
for Sale SecuritiesDecember 31,
2002:Obligations of U.S. Governmentagencies$ 
10,755,815$    85,412$      
-$ 
10,841,227Obligations of states and politicalsubdivisions26,173,3901,127,8269,01727,292,199Mortgage-backed securities100,310,2496,191,331-106,501,580Other91,210--91,210  $137,330,664$7,404,569$9,017$144,726,216  December 31,
2001:Obligations of U.S. Governmentagencies$ 
13,030,946$   339,974$       -$ 
13,370,920Obligations of states and politicalsubdivisions20,437,479387,6625,41320,819,728Mortgage-backed securities80,273,8682,549,538-82,823,406Equity securities24,011--24,011  $113,766,304$3,277,174$5,413$117,038,065  The
amortized cost and fair values of securities at December 31,
2002 by contractual maturity, are shown below. 
Mortgage-backed securities maturities are based upon their
estimated contractual maturities.  Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties. 3970:
Amortized
 CostFair
 Value  Due within
one year$      
999,302$    1,002,810Due after
one year through five years15,676,96415,799,359Due after
five years through ten years3,506,3103,747,571Due after
ten years117,056,878124,085,266Other91,21091,210  $137,330,664$144,726,216   Note 4 -
Securities (Continued) Securities
with amortized cost and fair values of $19,809,092 and $20,879,109,
respectively, at December 31, 2002 and $18,276,782 and
$19,015,564, respectively, at December 31, 2001 were pledged
to secure public deposits and for other purposes required or
permitted by law. Gross gains
of $-0-, $77,835 and $400,475 and gross losses of $-0-, $70,742 and
$1,092,175 were realized on those sales and calls of securities
during 2002, 2001 and 2000, respectively.  Note 5 -
Loans Loans are
summarized as follows: December
31,20022001  Commercial
loans$ 
12,725,196$ 
17,251,180Real estate
loans:Commercial54,618,27171,699,119Construction976,0131,629,135Other86,047,62995,795,479Installment
loans1,921,9322,486,375Municipal
loans10,078,48910,989,898Other
loans2,634,6962,555,164Net
unamortized (fees) costs27,999(71,186)  $169,030,225$202,335,164  The
Corporation’s loan portfolio is collateralized with assets
located within Western Pennsylvania.  Although the Corporation
has a diversified portfolio, exposure to credit loss can be
adversely impacted by downturns in local economic and employment
conditions. During 2000,
the Corporation sold its credit card loan portfolio which had a
principal balance of $6.3 million.  The gain recognized on
this sale was $822,875 which is included in other income.  Note 6 -
Allowance for Loan Losses Transactions
in the allowance for loan losses are summarized as follows: Years
Ended December 31,200220012000  Balance,
January 1$2,814,454$2,736,712$1,919,453Loans charged
off(449,241)(499,707)(395,276)Recoveries on
previously charged offloans44,08037,09936,535Provision for loan
losses298,030540,3501,176,000  Balance at
December 31$2,707,323$2,814,454$2,736,712  Note 6 -
Allowance for Loan Losses (Continued) At
December 31, 2002 and 2001, the recorded investment in loans
considered to be impaired was $9,012,615 and $12,601,053,
respectively.  The average recorded investment in impaired
loans during 2002, 2001 and 2000 was $12,323,317, $12,730,673 and
$14,569,050, respectively.  Impaired loans with balances of
$3,084,737 and $7,516,022 at December 31, 2002 and 2001 had
related allowance for loan losses of $1,536,467 and $1,947,719,
respectively.  Interest income on impaired loans of $749,113,
$1,080,215 and $1,302,588 was recognized in 2002, 2001 and 2000,
respectively.  The amount of interest income recognized using
a cash basis method approximated the interest income
recognized. Loans on
which the accrual of interest has been discontinued amounted to
$2,679,000 and $2,492,000 at December 31, 2002 and 2001,
respectively.  Loan balances past due 90 days or more and
still accruing interest, but which management expects will
eventually be paid in full, amounted to $2,966 and $745,000 at
December 31, 2002 and 2001, respectively.  Note 7 -
Financial Instruments with Off-Balance Sheet Risk The
Corporation is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers.  These financial instruments
include commitments to extend credit, standby letters of credit,
financial standby letters of credit and commercial letters of
credit.  Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet.  The contract or notional
amount of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial
instruments.  The Corporation does not issue any other
instruments with significant off-balance-sheet risk. The
Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit, financial
standby letters of credit and commercial letters of credit written
is represented by the contract or notional amount of those
instruments.  The Corporation uses the same credit policies in
making such commitments and conditional obligations as it does for
on-balance-sheet instruments. The following table identifies the
contract or notional amount of those instruments: Years
Ended December 31,20022001  Financial
instruments whose contractamounts represent
credit risk:Commitments to
extend credit$45,229,007$30,962,966Standby letters of
credit533,422595,995Financial standby
letters of credit3,700,2153,041,452  Commitments
to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the
contract.  Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a
fee.  Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  The
Corporation evaluates each customer's credit worthiness on a
case-by-case basis.  The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counter party. 
Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing
commercial properties.  Note 7 -
Financial Instruments with Off-Balance Sheet Risk
(Continued) Standby
letters of credit, financial standby letters of credit and
commercial letters of credit written are conditional commitments
issued by the Corporation to guarantee the performance of a
customer to a third party.  Those guarantees are primarily
issued to support public and private borrowing arrangements. 
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities
to customers.  Note 8 -
Concentrations of Credit Risk The Bank
grants commercial, residential and consumer loans to customers
primarily located in Westmoreland County in Pennsylvania.  The
concentrations of credit by type of loan are set forth in Note
5.  Although the Bank has a diversified loan portfolio, the
debtors’ ability to honor these contracts is influenced by
the region’s economy.  Note 9 -
Premises and Equipment The
composition of premises and equipment at December 31, 2002 and
2001 is as follows: 20022001  Premises$5,508,714$6,299,739Leasehold
improvements243,116228,317Furniture
and equipment5,279,4655,123,80311,031,29511,651,859Accumulated
depreciation and amortization(6,944,348)(6,770,385)4,086,9474,881,474Land436,973826,231  $4,523,920$5,707,705  Depreciation
and amortization expense was $636,402, $691,674 and $793,492 at
December 31, 2002, 2001 and 2000, respectively.  Note 10 -
Interest Bearing Deposits Interest
bearing deposits include certificates of deposit issued in
denominations of $100,000 or more which amounted to $21,812,218 and
$18,547,217 at December 31, 2002 and 2001, respectively. 
Interest expense related to certificates of $100,000 or greater was
$741,379, $1,682,552 and $3,236,224 for the years ended
December 31, 2002, 2001 and 2000, respectively. Interest
bearing deposits at December 31, 2002 and 2001 are detailed as
follows: 20022001  Savings
accounts$ 
55,616,265$ 
50,287,302NOW
accounts17,133,87114,653,449Money Market
NOW accounts7,415,6827,258,555FIMM
accounts46,599,50743,469,909Time
deposits91,904,23291,375,281  $218,669,557$207,044,496  Included in
time deposits at December 31, 2002 were certificates of
deposit with the following scheduled maturities: 2003$52,641,33420048,825,01020059,137,48920063,557,099200717,743,300  $91,904,232  Deposit
overdrafts reclassified to loans receivable amounted to $35,255 and
$25,904 at December 31, 2002 and 2001, respectively.  Note 11 -
Short-Term Borrowings Short-term
borrowings at December 31, 2002 and 2001 were as
follows: Ending
BalanceAverage
BalanceAverage
Rate  December
31, 2002:Federal funds
purchased$                
-$   536,5071.96%Borrowings from
Federal Home LoanBank-958,9041.99$                
-$1,495,4111.98%December
31, 2001:Federal funds
purchased$ 
4,275,000$1,150,4113.22%Borrowings from
Federal Home LoanBank-1,767,1235.38$ 
4,275,000$2,917,5343.27%Maximum total at
any month-end$16,500,000  At
December 31, 2002, the Corporation had approved but unused
funding availability from lines of credit of $30,000,000. Interest
expense on short-term borrowings for the years ended
December 31, 2002, 2001 and 2000 is detailed as
follows: 200220012000  Federal
funds purchased$10,556$37,003$120,149Borrowings
from Federal Home Loan Bank19,09458,443408,431Total
interest on short-term borrowings$29,650$95,446$528,580   Note 12 -
Long-Term Borrowings Long-term
borrowings consist of Federal Home Loan Bank (FHLB) advances which
are collateralized by certain mortgages and investment
securities. Advances
from the FHLB at December 31, 2002 and 2001 consisted of the
following: 20022001Stated
MaturityAmountWeighted
 Average
 RateAmountWeighted
 Average
 Rate  November 25,
2005$ 
5,000,0004.82%$ 
5,000,0004.82%March 1,
20065,000,0004.855,000,0004.85March 2,
20095,000,0005.525,000,0005.52April 30,
2009 Fixed5,000,0005.36--April 30,
2010 Fixed5,000,0005.49--March 1,
20115,000,0004.285,000,0004.28March 1,
20115,000,0005.235,000,0005.23March 21,
20115,000,0005.375,000,0005.37April 30,
2011 Fixed5,000,0005.59--April 30,
2012 Fixed5,000,0005.68--March 23,
20165,000,0005.275,000,0005.27$55,000,0005.22%$35,000,0005.05%  Unless
noted, outstanding advances are convertible rate notes which carry
an option, at the interest rate change date, to repay the advance
without incurring a prepayment penalty. Advances
from the FHLB of Pittsburgh are secured by the bank’s stock
in the FHLB of Pittsburgh, qualifying residential mortgage loans,
U.S. Government securities, U.S. agency securities and
mortgage-backed securities issued or guaranteed by GNMA, FHLMC and
FNMA to the extent that the defined statutory value must be at
least equal to the advances outstanding.  The maximum
remaining borrowing capacity at December 31, 2002 is
$152,000,000.  Note 13 -
Employee Benefit Plans The
Corporation sponsors an employee profit sharing plan available to
all employees with at least one year of service.  The
Corporation contributes to the plan, as determined by the Board of
Directors, in an amount not to exceed 15% of compensation of
eligible participants.  The Corporation also has a
supplemental retirement plan for certain retired employees. 
