Quarterly
      Summary of Financial Data (Unaudited)





The
      unaudited quarterly results of operations for the years ended December 31,
      2006
      and December 31, 2005 are as follows:




(Dollars
                in thousands, except Per Share Amounts)2006First
            
            
            Second
            
            
            Third
            
            
            FourthQuarter
            
            
            Quarter
            
            
            Quarter
            
            
            QuarterInterest
                income
            
            $
            4,088
            
            $
            4,377
            
            $
            4,528
            
            $
            4,648Interest
                expense
            
            
            1,199
            
            
            1,359
            
            
            1,620
            
            
            1,686Net
                interest income
            
            
            2,889
            
            
            3,018
            
            
            2,908
            
            
            2,962Provision
                for loan losses
            
            
            30
            
            
            30
            
            
            60
            
            
            90Net
                interest income afterprovision
                for loan losses
            
            
            2,859
            
            
            2,988
            
            
            2,848
            
            
            2,872Other
                income
            
            
            746
            
            
            742
            
            
            772
            
            
            794Other
                expenses
            
            
            2,872
            
            
            2,654
            
            
            2,575
            
            
            2,556Income
                before income taxes
            
            
            733
            
            
            1,076
            
            
            1,045
            
            
            1,110Applicable
                income taxes
            
            
            195
            
            
            271
            
            
            263
            
            
            277Net
                income
            
            $
            538
            
            $
            805
            
            $
            782
            
            $
            833Earnings
                per share, basic
            
            $
            0.16
            
            $
            0.26
            
            $
            0.26
            
            $
            0.27





2005First
            
            
            Second
            
            
            Third
            
            
            FourthQuarter
            
            
            Quarter
            
            
            Quarter
            
            
            QuarterInterest
                income
            
            $
            4,014
            
            $
            4,027
            
            $
            4,089
            
            $
            4,054Interest
                expense
            
            
            1,032
            
            
            1,077
            
            
            1,119
            
            
            1,154Net
                interest income
            
            
            2,982
            
            
            2,950
            
            
            2,970
            
            
            2,900Provision/credit)
                for loan losses
            
            
            (470
            )
            
            -
            
            
            15
            
            
            90Net
                interest income afterProvision/(credit)
                for loan losses
            
            
            3,452
            
            
            2,950
            
            
            2,955
            
            
            2,810Other
                income
            
            
            716
            
            
            718
            
            
            689
            
            
            836Other
                expenses
            
            
            2,732
            
            
            2,695
            
            
            2,582
            
            
            2,523Income
                before income taxes
            
            
            1,436
            
            
            973
            
            
            1,062
            
            
            1,123Applicable
                income taxes
            
            
            395
            
            
            242
            
            
            289
            
            
            291Net
                income
            
            $
            1,041
            
            $
            731
            
            $
            773
            
            $
            832Earnings
                per share,basic
            
            $
            0.31
            
            $
            0.21
            
            $
            0.23
            
            $
            0.24










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
                Dividend2006
            
            High
            
            Low
            
            Per
                ShareFirst
                Quarter
            $
            19.94
            $
            17.50
            $
            .20Second
                Quarter
            
            20.94
            
            17.90
            
            .20Third
                Quarter
            
            20.00
            
            19.23
            
            .20Fourth
                Quarter
            
            21.21
            
            18.40
            
            .202005First
                Quarter
            $
            23.50
            $
            21.20
            $
            .25Second
                Quarter
            
            24.30
            
            20.00
            
            .20Third
                Quarter
            
            21.50
            
            17.89
            
            .20Fourth
                Quarter
            
            19.25
            
            18.70
            
            .20










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








PERFORMANCE
      GRAPH








The
      graph
      appearing below compares the Corporation’s cumulative total shareholder returns
      with the performance of U.S Companies in the NASDAQ Stock Market Index and
      with
      the NASDAQ Bank Stock Index.

















Chart
      above assumes the value of the investment in the Corporation’s common Stock and
      each


index
      was
      $100 on December 31, 2001,and all dividends were reinvested.


1


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,
              (Dollars
                in thousands, except per share data)2006
            2005
            2004
            2003
            2002Total
                interest income
            $17,641
            $16,184
            $18,242
            $19,795
            $22,943Total
                interest expense
            5,864
            4,382
            5,951
            6,525
            7,575Net
                interest income
            11,777
            11,802
            12,291
            13,270
            15,368Provision/(credit)
                for loan losses
            210
            (365)
            (436)
            39
            298Net
                interest income afterprovision
                for loan losses
            11,567
            12,167
            12,727
            13,231
            15,070Other
                operating income
            3,054
            2,959
            4,591
            3,939
            3,290Other
                operating expenses
            10,657
            10,532
            16,906
            12,772
            11,143Income
                before taxes
            3,964
            4,594
            412
            4,398
            7,217Income
                taxes expense/(benefit)
            1,006
            1,217
            (209)
            837
            1,873Net
                income
            $2,958
            $3,377
            $
                621
            $
                3,561
            $
                5,344Per
                share dataNet
                income
            $
                0.95
            $
                0
                .99
            $
                0.18
            $
                1.03
            $
                1.56Dividends
                declared
            $
                0.80
            $
                0
                .85
            $
                1.00
            $
                1.00
            $
                1.00Average
                shares outstanding
            3,129,245
            3,413,426
            3,422,881
            3,441,556
            3,425,858**At
                end of period**Total
                assets
            $338,196
            $322,381
            $320,372
            $385,028
            $380,338Securities
            78,996
            66,117
            99,455
            164,340
            144,726Loans,
                net of unearned income
            229,528
            207,039
            192,255
            187,382
            169,030Allowance
                for loan losses
            1,806
            1,636
            1,855
            2,462
            2,707Deposits
            293,920
            277,009
            265,818
            259,216
            270,025Long-term
                borrowings
            -
            -
            -
            55,000
            55,000Shareholders'
                equity
            37,229
            43,661
            44,660
            49,537
            51,205**Key
                ratios (expressed as %)**Return
                on average assets
            0.90%
            1.06%
            0.17%
            0.95%
            1.46%Return
                on average equity
            7.77
            7.63
            1.36
            6.99
            11.02Net
                loans-to-deposit ratio
            77.47
            74.15
            71.63
            71.34
            61.59Dividend
                payout ratio (dividendsdeclared
                divided by net income)
            84.88
            85.91
            551.21
            96.63
            64.07Equity-to-assets
                ratio (averageequity
                divided by average total assets)
            11.62
            13.86
            12.47
            13.63
            13.27


2


**Management’s
      Discussion and Analysis**


**of**


**Financial
      Condition and Results of Operations**





**Safe
      Harbor Statement**





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







**Critical
      Accounting Policies**






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






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




**Overview**





The
      purpose of this discussion and the accompanying financial data is to provide
      aid
      in understanding and evaluating the financial condition and results of
      operations of the Corporation for the years ended December 31, 2006, 2005 and
      2004. This information should be read in conjunction with the consolidated
      financial statements and related footnotes for the years under
      review.





The
      Corporation is a one-bank holding company, with wholly-owned subsidiaries
      Commercial Bank & Trust of PA (the Bank), and Commercial National Insurance
      Services, Inc. (CNIS). In June 2004, CNIS sold all of its assets and is now
      inactive. See Note 1 to the consolidated financial statements for additional
      information.





The
      Corporation reported net income of $3.0 million or $0.95 per share for the
      year
      ended 2006 compared to $3.4 million or $0.99 per share for the year ended 2005.
      The Corporation’s return on average assets for 2006 and 2005 were 0.90% and
      1.06%, respectively. Return on average equity for the same two periods were
      7.77% and 7.63%, respectively.