The expense for the employee benefit plans was $607,684, $595,480
and $605,651 for the years ended December 31, 2002, 2001 and
2000, respectively.  Note 14 -
Comprehensive Income Accounting
principles generally require that recognized revenue, expenses,
gains and losses be included in net income.  Although certain
changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities, are reported as a separate
component of the equity section of the balance sheet, such items,
along with net income, are components of comprehensive
income. The
components of other comprehensive income and related tax effects
for the years ended December 31, 2002, 2001 and 2000 are as
follows: 200220012000  Gross change
in unrealized gainson securities
available for sale$4,123,791$1,620,851$3,705,181Less
reclassification adjustment for (gains) losses realized in
income-(7,093)691,700Net
unrealized gains4,123,7911,613,7584,396,881Tax
effect1,402,089548,6781,494,939Net of
tax amount$2,721,702$1,065,080$2,901,942  Note 15 -
Commitments The Bank
rents offices under operating leases that expire from 2003 through
2016. In 2002, the Corporation entered into a capital lease
agreement for equipment with a term of four years. The equipment is
included in premises and equipment. Amortization
expense for the year ended December 31, 2002 amounted to
$33,947.  The capital lease obligation is included in other
liabilities.  Net book values and scheduled maturities of
capital and operating lease obligations at December 31, 2002
are as follows: Cost$171,520Accumulated
amortization(33,947)  $137,573   Note 15 -
Commitments (Continued) Capital
Lease ObligationOperating
 Leases  2003$ 
48,552$119,496200448,55294,056200548,55286,51620068,02375,9602007-28,5002008 and
thereafter-256,500  153,679661,028Amount
representing interest(15,275)-  $138,404$661,028  Note 16 -
Income Taxes The
components of the net deferred tax liability at December 31,
2002 and 2001 are as follows: 20022001  Allowance
for loan losses$   761,684$798,109Accrued
benefits111,445120,917Deferred
loan fees33,72324,204Other1,683-Total
deferred tax assets908,535943,230Securities
accretion181,519156,836Unrealized
net gain on securities available for sale2,514,4881,112,399Depreciation22,762-Total
deferred tax liabilities2,718,7691,269,235Net
deferred tax liability$(1,810,234)$(326,005)   Note 16 -
Income Taxes (Continued) The income
tax provision for the years ended December 31, 2002, 2001 and
2000 is summarized as follows: 200220012000  Current$1,790,830$1,625,911$1,497,957Deferred82,14073,391(78,687)$1,872,970$1,699,302$1,419,270  The tax
provision for financial reporting purposes differs from the amount
computed by applying the statutory federal income tax rate of 34%
to income before income taxes.  The differences for the years
ended December 31, 2002, 2001, and 2000 are as follows: 200220012000  Tax at
statutory rates:$2,453,843$2,245,437$2,057,262Increase
(decrease) resulting from:Tax-exempt
interest and dividendincome(561,625)(538,145)(709,589)Non-deductible
interest expense45,98658,10192,376Income on life
insurance(174,927)(74,066)(26,964)Other109,6937,9756,185$1,872,970$1,699,302$1,419,270  Note 17 -
Fair Value of Financial Instruments Below are
various estimated fair values at December 31, 2002 and 2001,
as required by Statement of Financial Accounting Standards No. 107
(FAS 107).  Such information, which pertains to the
Corporation’s financial instruments, is based on the
requirements set forth in FAS 107 and does not purport to represent
the aggregate net fair value of the Corporation.  It is the
Corporation’s general practice and intent to hold its
financial instruments to maturity, except for certain securities
designated as securities available for sale, and not to engage in
trading activities.  Many of the financial instruments lack an
available trading market, as characterized by a willing buyer and
seller engaging in an exchange transaction.  Therefore, the
Corporation had to use significant estimations and present value
calculations to prepare this disclosure. Changes in
the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts.  Also, management is
concerned that there may not be reasonable comparability between
institutions due to the wide range of permitted assumptions and the
methodologies in absence of active markets.  This lack of
uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.  Note 17 -
Fair Value of FinancialInstruments (Continued) The
following methods and assumptions were used by the Corporation in
estimating financial instrument fair values: Cash and
Short Term Investments The carrying
amounts for cash and short-term investments approximate the
estimated fair values of such assets. Securities Fair values
for securities available for sale are based on quoted market
prices, if available.  If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments. Restricted Investments in Bank Stock The carrying
amounts of restricted investments in bank stock approximate the
estimated fair value of such assets. Loans
Receivable Fair values
of variable rate loans subject to frequent repricing and which
entail no significant credit risk are based on the carrying
values.  The estimated fair values of other loans are
estimated by discounting the future cash flows using interest rates
currently offered for loans with similar terms to borrowers of
similar credit quality. Deposit
Liabilities For deposits
which are payable on demand at the reporting date, representing all
deposits other than time deposits, management estimated that the
carrying value of such deposits is a reasonable estimate of fair
value.  The  carrying amounts of certificates of deposit
approximate their fair values at the report date.  Fair values
of fixed rate time deposits are estimated by discounting the future
cash flows using interest rates currently being offered and a
schedule of aggregate expected maturities. Short-Term Borrowings The carrying
amounts for short-term borrowings approximate the estimated fair
value of such liabilities. Accrued
Interest Receivable and Payable The carrying
amount of accrued interest receivable and payable is considered a
reasonable estimate of fair value. Long-Term
Borrowings Fair values
of fixed rate borrowings are estimated by discounting the future
cash flows using the Corporation’s estimated incremental
borrowing rate for similar types of borrowing arrangements.  Note 17 - Fair Value of Financial
Instruments (Continued) Off-Balance Sheet Instruments The fair
value of commitments to extend credit and for outstanding letters
of credit is estimated using the fees currently charged to enter
into similar agreements, taking into account market interest rates,
the remaining terms and present credit worthiness of the
counterparties. 6989:
December
31, 2002December
31, 2001Carrying
AmountFair
 ValueCarrying
AmountFair
 Value  Financial
assets:Cash and
short-term investments$ 
45,577,905$45,577,905$ 
10,112,268$ 
10,112,268Securities
available for sale144,726,216144,726,216117,038,065117,038,065Restricted
investments in bank stock3,618,2003,618,2002,358,0002,358,000Loans, net of
allowance166,322,902176,759,672199,520,710208,348,928Accrued interest
receivable1,541,9611,541,9611,800,8831,800,883Financial
liabilities:Deposits270,025,209275,138,263254,986,772257,131,826Short-term
borrowings--4,275,0004,275,000Accrued interest
payable1,024,2631,024,2631,048,2241,048,224Long-term
borrowings55,000,00060,551,00035,000,00035,650,000Off-balance
sheet financial instruments:Commitments to
extend credit----Standby letters of
credit----Financial standby
letters of credit----  Note 18 -
Related Party Transactions Some of the
Corporation's or the Bank’s directors, principal officers,
principal stockholders and their related interests had transactions
with the Bank in the ordinary course of business during 2002. 
All loans and loan commitments in such transactions were made on
substantially the same terms, including collateral and interest
rates, as those prevailing at the time for comparable transactions
with others.  In the opinion of management, these transactions
with others do not involve more than normal risk of collectibility
or present other unfavorable features.  It is anticipated that
further such extensions of credit will be made in the future. 
The aggregate amount of credit extended to these directors and
principal officers was approximately $1,656,401 and $2,162,856 at
December 31, 2002 and 2001, respectively.  Note 18 -
Related Party Transactions (Continued) The
following is an analysis of loans to those parties whose loan
balances exceeded $60,000 for the year ended December 31,
2002: Balances at
January 1$1,562,594Advances589,782Repayments(1,223,093)Balances at
December 31$ 
929,283  During 2002,
the Corporation had loan advances to certain directors which, when
aggregated with loans existing prior to January 1, 2002,
caused their aggregate loan balances to exceed $60,000. 
Therefore, the balance at January 1, 2002 was adjusted to
reflect these directors’ loan additions.  Note 19 -
Capital Requirements and Dividend Restrictions The
Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. 
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect
on the consolidated financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the
assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices.  The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weighting and
other factors. Quantitative
measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in
the tables below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1
Capital (as defined) to average assets (as defined). 
Management believes, as of December 31, 2002, that the
Corporation and the Bank meet all capital adequacy requirements to
which they are subject.   Note 19 -
Capital Requirements and Dividend Restrictions
(Continued) As of
December 31, 2002, the most recent notification from the
regulatory agencies categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action.  To be
categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as
set forth in the table.  There are no conditions or events
since those notifications that management believes have changed
those categories. ActualFor Capital Adequacy PurposesTo be
Well Capitalized Under Prompt Corrective Action
ProvisionsAmountRatioAmountRatioAmountRatio  As of
December 31, 2002:Total capital (to
risk-weighted assets):Commercial National Financial Corp.$46,867,74425.2%$314,875,21638.0%N/ACommercial National Bank46,693,26325.2314,865,21838.0$318,581,522310.0%Tier 1 capital (to
risk-weighted assets):Commercial National Financial Corp.44,538,76224.03  7,437,60834.0N/ACommercial National Bank44,365,82423.93  7,432,60934.0311,148,91336.0Tier 1 capital (to
average assets):Commercial National Financial Corp.44,538,76212.1314,925,97634.0N/ACommercial National Bank44,365,82412.0314,791,36034.0318,489,20035.0As of
December 31, 2001:Total capital (to
risk-weighted assets):Commercial National Financial Corp.$46,264,43123.6%$315,673,50338.0%N/ACommercial National Bank46,248,98423.6315,671,36838.0$319,589,210310.0%Tier 1 capital (to
risk-weighted assets):Commercial National Financial Corp.43,810,93422.43 
7,836,75234.0N/ACommercial National Bank43,795,81722.43 
7,835,68434.0311,753,54636.0Tier 1 capital (to
average assets):Commercial National Financial Corp.43,810,93412.7313,801,35034.0N/ACommercial National Bank43,795,81712.7313,800,01934.0317,250,02335.0  The amount
of funds available to a parent from its subsidiary bank is limited
for all national banks by restrictions imposed by the Comptroller
of the Currency.  Dividends from the Bank were restricted not
to exceed $3,288,568 at December 31, 2002.  These
restrictions have not had, and are not expected to have, a
significant impact on the Corporation's ability to meet its cash
obligations.  Note 20 -
Condensed Financial Information of Commercial National Financial
Corporation (Parent Only) Statements of Financial Condition December
31,20022001  AssetsCash$        
5,187$        
5,179Investment
in subsidiary, Commercial National Bank of Pennsylvania50,183,02145,955,589Investment
in subsidiary, Commercial National Investment Corporation1,030,37224,010Other
assets200200Total
assets$51,218,780$45,984,978Liabilities and Shareholders’
EquityLiabilities,
accounts payable$      14,278$      14,681Shareholders’ equity51,204,50245,970,297Total
liabilities and shareholders’ equity$51,218,780$45,984,978  Statements of Income Years
Ended December 31,200220012000  Dividends
from subsidiary, Commercial National Bank of Pennsylvania$3,824,431$3,136,623$3,800,430Fees from
subsidiary, Commercial National Bank of Pennsylvania302,600189,000161,500Expenses(303,659)(188,824)(123,094)3,823,3723,136,7993,838,836Applicable
tax benefit (expense)400-(13,059)3,823,7723,136,7993,825,777Equity in
excess undistributed earnings of subsidiaries1,520,4441,768,124805,735Net
income$5,344,216$4,904,923$4,631,512    Note 20 -
Condensed Financial Information of Commercial National Financial
Corporation (Parent Only) Statements of Cash Flows Years
Ended December 31,200220012000  Cash
flows from operating activitiesNet income$5,344,216$4,904,923$4,631,512Adjustments to
reconcile net income tonet cash provided by operatingactivities:Equity in undistributed earnings ofsubsidiaries(1,520,444)(1,768,124)(805,735)Issuance of treasury stock forcompensation1,069--Increase (decrease) in other assets-2,892(3,092)Increase (decrease) in accounts payable(403)201(24,965)Net cash
provided by operating activities3,824,4383,139,8923,797,720Cash
flows used in investing activitiesNet cash used in
acquisition(235,485)--Cash
flows from financing activitiesDividends
paid(3,424,008)(2,607,538)(2,383,528)Purchase of
treasury stock(164,937)(529,085)(1,416,902)Net cash
used in financing activities(3,588,945)(3,136,623)(3,800,430)Increase
(decrease) in cash83,269(2,710)Cash -
Beginning5,1791,9104,620Cash -
Ending$      
5,187$      
5,179$      
1,910


Independent
Auditor’s Report To the Board
of Directors and Shareholders
Commercial National Financial Corporation and Subsidiaries
 Latrobe, Pennsylvania We have
audited the accompanying consolidated statements of financial
condition of Commercial National Financial Corporation and its
wholly-owned subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income, changes in
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2002.  These
consolidated financial statements are the responsibility of the
Corporation's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We conducted
our audits in accordance with auditing standards generally accepted
in the United States of America.  Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Commercial National Financial Corporation and
its wholly-owned subsidiaries as of December 31, 2002 and
2001, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.   /s/ Beard
Miller Company LLP Pittsburgh,
Pennsylvania
January 17, 2003 Quarterly Summary of Financial Data
(Unaudited)  The unaudited
quarterly results of operations for the years ended December 31,
2002 and
December 31, 2001 are as follows:  2002FirstSecondThirdFourthQuarterQuarterQuarterQuarterInterest
income$
5,781,588$
5,700,828$
5,873,569$
5,586,568Interest
expense1,801,8311,932,9921,992,3981,847,279Net
interest income3,979,7573,767,8363,881,1713,739,289Provision for
loan losses39,214162,81696,000-Net
interest income afterprovision
for loan losses3,940,5433,605,0203,785,1713,739,289Other income
(including securitytransactions)687,462672,0941,227,329588,402Other
expenses2,697,4252,629,9232,804,6782,896,098Income before
taxes1,930,5801,647,1912,207,8221,431,593Applicable
income taxes535,700449,300477,700410,270Net
income$
1,394,880$
1,197,891$
1,730,122$
1,021,323Earnings per
share, basic$
      .41$  
   .35$ 
    .50$
     .30  2001FirstSecondThirdFourthQuarterQuarterQuarterQuarterInterest
income$
6,162,552$
6,193,997$
5,955,756$
6,086,685Interest
expense2,508,6472,600,9452,394,7622,211,596Net
interest income3,653,9053,593,0523,560,9943,875,089Provision for
loan losses--429,350111,000Net
interest income afterprovision
for loan losses3,653,9053,593,0523,131,6443,764,089Other income
(including securitytransactions)584,603665,641696,159608,434Other
expenses2,525,0412,545,7732,624,7172,397,771Income before
taxes1,713,4671,712,9201,203,0861,974,752Applicable
income taxes477,600485,500256,300479,902Net
income$
1,235,867$
1,227,420$ 
946,786$
1,494,850Earnings per
share, basic$
      .36$  
   .36$ 
    .28$
     .43                  Common Stock
Information  The following
table sets forth the high and low sales prices for the common
stock, as reported by The Nasdaq Stock Market, Inc., and the cash
dividends declared per share on the common stock for the periods
indicated.   Cash
Dividend2002HighLowPer ShareFirst
Quarter$18.75$16.65$.25Second
Quarter22.0018.05.25Third
Quarter23.3720.35.25Fourth
Quarter24.1021.00.252001First
Quarter$16.38$13.50$.19Second
Quarter20.0014.61.19Third
Quarter19.1016.50.19Fourth
Quarter18.7517.70.19    Commercial
National Financial Corporation common stock is traded on The Nasdaq
National Market System under the trading symbol “CNAF”
with an additional descriptive listing of
“CmclNat.” Selected
Financial Data  The following