In
      accordance with the strategic direction taken by the Board of Directors in
      January 2004, the Bank has concentrated efforts on core banking business of
      loans and deposits and trust and asset management services.





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





The
      Corporation reported net income of $3.4 million or $0.99 per share for the
      year
      ended 2005 compared to $621,000 or $0.18 per share for the year ended 2004.
      The
      Corporation’s return on average assets for 2005 and 2004 were 1.06% and 0.17%,
      respectively. Return on average equity for the same two periods were 7.63%
      and
      1.36%, respectively.





The
      Corporation’s largest segment of operating results is dependent upon net
      interest income. Net interest income is calculated by what is earned on
      interest-earning assets less interest paid on interest-bearing liabilities.
      For
      the years ended 2006 and 2005, net interest income was $11.8 million and $11.8
      million, respectively **,** with
      2006
      benefiting from $181,00 of interest income due to the payoff and change of
      status of non-accrual loans noted above **.** The
      related tax-equivalent net interest margin for these two years was 4.03% and
      4.19%, respectively **.** The
      decrease in the margin is mostly due to the increase in the cost of interest
      bearing liabilities, which has increased faster than the increase in yields
      on
      earning assets. The Corporation anticipates margins will continue to be
      compressed as long as the yield curve remains inverted, with short-term rates
      higher than long-term rates. Other factors that can affect the Corporation’s
      operating results are activity in the loan loss provision and components of
      non-interest income and non-interest expense.





The
      business strategy for 2007 is to continue asset growth through traditional
      loans
      and deposits supplemented by trust products offered to customers in its
      marketplace. Management anticipates continued pressure on net interest margins
      in 2007. Loans and deposits will continue to be competitively priced by the
      Corporation with the intention of acquiring profitable market share. Operating
      expenses will continue to be scrutinized for the purpose of offsetting the
      anticipated decline in net interest margins.





**Financial
      Condition**





Total
      assets of the Corporation were $338.2 million on December 31, 2006 compared
      to
      $322.4 million on December 31, 2005. Increases in Securities and Loans were
      offset by a decrease in Cash and Cash Equivalents along with a decrease in
      Federal funds sold. The increase in Total Liabilities was attributed to an
      increase in Total Deposits and an increase in Short-term
      borrowings.





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





The
      total
      loan portfolio increased $22.3 million in 2006 over the total of $205.4 million
      at the end of 2005. Increases in construction mortgages of $2.7 million,
      commercial real-estate loans of $9.3 million, consumer real estate loans of
      $8.0
      million, consumer loans of $1.2 million were offset by a decrease in consumer
      installments of $500,000, lines of credits of $700,000 and $1.2 million in
      commercial loans.




Total
      investment securities increased $12.9 million during 2006. The Corporation
      purchased $39.7 million of Mortgage Backed Securities (MBS) and $2.5 million
      of
      Municipal Bonds in 2006. These purchases were offset with $14.3 million in
      sales
      of MBS along with $12.5 million in pay downs of MBS. Maturities during 2006,
      were $500,000 in municipals and $2.0 million in US Government Agencies. All
      of
      the Corporation’s securities are held as available for sale. These securities
      consist of mortgage-backed securities and taxable and tax-free municipal bonds.
      The Corporation also owns restricted Federal Home Loan Bank stock. Depending
      upon market fluctuations or other circumstances that may arise, such as changes
      in prepayment rates, the Corporation may sell securities for asset/liability
      management and liquidity purposes.





At
      December 31, 2006, total deposits increased $16.9 million from December 31,
      2005
      to $293.9 million. This increase is due to an increase in certificates of
      deposits and savings accounts and a decrease in money market accounts and
      non-interest bearing deposits.


Total
      short-term borrowings increased $5.0 million from $ - 0 - in 2005. These
      borrowings were required to fund increases in loans and securities.





Shareholders’
      equity was $37.2 million on December 31, 2006 compared to $43.6 million on
      December 31, 2005, a decrease of $6.4 million. The change in shareholders’
equity consists of net income of $3.0 million being offset by dividends declared
      of $2.5 million and the purchase of treasury stock of $6.8 million. Book value
      per common share at year-end 2006 decreased by 4.3% to $12.23 from $12.79 at
      year-end 2005.





**Share
      Repurchase**





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


3





**Results
      of Operations**





Net
      income decreased $419,000, or 12.41%, to $3.0 million for the year ended
      December 31, 2006 from $3.4 million for the year ended December 31, 2005. The
      decrease was mainly due to the difference in the loan loss provision, with
      2006
      incurring a $210,000 expense compared to a benefit in 2005 from a $365,000
      credit.





Net
      income increased $2.8 million, or 444%, to $3.4 million for the year ended
      December 31, 2005 from $621,000 for the year ended December 31, 2004. The
      increase was primarily due to a $4.4 million charge relating to the prepayment
      of the Corporation’s long-term FHLB borrowings in 2004. Also included in
      operating income is a credit of $365,000 in the provision for loan losses.
      The
      credit is due to the combination of a partial recovery received in 2005 for
      a
      commercial loan charged off in a previous year and the bank received a pay-down
      on a classified loan, lowering the allowance requirements.








**Net
      Interest Income**





In
      2006,
      interest income was $17.6 million compared to $16.2 million in 2005, an increase
      of $1.4 million. Interest income on loans was up $1.7 million which was offset
      by a decline of $294,000 in investment income and other interest income. Loan
      income was up due to higher rates and higher volume. Security income was lower
      in 2006 due to lower average balances, which offset the higher yields on
      securities.





In
      2006,
      interest expense was $1.5 million higher than 2005. The increase is due to
      higher interest bearing liability cost, mainly higher certificates of deposits
      cost and to a lesser extent, an increase in outstanding interest bearing
      liabilities. The Corporation’s interest bearing liability cost in 2006 was
      2.64%, compared to 2.08% in 2005. For 2006, total outstanding deposits increased
      by $16.9 million to $293.9 million from $277.0 million at the end of
      2005.





As
      a
      result of these factors, net interest income in 2006 was $11.8 million, the
      same
      as 2005.





In
      2005,
      interest income was $16.2 million compared to $18.2 million in 2004, a decrease
      of $2.0 million. A $2.6 million decline in investment income and other interest
      income was partially offset by an increase in loan interest. The Bank reduced
      securities balances and related securities income as a result of a strategic
      decision to reduce FHLB borrowings in 2004 and not replace mortgage-backed
      securities as they amortize and prepay. Also contributing to the decline in
      total interest income were market conditions, specifically the fact that the
      yield on the 10-year Treasury note did not move in unison with short-term rates,
      which led to a flattening yield curve.





For
      2005,
      total deposits increased by $11.2 million to $277.0 million from $265.8 million
      at the end of 2004. This increase in deposits along with higher certificate
      of
      deposit rates increased overall deposit cost by $698,000, however the FHLB
      borrowing costs were $2.3 million lower in 2005, resulting in a decrease in
      interest expense from $6.0 million in 2004 to $4.4 million expense in
      2005.





As
      a
      result of these factors, net interest income in 2005 was $11.8 million compared
      to $12.3 million in 2004, a decrease of $500,000.










4


The
      following table displays the Corporation’s average balance sheet, annual
      interest earned and paid, and annual yields on interest earning assets and
      interest-bearing liabilities for 2006, 2005 and 2004.