financial information is not covered by the auditor's report and
must be read in
conjunction with the consolidated financial statements and related
notes along with
management's discussion and analysis of financial condition and
results of operations. Years Ended December 31,20022001200019991998Interest
incomeInterest
&  fees on loans$13,532,996$16,665,093$17,513,408$16,693,455$ 16,755,493Interest &
dividends onSecurities9,187,4597,085,4358,420,8517,475,6686,862,194Interest on
money marketInvestments222,098648,462121,528133,60949,405Total interest
income22,942,55324,398,99026,055,78724,302,73223,667,092Interest
expense-deposits4,997,7958,065,0559,336,5968,749,1739,537,002Interest
expense-short-term borrowings29,65095,446528,580471,711493,784Interest
expense-long-term borrowings2,547,0551,555,4491,839,724792,572287,795Total
interest expense7,574,5009,715,95011,704,90010,013,45610,318,581Net interest
income15,368,05314,683,04014,350,88714,289,27613,348,511Provision for
loan losses298,030540,3501,176,0003,289,706435,000Net interest
income afterprovision for loan losses15,070,02314,142,69013,174,88710,999,57012,913,511Other operating
income3,175,2872,554,8372,304,4641,936,4921,722,040Other operating
expenses11,028,12410,093,3029,428,5699,245,3538,529,594Income before
taxes7,217,1866,604,2256,050,7823,690,7096,105,957Applicable
income taxes1,872,9701,699,3021,419,270487,1041,465,071Net
income$  5,344,216$  4,904,923$  4,631,512$  3,203,605$  4,640,886Per share
dataNet
income$          1.56$          1.43$          1.32$            
..90$           
1.29Dividends declared$          
1.00$           
..76$           
..68$            
..60$             
..42Average shares outstanding3,425,8583,432,3893,511,6033,578,8943,600,000At end of
periodTotal assets$380,337,755$343,028,558$329,865,123$355,297,990$326,379,353Securities148,344,416119,396,065104,703,464124,743,186119,090,980Loans and leases, net of
unearnedIncome169,030,225202,335,164207,956,789204,839,335192,115,160Allowance for loan losses2,707,3232,814,4542,736,7121,919,4531,914,174Deposits270,025,209254,986,772266,611,370272,947,403266,460,521Long-term borrowings55,000,00035,000,00010,000,00025,000,00010,000,000Shareholders' equity51,204,50245,970,29743,136,91739,403,89343,161,649Key
ratiosReturn on average assets1.46%1.43%1.32%..95%1.46%Return on average equity11.0210.9011.217.5011.47Net loans-to-deposit ratio61.5978.2578.0074.3471.38Dividend payout ratio
(dividendsdeclared
divided by net income)64.0753.1651.4666.9832.58Equity-to-assets ratio (average equitydivided
by average total assets)13.2713.1211.8212.6812.72   Management’s Discussion and Analysis of Financial Condition and Results of
Operations  Introduction  The purpose of
this discussion and the accompanying financial data is to provide
aid in understanding and evaluating the financial condition and
results of operations of Commercial National Financial Corporation
(the Corporation) for the years ended on December 31, 2002, 2001
and 2000. This information should be read in conjunction with the
consolidated financial statements and related footnotes for the
years under review.  All material
intercompany transactions have been eliminated in
consolidation.  Critical
Accounting Policies: Disclosure of
the Corporation's significant accounting policies is included in
Note 1 to the consolidated financial statements. Certain of
these policies are particularly sensitive requiring significant
judgments, estimates and assumptions to be made by management.
Additional information is contained in management's discussion and
analysis for the most sensitive of these issues, including the
provision and allowance for loan losses. Management in
determining the allowance for loan losses makes significant
estimates. Consideration is given to a variety of factors in
establishing this estimate. In estimating the allowance for loan
losses, management considers current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of internal
loan reviews, its borrowers' perceived financial and managerial
strengths, the adequacy of the underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant
factors. The following
discussion and analysis is intended to assist the reader in
reviewing the financial information presented and should be read in
conjunction with the consolidated financial statements and other
financial data presented elsewhere herein. Financial
Condition  The
Corporation’s total assets at December 31, 2002 increased
$37,309,197, or 10.88% from the end of 2001. The increases were
primarily in securities, federal funds sold, interest bearing
deposit accounts and other assets.  The total loan
portfolio decreased as the Corporation’s primary subsidiary,
Commercial National Bank of Pennsylvania (the Bank) continued to
experience softer loan demand as a result of the weakening economy
during 2002. Although it is too soon to tell, early indications
suggest the Bank is likely to experience modest loan growth for
2003.  Other assets
increased $7,276,802, or 87.76% during 2002. The majority of this
increase was due to the purchase of a $5,000,000 bank-owned life
insurance (BOLI) policy. Other contributors to this increase are
intangible assets and goodwill associated with the Bank’s
purchase of a community banking office in Norwin, Pennsylvania and
the acquisition of Gooder Agency, Inc., an independently-owned
insurance agency located in Ligonier, Pennsylvania.  At December 31,
2002, total liabilities increased $32,074,992, or 10.80% to
$329,133,253. Of this increase, $20,000,000 was attributable to
long-term borrowings transacted by the Corporation to extend the
interest bearing liabilities of the Bank. This action better
positioned the Bank for an increase in interest rates in the
future.  Also
contributing to liability growth in 2002 was the increase in
deposits. Total non-interest and interest-bearing deposits
increased $15,038,437 during 2002. Factors that led to this
increase are the historically low bond yields and negative returns
experienced in the equity markets. Also assisting in growth of
deposits was the Corporation’s desire to offer competitive
rates in our market area.  Shareholders’ equity was $51,204,502 on
December 31, 2002 compared to $45,970,297 on December 31, 2001 and
increase of 11.39%. Book value per common share increased to $14.82
or 10.43% from $13.42 at year-end 2001. Excluding the net
unrealized gains and losses on securities available for sale, book
value per share would have been $13.41 at December 31, 2002, an
increase of 4.85% over the comparable book value at year-end
2001.   Results of
Operations  Net income
increased $439,293, or 9%, to $5,344,216 for the year ended
December 31, 2002 from $4,904,923 for the year ended December 31,
2001. The increase in net income for 2002 was due to higher
other operating income. The increase in net interest income
was negated by higher other operating expenses. Based on
current economic conditions, management views fourth quarter 2002
net income as a reasonable indicator for 2003 quarterly
results.  Net income for
year ended December 31, 2001 increased $273,411 to $4,904,923 from
$4,631,512 for year ended December 31, 2000. The reasons for this
increase were improved net interest income, a lower provision for
loan losses and higher operating income. The sum of those
components offset a 7% increase in operating expense.  Return on
average assets was 1.46% in 2002, 1.43% in 2001 and 1.32% in 2000.
For the same years, return on average equity was 11.02%, 10.90% and
11.21%, respectively.                                                     Net
Interest Income  The
Corporation’s primary source of earnings is represented by
net interest income. Net interest income is calculated by deducting
the interest paid on interest-bearing deposits and borrowed funds
from the interest received on interest-earning assets, primarily
loans and investments. In 2002, net interest income was $15,368,053
compared to $14,683,040 in 2001. The return on earning assets,
calculated on a tax-equivalent basis, equaled 7.06% in 2002 and was
7.84% in 2001. The cost-of-funds rate for 2002 and 2001 was 2.86%
and 3.93%, respectively. The tax-equivalent net interest margin for
2002 decreased one basis point to 4.81% from 4.82% in 2001.  In 2001, net
interest income was $14,683,040 compared to $14,350,887 in 2000.
The return on earning assets, calculated on a tax-equivalent basis,
equaled 7.84% in 2001 and was 8.08% in 2000. The cost-of-funds rate
for 2001 and 2000 was 3.93% and 4.47%, respectively. The
tax-equivalent net interest margin for 2001 increased twenty-two
basis points to 4.82% from 4.60% in 2000. During 2001, the Federal
Reserve reduced interest rates eleven times in an effort to
stimulate the economy. With these rate cuts, the Corporation
benefited by interest-bearing liability costs repricing lower at a
faster rate than the realized yield declines on interest earning
assets.  Average earning
assets increased $15,141,568 from 2001 to 2002. The Corporation
continued to experience overall loan contraction for much of 2002
due to a combination of weak demand and a new commercial lending
focus that implemented tighter underwriting standards. Also
contributing to the decrease was the Corporation’s reluctance
to aggressively price rates at low current market levels. During
the fourth quarter of 2002, the Corporation’s management
relaxed loan pricing constraints in an effort to become more
competitive in its marketplace. This relaxation will be monitored
closely so that the Corporation does not overweigh itself with an
abundance of lower yielding loans. Investment purchases throughout
the year helped offset both loan and security runoff during
2002.  Average earning
assets decreased $13,886,525, or 4.14%, in 2001 from 2000. The
Corporation experienced overall loan contraction in 2001 due to
weak demand and a change of focus in the commercial lending that
excluded specific business segments. Also contributing to the
average earning asset decrease in 2001 were lower volumes in
investment securities throughout the year due to the relative
decline in market yields.  Average
interest-bearing liabilities increased $17,577,721, or 7.11% in
2002 from 2001. The increase in average interest-bearing
liabilities from 2002 to 2001 was attributed to modest growth in
deposit accounts, particularly in the demand deposits, and the
extension of long-term debt through a series of advances from the
Federal Home Loan Bank of Pittsburgh.  Average
interest-bearing liabilities decreased $14,755,501, or 5.63% in
2001 but compared to an increase of $11,740,155 in 2000. The
decrease in average interest-bearing liabilities from 2001 to 2000
was attributed to declines in the interest-bearing deposits as the
Corporation experienced outflows due to the lower rate
environment.             COMMERCIAL NATIONAL FINANCIAL CORPORATIONFinancial ComparisonsConsolidated Average Balance Sheet, Interest Income/Expense and
Rates  200220012000  AverageInterestYield
orAverageInterestYield
orAverageInterestYield
orBalanceIncome/Rate
(a)BalanceIncome/Rate
(a)BalanceIncome/Rate
(a)ExpenseExpenseExpenseInterest-earning assetsLoans
(b)(c) net of unearned income$187,428,175$13,532,9967.38%$206,680,783$16,665,0938.23%$207,343,068$17,513,4088.59%Taxable securities111,966,5138,130,1977.2680,776,7526,161,1857.6396,284,7066,916,7527.18Non-taxable securities21,062,6031,057,2627.6118,077,452924,2507.7529,970,4971,504,0997.60Interest-bearing deposits with banks5,277,68448,8790.939,592,529363,4183.79233,49616,4987.07Federal funds sold11,146,849173,2191.556,612,740285,0444.311,795,014105,0305.85Total
earning assets336,881,82422,942,5537.06321,740,25624,398,9907.84335,626,78126,055,7878.08Non-interest-earning assetsCash8,006,9117,694,7717,481,338Allowance for loan losses(2,879,339)(2,671,013)))(2,283,390)Other
assets23,394,18516,043,9298,798,388Total non-interest-earning
assets28,521,75721,067,68713,996,336Total assets$365,403,581$342,807,943$349,623,117Liabilities and Shareholders’ EquityInterest-bearing depositsNOW
accounts$ 
22,952,36899,005.43$ 
20,480,266139,826.68$ 
20,552,997139,885.68Money
Market accounts46,793,084716,8821.5338,499,5681,153,9523.0043,301,7281,527,2443.53Savings deposits55,369,002801,2511.4546,002,5761,101,2292.3945,405,8211,153,3422.54Time
deposits89,490,2803,380,6573.78108,841,0525,670,0485.21118,235,7026,516,1255.51Short-term borrowings1,495,41129,6511.982,917,53495,4463.278,113,319528,5806.51Long-term borrowings48,602,1342,547,0545.2430,383,5621,555,4495.1226,270,4921,839,7247.00Total
interest-bearing liabilities264,702,2797,574,5002.86247,124,5589,715,9503.93261,880,05911,704,9004.47Non-interest-bearing deposits48,578,93747,411,93045,127,383Other
liabilities3,646,9123,283,2831,297,731Shareholders' equity48,475,45344,988,17241,317,944Total
non-interest-bearingFunding
sources100,701,30295,683,38587,743,058Total liabilities
andshareholders' equity$365,403,581$342,807,943$349,623,117Net
interest income and net yieldon
interest earning
assets$15,368,0534.81%$14,683,0404.82%$14,350,8874.60%  (a) Yields
on interest earning assets have been computed on a tax-equivalent
basis using the (a)   34% federal income tax statutory
rate.  (b) 
Income on non-accrual loans is accounted for on the cash basis, and
the loan balances are included in
interest earning assets.  ©   Loan income includes net loan
fees.            The following
table illustrates the impact and interaction of rate and volume
changes for the years under review:  Analysis of Year-to-Year
Changes in Net Interest Income  2002 Change
from 20012001 Change from
2000TotalChange DueChange
DueTotalChange DueChange DueChangeTo Volumeto
RateChangeto VolumeTo
Rate                          
to
Volume                          
to RateInterest-earning assetsLoans net of
unearned income$  
(3,132,097)$ 
(1,552,377)$
(1,579,720)$   (848,315)$ 
(55,940)$ (792,375)SecuritiesTaxable1,969,0122,378,975(409,963)(755,567)(1,114,037)358,470Non-taxable133,012152,623(19,611)(579,849)(596,864)17,015Interest-bearing deposits with banks(314,539)(163,470)(151,069)346,920661,276(314,356)Federal funds
sold(111,825)195,444(307,269)180,014281,895(101,881)Total interest income(1,456,437)1,011,195(2,467,632)(1,656,797)(823,670)(833,127)Interest-bearing liabilitiesDeposits(3,067,260)29,469(3,096,729)(1,271,541)(561,140)(710,401)Short-term
borrowings(65,796)(46,524)(19,272)(433,134)(338,504)(94,630)Long-term
borrowings991,606932,67858,928(284,274)288,038(572,312)Total interest expense(2,141,450)915,623(3,057,073)(1,988,949)(611,606)(1,377,343)Net interest
income$  
685,013$   95,572$  589,441$  
332,152$ (212,064)$  544,216   Allowance
for Loan Losses  The provision for loan losses
is the amount added to the allowance against which actual loan
losses are charged. The amount of the provision is determined by
management through an evaluation of the size and quality of the
loan portfolio, economic conditions, concentrations of credit,
recent loan loss trends, delinquencies and other risks inherent
within the loan portfolio.  The amount of the provision
was $298,030 in 2002, $540,350 in 2001 and $1,176,000 in 2000. For
each of the same years the net charge-off against the allowance for
loan losses was $405,161, $462,608 and $358,741, respectively. The
lower 2002 provision was the result of lower outstanding loan
balances and reduced credit risk in the loan portfolio.  On December 31, 2002, the
ratio of allowance for loan to total loans was 1.60% compared to
1.39% at the end of 2001 and 1.32% at the end of 2000. In 2002, the
year-end allowance was $2,707,323. The allowance decreased in 2002
by $107,131 from 2001. The reason for this decrease was due to the
charge-off of certain non-performing loans during 2002 that were
already included in the allowance for loan loss calculation.  Loans that were past due 90
days or more, or were on non-accrual represented 1.79% of total
loans on December 31, 2002, 1.32% on December 31, 2001 and 0.39% on
December 31, 2000. The Corporation’s policy is to place a
loan on non-accrual basis when it becomes 90 days past due provided
that the loan is well collateralized and evidence indicates a
reasonable likelihood for collection. Also, a loan is placed on
non-accrual in the event of a material decline in business activity
that may hinder the borrower’s ability to repay the
loan. The table below
provides an analysis of the allowance for loan losses for the
five years ended
December 31, 2002:  December 31,20022001200019991998Loans
outstanding at beginning of year,net of
unearned income$202,335,164$207,956,789$204,839,335$192,115,160$183,481,157Average loans outstanding$187,428,175$206,680,783$207,343,068$194,664,755$186,418,665Allowance
for loan losses:Balance,
beginning of year$  2,814,454$  2,736,712$
1,919,453$ 
1,914,174$ 
1,882,251Loans
charged off:Commercial
and Tax Free179,80189,50770,3422,678,26624,306Consumer30,97255,476232,915616,786377,353Real
estate238,468354,72492,01912,97111,208Total loans
charged off449,241499,707395,2763,308,023412,867Recoveries:Commercial
and Tax Free16,6343,3472,000-300Consumer24,25529,23434,04523,5969,490Real
estate3,1914,518490--Total
recoveries44,08037,09936,53523,5969,790Net loans
charged off405,161462,608358,7413,284,427403,077Provision
charged to expense298,030540,3501,176,0003,289,706435,000Balance, end
of year$   2,707,323$   2,814,454$
2,736,712$
1,919,453$
1,914,174Ratios:Net
charge-offs as a percentageof
average loans outstanding..22%..22%..17%1.69%.22%Allowance
for  loan lossesas a
percentage of average loansoutstanding1.44%1.36%1.32%..99%1.03%  Management
review and evaluation of loan loss experience and loan loss
potential on outstanding loans occurs on a quarterly basis and is
considered in conjunction with current economic conditions and the
current requirements of the appropriate regulatory agencies. Due to
the recent decline in the general economy, management expects loan
loss trends to be consistent with the three most recent
years.  As a result of
this on-going study, management believes that the reserve amount
shown for December 31, 2002 is adequate to offset the losses which
may exist as a result of under collateralization or
uncollectibility.  Management
maintains an allowance for loan losses that it considers adequate
based on the evaluation process that it performs on a quarterly
basis. As part of this process, management considers it appropriate
to maintain a portion of the allowance that is based on credit
quality trends, loan volume, current economic trends and other
uncertainties. This portion of the allowance for loan losses is reflected as the unallocated
portion in the table below that indicates the distribution of the
allowance as of the end of each of the last five years.  20022001200019991998PercentPercentPercentPercentPercentAmountOf
LoanAmountOf
LoanAmountOf
LoanAmountOf
LoanAmountOf
LoanTypeTypeTypeTypeTypeCommercial$2,422,09413$2,563,88015$1,894,44416$ 
     396,83313$   455,37513Real
Estate63,4058462,88683194,4468165,3788029,29078Consumer27,081131,2521234,97921,069,2752912,7033Unallocated194,7432156,4361412,8431387,9675516,8066Total$2,707,323$2,814,454$2,736,712$
1,919,453$1,914,174  Other
Operating Income and Expense  Total other operating income
for 2002 of $3,175,287 increased by $620,450 from the $2,554,837
earned in 2001. The increase included a gain of $469,782 from the
sale of one of the Bank’s branch offices. This branch,
located in Murrysville, Pennsylvania, failed to reach
management’s performance expectations and was no longer part
of the geographic scope of the Corporation’s long-range plan.