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





2006
            2005
            2004





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





Interest-earning
                assetsLoans
                net of unearned
              income
                (b) (c)
            
            $
            218,944
            
            $
            13,305
            
            
            6.08
            %
            $
            199,505
            
            $
            11,565
            
            
            5.80
            %
            $
            187,918
            
            $
            11,086
            
            
            5.90
            %Taxable
                securities
            
            
            69,785
            
            
            4,092
            
            
            5.87
            
            
            77,631
            
            
            4,441
            
            
            5.72
            
            
            126,135
            
            
            6,914
            
            
            5.48Non-taxable
                securities
            
            
            3,720
            
            
            217
            
            
            5.82
            
            
            3,874
            
            
            208
            
            
            5.36
            
            
            10,502
            
            
            598
            
            
            5.70Interest-bearing
                deposits with banks
            
            
            58
            
            
            3
            
            
            4.31
            
            
            59
            
            
            2
            
            
            2.71
            
            
            4,998
            
            
            63
            
            
            1.26Federal
                funds sold
            
            
            7,451
            
            
            349
            
            
            4.68
            
            
            8,417
            
            
            301
            
            
            3.58
            
            
            5,210
            
            
            61
            
            
            1.17Total
                earning assets
            
            
            299,958
            
            
            17,966
            
            
            5.99
            
            
            289,486
            
            
            16,517
            
            
            5.71
            
            
            334,763
            
            
            18,722
            
            
            5.59Non-interest-earning
                assetsCash
            
            
            8,948
            
            
            
            
            
            
            
            
            8,913
            
            
            
            
            
            
            
            
            8,596Allowance
                for loan losses
            
            
            (1,681
            )
            
            
            
            
            
            
            
            (1,733
            )
            
            
            
            
            
            
            
            (2,165
            )Other
                assets
            
            
            20,227
            
            
            
            
            
            
            
            
            22,627
            
            
            
            
            
            
            
            
            23,881Total
                non-interest-earning assets
            
            
            27,494
            
            
            
            
            
            
            
            
            29,807
            
            
            
            
            
            
            
            
            31,312Total
                assets
            
            $
            327,452
            
            
            
            
            
            
            
            $
            319,293
            
            
            
            
            
            
            
            $
            365,075Liabilities
                and Shareholders’ EquityInterest-bearing
                depositsNOW
                accounts
            
            $
            21,185
            
            
            32
            
            
            0.15
            
            $
            22,147
            
            
            34
            
            
            0.15
            
            $
            23,881
            
            
            36
            
            
            0.15Money
                Market accounts
            
            
            26,330
            
            
            239
            
            
            0.91
            
            
            30,485
            
            
            239
            
            
            0.78
            
            
            39,835
            
            
            253
            
            
            0.64Savings
                deposits
            
            
            47,624
            
            
            458
            
            
            0.96
            
            
            48,408
            
            
            284
            
            
            0.59
            
            
            52,695
            
            
            317
            
            
            0.60Time
                deposits
            
            
            124,706
            
            
            4,999
            
            
            4.01
            
            
            107,746
            
            
            3,786
            
            
            3.51
            
            
            92,210
            
            
            3,056
            
            
            3.31Short-term
                borrowings
            
            
            2,533
            
            
            136
            
            
            5.37
            
            
            1,501
            
            
            39
            
            
            2.60
            
            
            10,505
            
            
            161
            
            
            1.52Long-term
                borrowings
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            40,123
            
            
            2,128
            
            
            5.29Total
                interest-bearing liabilities
            
            
            222,378
            
            
            5,864
            
            
            2.64
            
            
            210,287
            
            
            4,382
            
            
            2.08
            
            
            259,249
            
            
            5,951
            
            
            2.29Non-interest-bearing
                deposits
            
            
            65,629
            
            
            
            
            
            
            
            
            63,250
            
            
            
            
            
            
            
            
            57,904Other
                liabilities
            
            
            1,393
            
            
            
            
            
            
            
            
            1,522
            
            
            
            
            
            
            
            
            2,271Shareholders'
                equity
            
            
            38,052
            
            
            
            
            
            
            
            
            44,234
            
            
            
            
            
            
            
            
            45,651Total
                non-interest-bearingFunding
                sources
            
            
            105,074
            
            
            
            
            
            
            
            
            109,006
            
            
            
            
            
            
            
            
            105,826Total
                liabilities andshareholders'
                equity
            
            $
            327,452
            
            
            
            
            
            
            
            $
            319,293
            
            
            
            
            
            
            
            $
            365,075Net
                interest income and netYield
                on interest earning assets
            
            
            
            
            $
            12,102
            
            
            4.03
            %
            
            
            
            $
            12,135
            
            
            4.19
            %
            
            
            
            $
            12,771
            
            
            3.82
            %


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


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


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


5


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


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




2006
                Change from 2005
            2005
                Change from 2004Total
            
            
            Change
                Due
            
            
            Change
                Due
            
            
            Total
            
            
            Change
                Due
            
            
            Change
                DueChange
            
            
            To
                Volume
            
            
            To
                Rate
            
            
            Change
            
            
            To
                Volume
            
            
            To
                RateInterest-earning
                assetsLoans
                net of unearned income
            
            $
            1,740
            
            $
            1,127
            
            $
            613
            
            $
            479
            
            $
            646
            
            $
            (167
            )SecuritiesTaxable
            
            
            (349
            )
            
            (449
            )
            
            100
            
            
            (2,473
            )
            
            (2,659
            )
            
            186Non-taxable
            
            
            9
            
            
            (8
            )
            
            17
            
            
            (390
            )
            
            (376
            )
            
            (14
            )Interest-bearing
                deposits with banks
            
            
            1
            
            
            0
            
            
            1
            
            
            (61
            )
            
            (62
            )
            
            1Federal
                funds sold
            
            
            48
            
            
            (35
            )
            
            83
            
            
            240
            
            
            38
            
            
            202Total
                interest income
            
            
            1,449
            
            
            635
            
            
            814
            
            
            (2,205
            )
            
            (2,413
            )
            
            208Interest-bearing
                liabilitiesDeposits
            
            
            1385
            
            
            230
            
            
            1,155
            
            
            681
            
            
            4
            
            
            677Short-term
                borrowings
            
            
            97
            
            
            27
            
            
            70
            
            
            (122
            )
            
            (139
            )
            
            17Long-term
                borrowings
            
            
            0
            
            
            0
            
            
            0
            
            
            (2,128
            )
            
            (2,128
            )
            
            0Total
                interest expense
            
            
            1,482
            
            
            257
            
            
            1,225
            
            
            (1,569
            )
            
            (2,263
            )
            
            694Net
                interest income
            
            $
            (33
            )
            $
            378
            
            $
            (411
            )
            $
            (636
            )
            $
            (150
            )
            $
            (486
            )





**Other
      Operating Income and Expense**





Total
      other operating income increased $100,000 to $3.1 million for 2006, compared
      to
      $3.0 million in 2005. The increase is due to higher trust department income
      of
      $93,000, an increase in service charge income from deposits of $38,000, gains
      on
      sale of securities of $25,000, an increase in other service charges of $9,000,
      an increase in Bank owned life insurance income of $22,000 and a decrease of
      other income of $92,000. The majority of the decrease in other income for 2006
      compared to 2005 is a result of $85,000 less in gains on sale of other real
      estate in 2006.




Total
      other operating income decreased $1.6 million to $3.0 million for 2005, compared
      to $4.6 million in 2004. The decrease is primarily two items; first, no security
      gains were taken in 2005 compared to the $1.2 million gain in 2004, the second
      being due to the sale of insurance agency, there were no commissions and fees
      from insurance sales in 2005 compared to $342,000 in 2004.