Income from investment in life insurance increased from $176,750 to
$474,286. This increase is related to higher BOLI income associated
with an additional investment of $5,000,000 during 2002 and a full
year of income from the $5,000,000 BOLI investment made in 2001.
Asset management and trust income during 2002 was $475,115, which
represents an increase of 3.99% over 2001. Service charges on
deposit accounts declined $41,192 to $737,426 for 2002. Lower fees
collected from overdrawn accounts contributed to this revenue
decrease. Other service charges and fees decreased by $59,008 in
2002 from 2001’s level of $750,248. Reasons for this decrease
were lower volumes of fees and commissions collected from various
loan and deposit product offerings by the Corporation.  Total other operating income
for 2001 of $2,554,837 increased by $250,373 from the $2,304,464
earned in 2000. Increases in trust fees, service charges on deposit
accounts and fee income offset a decrease of $651,950 in other
income from 2001 to 2000. This decrease in other income during 2001
was the result of $822,875 received by the Bank for the sale of its
credit-card loan portfolio in 2000. As a result of this premium,
the Corporation repositioned the investment portfolio and incurred
a loss of $691,700 in securities sold to take advantage of higher
yields that were available in the bond market at that time.  Total other
operating expense increased $934,822 to $11,028,124 for 2002
compared to $10,093,302 in 2001. Personnel expense, accounting for
more than 50% of total non-interest expense, increased only 2.95%
or $162,358 in 2002. Net occupancy expense increased by a modest
$21,195. Furniture and equipment expense remained relatively
unchanged when compared to 2001. Pennsylvania shares tax increased
$39,811. Other expense increased by $692,811 to $3,240,638. An
increase of $208,227 was attributable to advertising, ATM/debit
card, stationary and printing and employee training expenses during
2002. This expense increase is associated with the cost of doing
business. Branch amortization expense of $39,005 is related to the
acquisition of the Norwin branch. Other real estate expense
increased $66,196 due to more properties acquired by the
Corporation through foreclosure. Legal costs increased $238,495.
This increase is mainly due to the work involved with the branch
acquisition, branch divestiture, insurance agency acquisition and
the continued collection efforts relating to a previously
charged-off loan.  Total other
operating expense increased $664,733 to $10,093,302 for 2001
compared to $9,428,569 in 2000. Personnel expense increased 7.62%
or $389,292 in 2001. Annual salary and hospitalization increases
along with higher incentive compensation payouts were the main
contributors to this increase. Net occupancy expense increased by a
modest $14,292. Pennsylvania shares tax increased $34,769 over 2000
while other operating expense increased $393,111. Increases in
advertising, professional fees and automated teller expense were
the primary reasons for the 15.99% rise in other operating expense.
Furniture and equipment expense declined $166,731 as the
Bank’s core operating software became fully depreciated in
mid-2001.  Income tax
expense was $1,872,970 in 2002, $1,699,302 in 2001 and $1,419,270
in 2000. The effective tax rate in those years were 25.95%, 25.73%
and 23.46%, respectively.  Liquidity  Liquidity
measurements attempt to evaluate the Corporation’s ability to
meet the cash-flow needs of its depositors and borrowers. The most
desirable source of liquidity is deposit growth. Additional
liquidity is provided by the maturity of investments in loans and
securities and the principal and interest received from those
earning assets. Another source of liquidity is represented by the
Corporation’s ability to sell both loans and
available-for-sale securities. The Bank is a member of the Federal
Home Loan Bank (FHLB) system. The FHLB provides an additional
source for liquidity for long- and short-term funding. Additional
sources of funding from financial institutions have been
established for short-term funding.  On December 31,
2002, total deposits were $15,038,437 greater than on December 31,
2001. Interest-bearing deposits increased $11,625,061 in 2002 while
demand deposits increased an additional $3,413,376.  The amortized cost of the
Corporation’s securities portfolio was $137,330,664 on
December 31, 2002. On that same date, the estimated market value of
the entire securities portfolio was $144,726,216 which was higher
than amortized cost by $7,395,552 and represented the net of
$7,404,569 gross unrealized gains less $9,017 gross unrealized
losses.  As of December
31, 2002, the Corporation had available funding of approximately
$152,022,000 at the FHLB with an additional $30,000,000 of
short-term funding available through federal funds lines of
credit.  During January
2003, the Corporation settled on $20,000,000 of a Federal National
Mortgage Association 15 year mortgage pass-through security. The
Corporation committed to this purchase on October 23, 2002 with a
forward settlement set for January 21, 2003.  The following
table presents average deposits by type and the average interest
rates paid during the years 2002, 2001 and 2000:  200220012000AverageAverageAverageAverageAverageAverageBalanceRate PaidBalanceRate PaidBalanceRate PaidNon-interest
bearing demand$48,578,937- %$47,411,930- %$
45,127,383- %Interest
bearing demand22,952,368..4320,480,266..6820,552,997.68Money
market46,793,0841.5338,499,5683.0043,301,7283.53Savings55,369,0021.4546,002,5762.3945,405,8212.54Time89,490,2803.78108,841,0525.21118,235,7025.51Total$263,183,6711.90%$261,235,3923.09%$272,623,6313.42%  Time deposits of
$100,000 or more at December 31, 2002, 2001 and 2000 are as
follows:  December 31,200220012000AmountPercentAmountPercentAmountPercentRemaining
maturity:3 months or
less$
7,139,75233%$11,117,16360%$19,910,82859%Over 3
through 6 months1,592,23573,083,318162,999,2069Over 6
months through 12 months1,192,83352,190,147127,145,06721Over 12
months11,887,398552,156,589123,920,34711Total$
21,812,218100%$
18,547,217100%$33,975,448100%          The following
tables present a five-year summary of loan classifications and the
maturity distribution of securities on December 31, 2002  Loans
by Classification on December 31,20022001200019991998Cent                                        
Amount                                        
Cent                                        
Amount                                        
Cent                                        
Amount                                        
Cent                                        
Amount                                        
CentCommercial$12,725,1967%$17,251,1809%$
25,802,52912%$
23,069,38511%$
20,893,91111%Real estate
– commercial54,618,2713271,699,1193566,051,8113259,386,5432952,165,38427Real estate
- construction976,01311,629,13512,380,73714,275,98822,754,9641Real estate
– other86,047,6295195,795,47947100,347,1434899,769,5944996,210,30450Consumer -
installment1,921,93212,486,37513,433,99324,396,06525,388,2463Municipal10,078,489610,989,89867,114,30644,290,28923,757,5632Other2,634,69622,555,16412,891,74619,771,934511,068,8776Total
loans169,002,226100%202,406,350100%208,022,265100%204,959,798100%192,239,249100%Unearned  income27,999(71,186)(65,476)(120,463)(124,089)Total loans,
net ofunearned income$169,030,225$202,335,164$207,956,789$204,839,335$192,115,160    Maturity Distribution of Securities on December 31,
2002U.S. TreasuryState &TotalWeighted& other U.S. Govt.PoliticalOtherAmortizedAverageAgencies & Corp.Subdivisions (1)SecuritiesCostYieldWithin 1
year$      
999,302$               
-$             
-$      
999,3027.07After 1 but
within 5 years9,756,5135,920,451-15,676,9643.34After 5 but
within 10 years-3,506,310-3,506,3107.02After 10
years100,310,24816,746,630-117,056,8787.34Equity
securities andRestricted
bank stock--3,709,4103,709,4103.55$111,066,063$26,173,391$3,709,410$140,948,8646.79% (1) Yield on
tax-exempt obligations has been computed on a fully tax-equivalent basis (using statutory federal income tax rate of
34%)   Included in U.S.
Treasury & other U.S. Government Agencies are mortgage-backed
securities. These securities carry an amortized value of
$100,310,249 and mature based upon their estimated contractual
maturities. Expected maturities will differ from contractual
maturities because borrowers may have the right to prepay with or
without prepayment penalties.               Interest
Sensitivity  One of the
desired goals of interest-sensitivity management is to achieve an
appropriate balance between stable income growth and the risks
inherent in achieving that growth through managed maturity
imbalances between interest-earning assets and interest-bearing
liabilities. These relationships are generally so complex that
exact measurement of the impact of interest rate changes is
virtually impossible. However, an indication of an
institution’s vulnerability to such changes can be roughly
gauged through the measurement and analysis of the so-called
“gap” or the difference between the dollar volumes of
interest-sensitive assets and interest-sensitive liabilities
scheduled to reprice over a variety of time periods.  An asset or
liability is considered to be sensitive if the interest rate it
earns or pays is set to change within a certain time period. When
the amount of the interest-sensitive assets is greater than the
interest-sensitive liabilities, the gap is labeled positive and the
institution’s interest rate spread will widen and earnings
will respond favorably to a general rise in interest rates. The
opposite relationship produces a negative gap and the interest rate
spread will increase and earnings will show a favorable response in
a declining rate environment.  The following
table lists the amounts and ratio of assets and liabilities subject
to change as of December 31, 2002.  Interest
Sensitivity Analysis (In Thousands)0-30 Days31-90 Days91-180 Days181-365
Days1-5 YearsOver 5
YearsInterest-earning assets:Securities$6,746$11,494$16,152$32,304$57,822$12,721Federal
funds sold &other
deposits with banks35,284-----Loans22,8933,6714,5628,86876,58349,595Total
interest-sensitiveAssets64,92315,16520,71441,172134,40562,316Interest-bearing liabilities:Certificates
of deposit6,44316,05815,36614,79921,44817,629Other
interest-bearing liabilities-5,1195,1197,44948,31760,923Other term
borrowings-----30,00025,000Total
interest-sensitiveLiabilities6,44321,17720,48522,24899,765103,552Interest
sensitivity gap$58,480$(6,012)$229$18,924$34,640$(41,236)Cumulative
gap$58,480$52,468$52,697$71,621$106,261$65,025Ratio of
cumulative gap toearning
assets16.72%15.00%15.07%20.48%30.39%18.59%                  Market
Risk  The
Corporation’s interest rate risk management is the
responsibility of the Asset/Liability Management Committee, which
reports to the Board of Directors. This committee establishes
policies that monitor and coordinate the Corporation’s
sources, uses and pricing of funds. The committee is also involved
with management in the Corporation’s planning and budgeting
process.  The Corporation
regularly reviews its exposure to changes in interest rates. Among
the factors considered are changes in the mix of earning assets and
interest-bearing liabilities, interest rate spreads and repricing
periods. Typically, the committee reviews on at least a quarterly
basis the Bank’s relative ratio of rate sensitive assets to
rate sensitive liabilities and the related cumulative gap for
different time periods. Additionally, the committee and management
utilize a simulation model in assessing the Corporation’s
interest rate sensitivity.  This simulation
modeling process projects a baseline net interest income (assuming
no changes in interest rate levels) and estimates changes to that
baseline net interest income resulting from changes in interest
rate levels. The Corporation utilizes the results of this model in
evaluating its interest rate risk. This model incorporates a number
of additional factors. These factors include: (1) the expected
exercise of call features on various assets and liabilities, (2)
the expected rates at which various rate sensitive assets and
liabilities will reprice, (3) the expected relative movements in
different interest rate indexes that are used as the basis for
pricing or repricing various assets and liabilities, (4) expected
changes in administered rates on interest-bearing transaction,
savings, money market and time deposit accounts and the expected
impact of competition on the pricing or repricing of such accounts
and (5) other factors. Inclusion of these factors in the model is
intended to more accurately project the Corporation’s changes
in net interest income resulting from an immediate and sustained
parallel shift in interest rates of up 100 basis points (bps), up
200 bps, down 100 bps and down 200 bps. While the Corporation
believes this model provides a useful projection of its interest
rate risk, the model includes a number of assumptions and
predictions that may or may not be accurate. These assumptions and
predictions include inputs to compute baseline net interest income,
growth rates, competition and a variety of other factors that are
difficult to accurately predict. Accordingly, there can be no
assurance the simulation model will reflect future results.  The following
table presents the simulation model's projected impact of an
immediate and sustained parallel shift in interest rates on the
projected baseline net interest income for a twelve-month period
commencing January 1, 2003.   $ Change in
Projected% Change in
ProjectedChange in
InterestBaselineBaselineRatesNet Interest
IncomeNet Interest
Income(dollar amounts
in thousands)+200 basis
points$  
2,51617.9%+100 basis
points$  
1,54010.9%-100 basis
points$  (1,573)(11.2%)-200 basis
points$  (2,807)(20.0%)   In the event of
a shift in interest rates, management may take certain actions
intended to mitigate the negative impact to net interest income or
to maximize the positive impact to net interest income. These
actions may include, but are not limited to, restructuring of
earning assets and interest-bearing liabilities, seeking
alternative funding sources or investment opportunities and
modifying the pricing or terms of loans and deposits.     Final loan
maturities excluding consumer installment and mortgage loans and
before unearned income at December 31, 2002:  (in
thousands)  WithinOne-FiveAfterOne YearYearsFive YearsTotalCommercial and
Industrial$   4,286$
6,449$    892$ 11,627Real
estate-construction976--976Other3,038*1,1828,49312,713Totals$
8,300$  7,631$  9,385$
25,316Loans at fixed
interest rates$ 
5,852$ 
9,385$ 15,237Loans at variable interest
rates1,779-1,779$  7,631$  9,385$
17,016   *Includes
$1.5 million Pennsylvania Higher Education Assistance Agency loans
with no fixed maturity date.             Credit
Review  Maintaining a
high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of
the loan portfolio through the use of prudent lending policies and
procedures and monitors risk through a periodic review process
provided by internal auditors, regulatory authorities and internal
loan review procedures. These reviews include the analysis of
credit quality, diversification of industry, compliance to policies
and procedures, and an analysis of current economic conditions. In
addition to these reviews, the Corporation annually has commercial
loan reviews performed by a third party specializing in this
area.  The
Corporation’s credit culture fosters and actively supports
the extension of credit on sound, fundamental lending policies. The
purpose of each credit is to be logical, legal, constructive and
acceptable within policy guidelines. Credit is only to be granted
to reputable borrowers and only when supported by acceptable and
reliable financial information.  The allowance
for loan losses is a valuation reserve that is intended to account
for credit losses, which may be expected in the Corporation’s
loan portfolio as a result of the credit risk involved in the
normal granting of credit. Adequate management of the allowance is
an integral part of the credit risk management process. The risks
directly associated with the maintenance of the allowance are
compliance risk and reputation risk. The Corporation will maintain
an adequate allowance in anticipation of losses reflected as of the
evaluation date. Management is cognizant of the subjective nature
of decisions regarding loan portfolio factors and the variability
over time of internal and external factors affecting portfolio
quality, and realizes that an effective asset review system is
essential to establishing the basis for an adequate allowance. To
improve the accuracy of determining the allowance, management will
continuously monitor all factors and current conditions that may
affect loss recognition.  For analytical
purposes, the following table sets forth an allocation of the
allowance for loan losses on December 31, 2002 and December 31,
2001 according to the categories indicated:  Allocation of the Allowance for Loan Losses(dollar amounts in thousands)20022001Commercial and Tax Free$2,422$2,564Residential
Mortgages6363Consumer
Loans2731Unallocated195156Total$2,707$2,814Allowance as a
percentage of averagetotal
loans1.44%1.36%  The following
table details, for each of the most recent five years, the year end
amounts which were accounted for on a non-accrual basis or were
past due 90 days or more:  Dec. 31,
2002Loans on non-accrual basis$
2,679,355Loans past due 90 days or
more2,966Renegotiated loans-Total$ 2,682,321Dec. 31,
2001Loans on non-accrual basis$
2,492,432Loans past due 90 days or
more122,966Renegotiated loans59,854Total$ 2,675,252Dec. 31,
2000Loans on non-accrual basis$   358,429Loans past due 90 days or
more207,834Renegotiated loans170,572Total$   736,835Dec. 31,
1999Loans on non-accrual basis$   517,644Loans past due 90 days or
more187,259Renegotiated loans493,215Total$ 1,198,118Dec. 31,
1998Loans on non-accrual basis$    95,032Loans past due 90 days or
more320,438Renegotiated loans572,352Total$   987,822  Non-accrual
loans remained relatively unchanged during 2002 due to the general
economic slowdown. As of December 31, 2002, $1,205,374 of the
non-accrual loans were current with interest and principal payments
recognized on a cash basis only.  At present no
other outstanding loans present a serious doubt in regard to the
borrower's ability to comply with the current loan repayment terms.
As of December 31, 2002 the Corporation had $344,048 in other real
estate owned.  Effect of
non-accrual loans on interest income during 2002 is as
follows:   Non-accrualLoansGross amount of
interest that would haveBeen recorded at
original rates$158,725Less: Interest
that was reflected in income27,562Net reduction to
interest income$131,163   Capital
Resources  Shareholders’ equity increased $5,234,205
during 2002 and was $51,204,502 on December 31, 2002 compared to
$45,970,297 on December 31, 2001. Net unrealized gains on
securities available for sale on December 31, 2002 temporarily
increased shareholders’ equity by $4,881,065. This component
will fluctuate given the timing of investment purchases versus the
current interest rate environment.  The
shareholders’ equity or the capital base represents the
investment by the Corporation’s owners either initially or
through retention of earnings (net after income tax less dividend
payments). This investment acts as a safeguard against future
uncertainties. The amount of capital which is deemed appropriate is
dependent upon an assessment of the corporation’s total
assets, the quality of its loans and securities, its historical
earnings record, its business prospects for the near and long term,
the management and information systems in place and the general
competence and abilities of the corporation’s
management.  On December 31,
2002, the Corporation’s capital (not including the allowance
for loan losses) amounted to $51,204,502 or 13.46% of total assets.