Non-interest
      expense for 2006 increased $100,000 to $10.6 million, compared to $10.5 million
      in 2005. Professional fees were $79,000 higher in 2006.





Non-interest
      expense for 2005 decreased $6.4 million to $10.5 million, compared to $16.9
      million in 2004. The majority of this decrease in expenses is the $4.4 million
      prepayment penalty paid to FHLB, which inflated 2004 non-interest expense.
      Also,
      payroll costs were $1.0 million lower in 2005 compared to 2004. This reduction
      is the result of less staffing due to the sale of the Gooder Agency and staffing
      reductions at the Bank. In addition, legal and professional expenses decreased
      by $110,000 in 2005 compared to 2004. In 2004, legal costs were higher due
      to
      the merger of Highview Trust back into the Bank and the sale of the Gooder
      Agency. Other expenses were lower in 2005 compared to 2004, due to the sale
      of
      Gooder Agency and general cost controls within the Bank.





Income
      tax expense/(benefit) was $1,006,000 in 2006, $1,217,000 in 2005 and ($209,000)
      in 2004. The income tax benefit for 2004 was due to higher tax-free income
      in
      relation to lower pre-tax income in 2004.

















**Liquidity
      and Capital Resources**





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





As
      of
      December 31, 2006, the Corporation had available funding of approximately $194
      million at the FHLB with an additional $26.0 million of short-term funding
      available through federal funds lines of credit.





The
      Corporation has outstanding commitments to fund loans that are made in the
      normal course of business. At December 31, 2006, the commitments stood at $35.3
      million. Since many of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements.





Cash
      flows from operating activities in 2006 decreased by $1.0 million to $3.6
      million, from $4.6 million in 2005. The majority of this decrease is attributed
      to the decrease in interest receivables and other assets in 2005 provided cash
      of $1.0 million compared to the increase in 2006 of $111,000. Other factors
      include lower net income in 2006 and a $337,000 increase in other liabilities
      in
      2006 compared to a 2005 increase other liabilities of $95,000.





Cash
      flows used in investing activities totaled $18.9 million in 2006, compared
      to
      cash provided by investing activities in 2005 of $129,000. Cash used for loan
      and securities growth in 2006 offset net inflows from reduction of federal
      funds
      sold.





Cash
      provided from financing activities totaled $12.6 million in 2006. Cash provided
      by increase in deposits and the increase in short term borrowings was partially
      offset by cash used to pay dividends and purchase treasury stock.





**Aggregate
      Contractual Obligations**





The
      following table presents contractual obligation payments due by specific time
      periods:





(Dollars
                in thousands)<
1
              year
            
            
            1
                - 3 years
            
            
            >
                3 - 5 years
            
            
            >
                5 years
            
            
            TotalCapital
                lease obligations
            
            $
            22
            
            $
            15
            
            $
            -
            
            $
            -
            
            $
            37Operating
                lease obligations
            
            
            101
            
            
            202
            
            
            171
            
            $
            140
            
            
            614Time
                deposits
            
            
            78,559
            
            
            42,441
            
            
            9,019
            
            
            -
            
            
            130,019Total
            
            $
            78,682
            
            $
            42,658
            
            $
            9,190
            
            $
            140
            
            $
            130,670





6




**Interest
      Sensitivity and Market Risk**





Time
      deposits of $100,000 or more at December 31, 2006 are as follows:





Amount
            Percent(in
                thousands)Remaining
                maturity:3
                months or less
            $6,798
            20%Over
                3 through 6 months
            9,391
            28Over
                6 months through 12 months
            9,865
            29Over
                12 months
            7,993
            23Total
            $ 34,047
            100%





The
      following table shows final loan maturities and rate sensitivities of the loan
      portfolio excluding consumer installment, mortgage and non-accrual loans and
      before unearned income at December 31, 2006: (in thousands)





Within
            
            
            One-Five
            
            
            AfterOne
              year
            
            
            Years
            
            
            Five
                Years
            
            
            TotalCommercial
                and industrial
            
            $
            3,844
            
            $
            13,037
            
            $
            1,307
            
            $
                18,188Real
                estate-construction
            
            
            1,256
            
            
            -
            
            
            -
            
            1,256Other
            
            
            1,345
            
            
            261
            
            
            10,424
            
            12,030Totals
            
            $
            6,445
            
            $
            13,298
            
            $
            11,731
            
            $
                31,474Loans
                at fixed interest rates
            
            
            
            
            $
            7,602
            
            $
            11,495Loans
                at variable interest rates
            
            
            
            
            
            5,696
            
            
            236$
            13,298
            
            $
            11,731











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





Loans
                by Classification at December 31,(in
                thousands)2006
            
            
            
            
            
            2005
            
            
            
            
            
            2004
            
            
            
            
            
            2003
            
            
            
            
            
            2002Commercial
            
            $
            18,188
            
            
            8
            %
            $
            18,275
            
            
            9
            %
            $
            15,933
            
            
            8
            %
            $
            14,802
            
            
            8
            %
            $
            12,725
            
            
            7
            %Real
                estate - commercial
            
            
            65,786
            
            
            29
            
            
            60,794
            
            
            29
            
            
            55,555
            
            
            29
            
            
            51,006
            
            
            27
            
            
            54,618
            
            
            32Real
                estate - construction
            
            
            1,256
            
            
            -
            
            
            910
            
            
            -
            
            
            258
            
            
            -
            
            
            1,108
            
            
            1
            
            
            976
            
            
            1Real
                estate - other
            
            
            128,364
            
            
            56
            
            
            115,294
            
            
            56
            
            
            107,819
            
            
            56
            
            
            106,121
            
            
            57
            
            
            86,048
            
            
            51Consumer
                - installment
            
            
            3,704
            
            
            2
            
            
            2,929
            
            
            1
            
            
            886
            
            
            1
            
            
            1,405
            
            
            1
            
            
            1,922
            
            
            1Municipal
            
            
            11,226
            
            
            5
            
            
            7,596
            
            
            4
            
            
            10,002
            
            
            5
            
            
            10,622
            
            
            5
            
            
            10,078
            
            
            6Other
            
            
            805
            
            
            -
            
            
            1,019
            
            
            1
            
            
            1,579
            
            
            1
            
            
            2,179
            
            
            1
            
            
            2,635
            
            
            2Total
                loans
            
            
            229,329
            
            
            100
            %
            
            206,817
            
            
            100
            %
            
            192,032
            
            
            100
            %
            
            187,243
            
            
            100
            %
            
            169,002
            
            
            100
            %Net
                unamortizedcosts/(fees)
            
            
            199
            
            
            
            
            
            222
            
            
            
            
            
            223
            
            
            
            
            
            139
            
            
            
            
            
            28Total
                loans, net ofcosts/(fees)
            
            $
            229,528
            
            
            
            
            $
            207,039
            
            
            
            
            $
            192,255
            
            
            
            
            $
            187,382
            
            
            
            
            $
            169,030





Maturity
                Distribution of Securities at December 31, 2006(in
                thousands)U.S
            State
                &
            Total
            WeightedGovt.
            Political
            Amortized
            AverageAgencies
                (1)
            Subdivisions
                (2)
            Cost
            YieldWithin
                1 year
            $
                -
            $
                100
            $
                100
            4.99%After
                1 but within 5 years
            -
            2,971
            2,971
            5.02After
                5 but within 10 years
            -
            2,348
            2,348
            6.01After
                10 years
            72,720
            -
            72,720
            5.98$
                72,720
            $
                5,419
            $78,139
            5.94%


Included
      in U.S. Government Agencies are mortgage-backed securities. These securities
      carry an amortized cost of $72.7 million and mature based upon their estimated
      contractual maturities. Expected maturities will differ from contractual
      maturities because borrowers may have the right to prepay with or without
      prepayment penalties.





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


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


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





Fair
                Values of Securities at December 31,(in
                thousands)2006
            2005
            2004U.S
                Govt. Agencies
            $
                73,644
            $
                63,779
            $
                96,365Obligations
                of State &Political
                Subdivisions
            5,352
            2,338
            3,090$
                78,996
            $
                66,117
            $
                99,455





**Interest
      Sensitivity and Market Risk**





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





The
      following table lists the amounts and ratio of assets and liabilities subject
      to
      change as of December 31, 2006.





Interest
      Sensitivity Analysis (In Thousands)




0-30
                Days
            31-90
                Days
            91-180
                Days
            181-365
                Days
            1-5
                Years
            Over
                5 Years
            TotalsInterest-earning
                assets:Securities
            $585
            $
                1,167
            $2,058
            $4,484
            $31,942
            $37,903
            $ 
                78,139Loans
            16,902
            7,552
            11,662
            24,249
            141,709
            27,454
            229,528Total
                interest-sensitiveAssets
            17,487
            8,719
            13,720
            28,733
            173,651
            65,357
            307,667Interest-bearing
                liabilities:Certificates
                of deposit
            6,506
            16,611
            26,224
            29,217
            51,235
            226
            130,019Other
                interest-bearing deposits
            42,966
            284
            427
            853
            38,110
            15,562
            98,202Short
                term borrowings
            5,000
            -
            -
            -
            -
            -
            5,000Total
                interest-sensitiveLiabilities
            54,472
            16,895
            26,651
            30,070
            89,345
            15,788
            233,221Interest
                sensitivity gap
            $(36,,985)
            $(8,176)
            $(12,931)
            $(1,337)
            $84,306
            $49,569
            $74,446Cumulative
                gap
            $(
                36,985)
            $(45,161)
            $(58,092)
            $(59,429)
            $24,877
            $74,446Ratio
                of cumulative gap toInterest
                sensitive assets
            12.02%
            14.67%
            18.88%
            19.31%
            8.08%
            24.19%





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





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





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








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





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





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





The
      following table presents the simulation model's projected impact of an immediate
      and sustained parallel shift in interest rates on the projected baseline net
      interest income for a twelve-month period commencing January 1,
      2007.





**%
                Change in projected**
            **%
                Change in projected****Change
                in interest**
            **Baseline**
            **Economic****rates**
            **net
                interest income**
            **value
                of capital**+200
                basis points
            (6.9%)
            (19.2%)+100
                basis points
            (3.3%)
            (8.8%)-100
                basis points
            1.8%
            2.7%-200
                basis points
            4.0%
            1.2%





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.





**Allowance
      for Loan Losses and Credit Review**





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





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





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





The
      amount of the provision/(credit) for loan losses was $210,000 in 2006,
      ($365,000) in 2005, ($436,000) in 2004. The credit for loan losses in 2005
      is
      due to the combination of a $285,000 recovery received for a commercial loan
      charged off in a previous year and the bank received a pay-down on a classified
      loan, lowering the allowance requirement. The credit in 2004 was from the
      allocations of $3.2 million in classified loans that paid off in the first
      quarter. For each of the same years, the net charge-offs(recoveries) against
      the
      allowance for loan losses was $40,000, ($146,000) and $171,000 respectively.
      The
      allowance for loan losses is maintained at a level that represents management’s
      best estimates of losses in the loan portfolio at the balance sheet date.
      However, there can be no assurance that the allowance for loan losses will
      be
      adequate to cover losses which may be realized in the future, or that additional
      provisions for losses on loans will not be required.














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





Years
                Ended December 31,
              (Dollars
                in thousands)2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Loans
                outstanding at end of the year,net
                of unearned income
            
            $
            229,528
            
            $
            207,039
            
            $
            192,255
            
            $
            187,382
            
            $
            169,030Average
                loans outstanding
            
            $
            218,944
            
            $
            199,505
            
            $
            187,918
            
            $
            183,628
            
            $
            187,428Allowance
                for loan losses:Balance,
                beginning of year
            
            $
            1,636
            
            $
            1,855
            
            $
            2,462
            
            $
            2,707
            
            $
            2,814Loans
                charged off:Commercial
                and tax free
            
            
            47
            
            
            105
            
            
            251
            
            
            29
            
            
            180Consumer
            
            
            13
            
            
            30
            
            
            41
            
            
            32
            
            
            31Real
                estate
            
            
            0
            
            
            20
            
            
            69
            
            
            272
            
            
            238Total
                loans charged off
            
            
            60
            
            
            155
            
            
            361
            
            
            333
            
            
            449Recoveries:Commercial
                and tax free
            
            
            11
            
            
            296
            
            
            136
            
            
            21
            
            
            17Consumer
            
            
            9
            
            
            5
            
            
            10
            
            
            13
            
            
            24Real
                estate
            
            
            0
            
            
            0
            
            
            44
            
            
            15
            
            
            3Total
                recoveries
            
            
            20
            
            
            301
            
            
            190
            
            
            49
            
            
            44Net
                loans charged off/(recovered)
            
            
            40
            
            
            (146
            )
            
            171
            
            
            284
            
            
            405Provision
                charged/(credited) to expense
            
            
            210
            
            
            (365
            )
            
            (436
            )
            
            39
            
            
            298Balance,
                end of year
            
            $
            1,806
            
            $
            1,636
            
            $
            1,855
            
            $
            2,462
            
            $
            2,707Ratios:Net
                (recoveries)/charge-offs as apercentage
                of average loansoutstanding
            
            
            .02
            %
            
            (.07
            )%
            
            .09
            %
            
            .15
            %
            
            .22
            %Allowance
                for loan lossesas
                a percentage of average loansoutstanding
            
            
            .83
            %
            
            .82
            %
            
            .99
            %
            
            1.34
            %
            
            1.44
            %


Management’s
      review and evaluation of loan loss experience and loan loss potential on
      outstanding loans occurs on a quarterly basis and includes a review of such
      factors as charge-off history, delinquent loans, loan collateral value, the
      borrower’s financial condition, current economic conditions and the current
      requirements of the appropriate regulatory agencies. As a result of this
      on-going study, management believes that the allowance for loan loss amount
      for
      December 31, 2006 is adequate.


7


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





2006
            2005
            2004
            2003
            2002(Dollars
                in thousands)Percent
            
            Percent
            
            Percent
            
            Percent
            
            PercentAmount
            Of
                Loan
            Amount
            Of
                Loan
            Amount
            Of
                Loan
            Amount
            Of
                Loan
            Amount
            Of
                LoanType
            
            Type
            
            Type
            
            Type
            
            TypeCommercial
            $1,668
            47%
            $1,540
            47%
            $1,771
            42%
            $2,371
            40%
            $2,617
            45%Residential
            97
            52
            63
            52
            58
            56
            69
            58
            63
            52Consumer
            41
            1
            33
            1
            26
            2
            22
            2
            27
            3Total
            $1,806
            100%
            $1,636
            100%
            $1,855
            100%
            $2,462
            100%
            $2,707
            100%





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





Dec.
                31, 2006Loans
                on non-accrual basis
            $
                561Loans
                past due 90 days or more
            -Renegotiated
                loans
            2,823Total
            $
                3,384Dec.
                31, 2005Loans
                on non-accrual basis
            $
                1,308Loans
                past due 90 days or more
            2Renegotiated
                loans
            2,860Total
            $
                4,170Dec.
                31, 2004Loans
                on non-accrual basis
            $
                1,667Loans
                past due 90 days or more
            12Renegotiated
                loans
            3,083Total
            $
                4,762Dec.
                31, 2003Loans
                on non-accrual basis
            $
                2,331Loans
                past due 90 days or more
            5Renegotiated
                loans
            -Total
            $
                2,336Dec.
                31, 2002Loans
                on non-accrual basis
            $
                2,679Loans
                past due 90 days or more
            3Renegotiated
                loans
            -Total
            $
                2,682





Loans
      that were past due 90 days or more, or were on non-accrual represented .24%
      of
      total loans on December 31, 2006, which was down from 0.63% on December 31,
      2005
      and 0.87% on December 31, 2004. The Corporation’s policy is to place a loan on
      non-accrual basis when it becomes 90 days past due provided that the loan is
      well collateralized and evidence indicates a reasonable likelihood for
      collection. Also, a loan is placed on non-accrual in the event of a material
      decline in business activity that may hinder the borrower’s ability to repay the
      loan.