The inclusion of the allowance increases the capital ratio to
14.17%. On the same basis of calculation, these ratios were 13.40%
and 14.22% respectively on December 31, 2001.  The Federal
Reserve Board’s risk-based capital adequacy standards are
designed principally as a measure of credit risk. These standards
require that (1) at least 50% of total capital must be common and
certain other “core” equity capital (“Tier I
Capital”); (2) assets and off-balance sheet items must be
weighted according to risk; (3) the total capital to risk-weighted
asset ratio must be at least 8%; and (4) a minimum 4% leverage
ratio of Tier I Capital to average total assets must be
maintained.  As of December
31, 2002, the Corporation had Tier I and total equity capital to
risk adjusted asset ratios of 23.95% and 25.21%, respectively. In
2002, the leverage ratio was 12.06%. At December 31, 2001, the
Corporation had Tier I and total equity capital to risk adjusted
assets ratios of 22.36% and 23.61%, respectively.   The table below presents the
Corporation’s capital position on December 31, 2002 (dollar amounts in thousands)    Percentof AdjustedAmountAssetsTier I Capital44,53923.95Tier I Capital
Requirement7,4384.00Total Equity
Capital46,86825.21Risk-Based
Requirement14,8758.00Leverage
Capital44,53912.06Leverage
Requirement14,9264.00  Inflation
and Changing Prices  Inflation can
have significance to a banking institution because of its
implication for the interest rate environment and its influence on
personnel expenses and the costs of supplies and materials needed
for day to day operations. Because such a large portion of the
Corporation’s assets and liabilities are represented by
monetary investments, inflationary impact tends to be dampened
except for the dislocation caused by maturity variances. Management
efforts to gauge and control these variables have been discussed
earlier under Interest Sensitivity. The inflationary effect on
non-interest expenses is monitored closely by management and
consistent attention is given to controlling these cost areas in an
attempt to limit their increase to levels which are lower than the
rate of asset growth.  Certain interest
rate movements will continue to influence ongoing earnings levels.
Even though the exact impact of these factors cannot be predicted,
the Corporation believes that given its financial strength and
stability, it will be able to meet these situations in a positive
manner.   CORPORATE
OFFICERS  Louis A.
SteinerChairman of
the BoardLouis T.
SteinerVice
Chairman, President and Chief Executive OfficerGregg E.
HunterVice
Chairman and Chief Financial OfficerWendy S.
SchmuckerVice
President and Secretary/TreasurerRyan M.
GlistaVice
President and ComptrollerSusan F.
RobbAssistant
Vice President and Assistant Secretary/TreasurerCORPORATE DIRECTORSJohn T.
BabilyaFrank E.
JobeDebra L.
SpatolaPresident,
Arc Weld Inc.Retired,
former ExecutivePresident,Vice
President, CommercialLaurel
Valley Foods, Inc.National
Bank of PennsylvaniaGeorge A.
Conti, Jr.Roy M.
LandersLouis A.
SteinerAttorney at
LawRetired,
former Executive ViceVice
Chairman,President R
& L Development Co.Commercial
National Bank ofPennsylvaniaRichmond H.
FergusonJohn C.
McClatcheyLouis T.
SteinerAttorney at
LawRetired,
former Chief ExecutiveChairman,
President and ChiefFerguson Law
AssociatesOfficer, JCM
IndustriesExecutive
Officer, CommercialNational
Bank of PennsylvaniaDorothy S.
HunterJoseph A.
MossoGeorge V.
WeltyVice
President, LatrobeRetired,
former PresidentAttorney at
LawFoundry
Machine & Supply Co.Mosso’s Pharmacy, Inc.Gregg E.
HunterJoedda M.
SampsonC. Edward
WibleVice
Chairman and ChiefPresident
and Principal Owner,Certified
Public AccountantFinancial
Officer, CommercialAllegheny City
Restorations, Inc.Horner Wible
Kisiel Zimmerman PCNational
Bank of PennsylvaniaCertified
Public AccountantsAll corporate
directors also serve as directors ofCommercial National Bank of Pennsylvania andCommercial National Insurance ServicesDirectors
EmeritiJames A. CharleyWilliam M. CharleyWilliam W. Washnock    BUSINESS LOCATIONSCorporate
HeadquartersLatrobeNorwin900 Ligonier
Street900 Ligonier
Street8775 Norwin
AvenueP.O. Box
429P.O. Box
429North
Huntingdon, PA 15642Latrobe, PA
15650Latrobe, PA
15650724/864-7536724/539-3501724/537-9963724/864-7531
(Fax)724/532-2973
(Fax)724/539-0816
(Fax)Asset
Management and TrustLawson
HeightsPleasant
UnityDivisionRoute 981 at
Terry WayRoutes 981 and
13019 North Main
StreetP.O. Box
429P.O. Box
503Greensburg, PA
15601Latrobe, PA
15650Pleasant Unity,
PA 15676724/836-7670724/539-9774724/423-5222724/836-7675
(Fax)724/539-3523
(Fax)724/423-1155
(Fax)Courthouse
SquareLigonierWest
Newton19 North Main
Street201 West Main
Street109 East Main
StreetGreensburg, PA
15601P.O. Box
528P.O. Box
219724/836-7699Ligonier, PA
15658West Newton, PA
15089724/836-7675
(Fax)724/238-9538724/872-5100724/238-9530
(Fax)724/872-5143
(Fax)EastgateLincoln
RoadGeorges Station
RoadLincoln Road
Shopping CenterP.O. Box
3206P.O. Box
429Greensburg, PA
15601Latrobe, PA
15650724/836-7600724/537-9980724/836-7604
(Fax)724/537-9982
(Fax)  In addition
to the full-service MAC machines located at all Commercial National
Bank community offices indicated above (except Latrobe and
Courthouse Square), additional
ATMs are available for your 24-hour banking convenience at Arnold
Palmer Regional Airport, Latrobe Area Hospital, Norvelt Open
Pantry, Saint Vincent College and the University of Pittsburgh at
Greensburg. All are linked to the national Cirrus, Honor, Plus and
Star networks and also accept MasterCard, Visa, Discover and
American Express for cash advances.  Touch Tone
Teller 24-hour banking serviceWebsite724/537-9977Further
information onFREE from
Blairsville, DerryCommercial
National BankGreensburg,
Kecksburg, Latrobeof Pennsylvania
isLigonier and New
Alexandria.available on the
World1-800-803-BANKWide Web
at:FREE from all
other locations.www.cnbthebank.com.InsuranceCommercial
National Insurance Services, Inc./Gooder Agency,
Inc.232 North Market StreetLigonier, PA
15658727/238-4617877/205-4617
(toll free)724/238-0160 (fax)cnisinfo@cnbinsurance.comwww.cnbinsurance.com   SUBSIDIARIES  EXECUTIVE
OFFICERS  EXECUTIVE
OFFICERS OF COMMERCIAL NATIONAL BANK OF PENNSYLVANIA:  Chairman/President/Chief Executive
Officer Louis T.
Steiner  Vice
Chairman Louis A.
Steiner  Vice
Chairman/Chief Financial
Officer Gregg E.
Hunter  Executive
Vice President/Chief Operating Officer Gerard R.
Kunic       EXECUTIVE
OFFICERS OF COMMERCIAL NATIONAL INSURANCE SERVICES,
INC.:  Chairman/President/Chief Executive Officer Louis T.
Steiner  Vice
Chairman Louis A.
Steiner  Vice
Chairman/Chief Financial Officer Gregg E.
Hunter  Executive
Vice President/Chief Operating Officer Stephen R.
Gooder    Market
Makers  The following
firms have committed to make a market in the stock of Commercial
National Financial Corporation. Inquiries concerning their services
should be directed to:  Ferris Baker
WattsM. H. Meyerson
& Co.100 Light
Street525 Washington
BlvdBaltimore, MD
2120234th
Floor800-638-7411Jersey City, NJ
07303800-333-3113F.J. Morrissey
& Company, Inc.Ryan, Beck &
Co.Suite 42080 Main
Street1700 Market
StreetWest Orange, NJ
07052Philadelphia, PA
19103-3913973-597-6020800-842-8928Knight
SecuritiesGoldman, Sachs
& Co.525 Washington
Boulevard85 Broad
StreetJersey City, NJ
07310New York, NY
10004201-222-9400800-221-5320  Transfer
Agent  Should you need
assistance regarding changes in the registration of certificates or
in reporting lost certificates please contact:  Commercial
National Financial Corporation Stock Transfer
Department P.O. Box
429 Latrobe, PA
15650 (724)537-9923 (724)539-1137
(fax)  Form
10-K  The Corporation
will provide without charge to any shareholder a copy of its 2002
Annual Report on Form 10-K as required to be filed with the
Securities and Exchange Commission. Requests should be made in
writing to:  Commercial
National Financial Corporation P.O. Box
429 Latrobe, PA
15650