As
      of
      December 31, 2006 **,** $418,000
      of non-accrual loans were paying principal or principal and interest with
      payments recognized on a cash basis. Renegotiated loans remained the same at
      $2.8 million. Of this amount, $2.5 million relates to a single borrower. At
      present, the Corporation has no knowledge of other outstanding loans that
      present a serious doubt in regard to the borrower's ability to comply with
      the
      current loan repayment terms. As of December 31, 2006 the Corporation had
      $905,000 in foreclosed real estate compared to $740,000 at the end of
      2005.





In
      2006,
      the gross amount of interest that would have been recorded on non-accrual loans
      would have been $31,000. The actual interest reflected in income on these loans
      was $23,000.





**Capital**





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





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





As
      of
      December 31, 2006, the Corporation had Tier I and total equity capital to risk
      adjusted asset ratios of 16.9% and 17.8%, respectively. In 2006 the leverage
      ratio was 10.8%. At December 31, 2005, the Corporation had Tier I and total
      equity capital to risk adjusted assets ratios of 21.4% and 22.3%, respectively.
      The leverage ratio was 13.3%.





The
      table
      below presents the Corporation’s capital position at December 31, 2006.


(dollar
      amounts in thousands)





**Percent****of
                Adjusted****Amount**
            
            
            **Assets**Tier
                I Capital
            
            $
            36,102
            
            
            16.9
            %Tier
                I Capital Requirement
            
            
            8,525
            
            
            4.0Total
                Equity Capital
            
            $
            37,908
            
            
            17.8
            %Risk-Based
                Requirement
            
            
            17,049
            
            
            8.0Leverage
                Capital
            
            $
            36,102
            
            
            10.8
            %Leverage
                Requirement
            
            
            13,404
            
            
            4.0








**Inflation
      and Changing Prices**





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





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





8


**Market
      Makers**





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





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








**Transfer
      Agent**





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





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 2006
      ANNUAL REPORT ON FORM 10-K AS REQUIRED TO BE FILED WITH THE SECURITIES AND
      EXCHANGE COMMISSION. REQUESTS SHOULD BE MADE IN WRITING
      TO:**





Commercial
      National Financial Corporation


Attn:
      Wendy S. Schmucker, Secretary


P.O.
      Box
      429


Latrobe,
      PA 15650


9
  ***Commercial
          National***
  ***Financial
          Corporation***
  Consolidated
          Financial Report
 
  December
          31, 2006
 
 
  10
   **Table
          of Contents**
 
  **Page
          No.**
  **Consolidated
          Financial Statements:**
  Report
          of
          Independent Registered Public Accounting Firm        
 12
  Consolidated
          Statements of Financial Condition        13
  Consolidated
          Statements of Income           
14
  Consolidated
          Statements of Shareholders’ Equity               
          15
  Consolidated
          Statements of Cash Flows         
16
  Notes
          to
          Consolidated Financial Statements                                   
          17
 11
  
   **Report
        of Independent Registered Public Accounting Firm******
  To
        the
        Board of Directors and Shareholders
  Commercial
        National Financial Corporation and Subsidiaries
  Latrobe,
        Pennsylvania
  We
        have
        audited the accompanying consolidated statements of financial condition of
        Commercial National Financial Corporation and its subsidiaries as of
        December 31, 2006 and 2005, and the related consolidated statements of
        income, shareholders’ equity and cash flows for each of the three years in the
        period ended December 31, 2006. These consolidated financial statements are
        the responsibility of the Corporation's management. Our responsibility is
        to
        express an opinion on these financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Corporation is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Corporation’s internal control over
        financial reporting. Accordingly, we express no such opinion. An audit also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements, assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation. We believe that our audits provide
        a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Commercial National
        Financial Corporation and subsidiaries as of December 31, 2006 and 2005,
        and the results of their operations and their cash flows for each of the
        three
        years in the period ended December 31, 2006 in conformity with accounting
        principles generally accepted in the United States of America.
  /s/
        Beard
        Miller Company LLP
 
 Beard
        Miller Company LLP
 Pittsburgh,
        Pennsylvania
 March
        14,
        2007
 
  
 12
 
 
  **Consolidated
        Statements of Financial Condition**
 
  **December
                  31,****2006**
              
              **2005****(Dollars
                  in Thousands, Except per Share
                  Data)**
 **Assets**
  Cash
                  and due from banks
              
              **$**
              **10,134**
              
              $
              12,760Interest
                  bearing deposits with banks
              
              
              **22**
              
              
              121Cash
                  and Cash Equivalents
              
              
              **10,156**
              
              
              12,881Federal
                  funds sold
              
              
              **-**
              
              
              16,950Securities
                  available for sale
              
              
              **78,996**
              
              
              66,117Restricted
                  investments in bank stock
              
              
              **1,180**
              
              
              1,013Loans
                  receivable, net of allowance for loan losses of $1,806 in 2006
                  and $1,636
                  in 2005
              
              
              **227,722**
              
              
              205,403Premises
                  and equipment,net
              
              
              **3,886**
              
              
              4,301Accrued
                  interest receivable
              
              
              **1,044**
              
              
              862Investment
                  in life insurance
              
              
              **13,452**
              
              
              12,940Other
                  assets
              
              
              **1,760**
              
              
              1,914
 
 **Total
                  Assets**
              
              **$**
              **338,196**
              
              $
              322,381
 
 **Liabilities
        and Shareholders’ Equity**
  **Liabilities**
  Deposits:Non-interest
                  bearing
              
              **$**
              **65,699**
              
              $
              69,025Interest
                  bearing
              
              
              **228,221**
              
              
              207,984Total
                  Deposits
              
              
              **293,920**
              
              
              277,009Short-term
                  borrowings
              
              
              **5,000**
              
              
              -Other
                  liabilities
              
              
              **2,047**
              
              
              1,711
 
 **Total
                  Liabilities**
              
              
              **300,967**
              
              
              278,720
 
 **Shareholders’
        Equity**
  Common
                  stock, par value $2 per share; authorized 10,000,000 shares; issued
                  3,600,000 shares; outstanding 3,044,813 and 3,413,426 shares in
                  2006 and
                  2005
              
              
              **7,200**
              
              
              7,200Retained
                  earnings
              
              
              **39,869**
              
              
              39,422Accumulated
                  other comprehensive income
              
              
              **566**
              
              
              617Treasury
                  stock, at cost, 555,187 and 186,574 shares in 2006 and
                  2005
              
              
              **(10,406**
              **)**
              
              (3,578
              )
 
 **Total
                  Shareholders’ Equity**
              
              
              **37,229**
              
              
              43,661
 
 **Total
                  Liabilities and Shareholders’ Equity**
              
              **$**
              **338,196**
              
              $
              322,381
 
  *See
              notes to consolidated financial statements.*
 13
 ***Commercial
              National Financial
              Corporation***
   **Consolidated
        Statements of Income** ****
 
  **Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****(In
                  Thousands, Except per Share
                  Amounts)**
 
 **Interest
        Income**
 Interest
                  and fees on loans
              
              **$**
              **13,054**
              
              $
              11,303
              
              $
              10,809Interest
                  and dividends on securities:Taxable
              
              
              **4,092**
              
              
              4,441
              
              
              6,914Exempt
                  from federal income taxes
              
              
              **143**
              
              
              137
              
              
              395Other
              
              
              **352**
              
              
              303
              
              
              124
 
 **Total
                  Interest Income**
              
              
              **17,641**
              
              
              16,184
              
              
              18,242
 
 **Interest
        Expense**
 Deposits
              
              
              **5,728**
              
              
              4,343
              
              
              3,662Short-term
                  borrowings
              
              
              **136**
              
              
              39
              
              
              161Long-term
                  borrowings
              
              
              **-**
              
              
              -
              
              
              2,128
 
 **Total
                  Interest Expense**
              
              
              **5,864**
              
              
              4,382
              
              
              5,951
 
 **Net
                  Interest Income**
              
              
              **11,777**
              
              
              11,802
              
              
              12,291
 
 **Provision
                  (Credit) for Loan Losses**
              
              
              **210**
              
              
              (365
              )
              
              (436
              )
 
 **Net
                  Interest Income after Provision (Credit) for Loan
                  Losses**
              
              
              **11,567**
              
              
              12,167
              
              
              12,727
 
 **Other
        Operating Income**
 Service
                  charges on deposit accounts
              
              
              **642**
              
              
              604
              
              
              644Other
                  service charges and fees
              
              
              **710**
              
              
              701
              
              
              726Net
                  security gains
              
              
              **25**
              
              
              -
              
              
              1,195Trust
                  department income
              
              
              **922**
              
              
              829
              
              
              876Income
                  from investment in life insurance
              
              
              **547**
              
              
              525
              
              
              529Commissions
                  and fees from insurance sales
              
              
              **-**
              
              
              -
              
              
              342Other
                  income
              
              
              **208**
              
              
              300
              
              
              279
 
 **Total
                  Other Operating Income**
              
              
              **3,054**
              
              
              2,959
              
              
              4,591
 
 **Other
        Operating Expenses**
 Salaries
                  and employee benefits
              
              
              **5,154**
              
              
              5,196
              
              
              6,236Net
                  occupancy
              
              
              **711**
              
              
              722
              
              
              702Furniture
                  and equipment
              
              
              **615**
              
              
              742
              
              
              809Professional
                  fees
              
              
              **639**
              
              
              560
              
              
              670Pennsylvania
                  shares tax
              
              
              **561**
              
              
              559
              
              
              546Automated
                  teller machine
              
              
              **314**
              
              
              315
              
              
              300Director
                  fees
              
              
              **400**
              
              
              382
              
              
              408FHLB
                  prepayment penalty
              
              
              **-**
              
              
              -
              
              
              4,402Other
                  expenses
              
              
              **2,263**
              
              
              2,056
              
              
              2,833
 
 **Total
                  Other Operating Expenses**
              
              
              **10,657**
              
              
              10,532
              
              
              16,906
 
 **Income
                  before Income Taxes (Benefit)**
              
              
              **3,964**
              
              
              4,594
              
              
              412
 
 **Income
                  Tax Expense (Benefit)**
              
              
              **1,006**
              
              
              1,217
              
              
              (209
              )
 
 **Net
                  Income**
              
              **$**
              **2,958**
              
              $
              3,377
              
              $
              621
 
 **Earnings
                  per Share, Basic**
              
              **$**
              **0.95**
              
              $
              0.99
              
              $
              0.18
 
  *See
              notes to consolidated financial statements.*
 14
 ***Commercial
              National Financial
              Corporation***
   **Consolidated** **Statements
        of Shareholders’ Equity**
 **Years
        Ended December 31, 2006, 2005 and 2004**
 
  **Common**
                **Stock**
              
              **Retained
                  Earnings**
              
              **Accumulated**
                **Other
                  Comprehensive Income**
              
              **Treasury**
                **Stock**
              
              **Total**
                **Shareholders’**
                **Equity****(In
                  Thousands, Except per Share
                  Amounts)**
 
 **Balance
                  - December 31, 2003**
              
              $
              7,200
              
              $
              41,748
              
              $
              3,746
              
              $
              (3,157
              )
              $
              49,537Comprehensive
                  loss:Net
                  income
              
              
              -
              
              
              621
              
              
              -
              
              
              -
              
              
              621Change
                  in unrealized net gains on securities
                available
                  for sale, net of reclassification
                adjustment
                  and deferred income taxes
              
              
              -
              
              
              -
              
              
              (1,654
              )
              
              -
              
              
              (1,654
              )**Total
                  Comprehensive Loss**
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,033
              )Cash
                  dividends declared, $1.00 per share
              
              
              -
              
              
              (3,423
              )
              
              -
              
              
              -
              
              
              (3,423
              )Purchases
                  of treasury stock (16,950 shares)
              
              
              -
              
              
              -
              
              
              -
              
              
              (421
              )
              
              (421
              )**Balance
                  - December 31, 2004**
              
              
              7,200
              
              
              38,946
              
              
              2,092
              
              
              (3,578
              )
              
              44,660Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              3,377
              
              
              -
              
              
              -
              
              
              3,377Change
                  in unrealized net gains on securities
                available
                  for sale, net of reclassification
                adjustment
                  and deferred income taxes
              
              
              -
              
              
              -
              
              
              (1,475
              )
              
              -
              
              
              (1,475
              )**Total
                  Comprehensive Income**
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,902Cash
                  dividends declared, $0.85 per share
              
              
              -
              
              
              (2,901
              )
              
              -
              
              
              -
              
              
              (2,901
              )**Balance
                  - December 31, 2005**
              
              
              7,200
              
              
              39,422
              
              
              617
              
              
              (3,578
              )
              
              43,661Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              **2,958**
              
              
              **-**
              
              
              **-**
              
              
              **2,958**Change
                  in unrealized net gains on securities
                available
                  for sale, net of reclassification
                adjustment
                  and deferred income taxes
              
              
              -
              
              
              **-**
              
              
              **(51**
              **)**
              
              **-**
              
              
              **(51**
              **)****Total
                  Comprehensive Income**
              
              
              -
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **2,907**Cash
                  dividends declared, $0.80 share
              
              
              -
              
              
              **(2,511**
              **)**
              
              **-**
              
              
              **-**
              
              
              **(2,511**
              **)**Purchases
                  of treasury stock (368,613 shares)
              
              
              -
              
              
              **-**
              
              
              **-**
              
              
              **(6,828**
              **)**
              
              **(6,828**
              **)****Balance
                  - December 31, 2006**
              
              **$**
              **7,200**
              
              **$**
              **39,869**
              
              **$**
              **566**
              
              **$**
              **(10,406**
              **)**
              **$**
              **37,229**
 
 
 
 
  *See
              notes to consolidated financial statements.*
 15
 ***Commercial
              National Financial
              Corporation***
   **Consolidated
        Statements of Cash Flows**
 
  **Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****(In
                  Thousands)**
 
 **Cash
        Flows from Operating Activities**
 Net
                  income
              
              **$**
              **2,958**
              
              $
              3,377
              
              $
              621Adjustments
                  to reconcile net income to net cash provided by
                (used
                  in) operating activities:Depreciation
                  and amortization
              
              
              **623**
              
              
              762
              
              
              905Provision
                  (credit) for loan losses
              
              
              **210**
              
              
              (365
              )
              
              (436
              )Net
                  accretion of securities and loan fees
              
              
              **(60**
              **)**
              
              (66
              )
              
              (128
              )Net
                  security gains
              
              
              **(25**
              **)**
              
              -
              
              
              (1,195
              )(Gain)
                  loss on sale of foreclosed real estate
              
              
              **(12**
              **)**
              
              (97
              )
              
              38Income
                  from investment in life insurance
              
              
              **(547**
              **)**
              
              (525
              )
              
              (529
              )Deferred
                  tax expense (benefit)
              
              
              **(52**
              **)**
              
              430
              
              
              (439
              )(Increase)
                  decrease in accrued interest receivable and
                other
                  assets
              
              
              **111**
              
              
              1,015
              
              
              (448
              )Increase
                  (decrease) in other liabilities
              
              
              **371**
              
              
              95
              
              
              (589
              )
 
 **Net
                  Cash Provided by (Used in) Operating Activities**
              
              
              **3,577**
              
              
              4,626
              
              
              (2,200
              )
 
 **Cash
        Flows from Investing Activities**
 (Increase)
                  decrease in federal funds sold
              
              
              **16,950**
              
              
              (16,950
              )
              
              -Purchases
                  of securities
              
              
              **(42,164**
              **)**
              
              (602
              )
              
              (110,449
              )Maturities,
                  calls and principal repayments of securities
              
              
              **14,969**
              
              
              31,772
              
              
              40,096Proceeds
                  from sales of securities
              
              
              **14,345**
              
              
              -
              
              
              133,969Net
                  (increase) decrease in restricted bank stock
              
              
              **(167**
              **)**
              
              793
              
              
              2,539Net
                  increase in loans
              
              
              **(22,731**
              **)**
              
              (14,784
              )
              
              (4,960
              )Net
                  proceeds from sale of foreclosed assets
              
              
              **29**
              
              
              215
              
              
              1,291Purchases
                  of premises and equipment
              
              
              **(105**
              **)**
              
              (315
              )
              
              (399
              )
 
 **Net
                  Cash Provided by (Used in) Investing Activities**
              
              
              **(18,874**
              **)**
              
              129
              
              
              62,087
 
 **Cash
        Flows from Financing Activities**
 Net
                  increase in deposits
              
              
              **16,911**
              
              
              11,191
              
              
              6,602Net
                  increase (decrease) in short-term borrowings
              
              
              **5,000**
              
              
              (7,950
              )
              
              (9,500
              )Repayment
                  of long-term borrowings
              
              
              **-**
              
              
              -
              
              
              (55,000
              )Dividends
                  paid
              
              
              **(2,511**
              **)**
              
              (2,901
              )
              
              (3,423
              )Purchases
                  of treasury stock
              
              
              **(6,828**
              **)**
              
              -
              
              
              (421
              )
 
 **Net
                  Cash Provided by (Used in) Financing Activities**
              
              
              **12,572**
              
              
              340
              
              
              (61,742
              )
 
 **Net
                  Increase (Decrease) in Cash and Cash Equivalents**
              
              
              **(2,725**
              )
              
              5,095
              
              
              (1,855
              )
 
 **Cash
                  and Cash Equivalents - Beginning**
              
              
              **12,881**
              
              
              7,786
              
              
              9,641
 
 **Cash
                  and Cash Equivalents - Ending**
              
              **$**
              **10,156**
              
              $
              12,881
              
              $
              7,786
 **Supplementary
        Cash Flows Information**
 Interest
                  paid
              
              **$**
              **5,478**
              
              $
              4,216
              
              $
              6,133
 
 Income
                  taxes paid
              
              **$**
              **975**
              
              $
              866
              
              $
              981
 
 Loans
                  transferred to foreclosed real estate
              
              **$**
              **181**
              
              $
              178
              
              $
              34
 
 
 
  *See
              notes to consolidated financial statements.*
 16
 ***Commercial
              National Financial
              Corporation***
   **Notes
        to Consolidated Financial Statements**
 
  **Note
        1 - Significant Accounting Policies**
  **General**
  The
        accompanying consolidated financial statements include the accounts of
        Commercial National Financial Corporation (the Corporation) and its wholly-owned
        subsidiaries, Commercial Bank & Trust of PA, and Commercial National
        Insurance Services, Inc. (CNIS). In December 2002, CNIS acquired The Gooder
        Agency, Inc. (Gooder) which was subsequently sold in 2004. A $39,000 loss
        was
        recognized on the sale, which is included in other expenses. The result of
        operations of Gooder prior to the sale were not material to the Corporation’s
        results of operations. All material intercompany transactions have been
        eliminated in consolidation.
  The
        Bank
        operates under a state bank charter and provides full banking services. The
        Corporation is subject to regulation by the Federal Reserve Board and the
        Bank
        is subject to regulation by the Federal Deposit Insurance Corporation and
        the
        Pennsylvania Department of Banking. The Bank’s primary business consists of
        taking deposits and granting loans to customers who generally do business
        in the
        area of Westmoreland County, Pennsylvania.
  As
        of
        December 31, 2006, the Corporation employed 112  people
        in
        full-time and part-time positions. Approximately 55 employees are represented
        by
        the United Auto Workers, Local 1799. In 2004, the Corporation and bargaining
        unit employees entered into a labor agreement that will expire in February
        2009.
  The
        following summary of accounting and reporting policies is presented to aid
        the
        reader in obtaining a better understanding of the consolidated financial
        statements and related financial data of the Corporation and its wholly-owned
        subsidiaries contained in this report. Such policies conform to generally
        accepted accounting principles (GAAP) and to general practice within the
        banking
        industry.
  **Estimates**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.
  Material
        estimates that are particularly susceptible to significant change in the
        near
        term relate to the determination of the allowance for loan losses, the valuation
        of real estate acquired in connection with foreclosures or in satisfaction
        of
        loans, and the evaluation of other than temporary impairment of securities.
  **Significant
        Concentrations of Credit Risk**
  Most
        of
        the Corporation’s activities are with customers located within Westmoreland
        County, Pennsylvania. Note 3 discusses the types of securities that the
        Corporation invests in. Note 4 discusses the types of lending that the
        Corporation engages in. The Corporation does not have any significant
        concentrations to any one industry or customer. Although the Corporation
        has a
        diversified loan portfolio, exposure to credit loss can be adversely impacted
        by
        downturns in local economic and employment conditions.
  
  
 
   17
 ***Commercial
              National Financial
              Corporation***
   **Note
        1 - Significant Accounting Policies (Continued)**
  **Securities**
  Debt
        and
        equity securities are classified as “securities available for sale” and reported
        at fair value, with unrealized gains and losses excluded from earnings and
        reported as a separate component of shareholders’ equity, net of the related
        deferred income tax effect.
  Purchase
        premiums and discounts are recognized in interest income using the interest
        method over the terms of the securities. Declines in the fair value of available
        for sale securities below their cost that are deemed to be other than temporary
        are reflected in earnings as realized losses. In estimating other-than-temporary
        impairment losses, management considers (1) the length of time and the extent
        to
        which the fair value has been less than cost, (2) the financial condition
        and
        near-term prospects of the issuer, and (3) the intent and ability of the
        Corporation to retain its investment in the issuer for a period of time
        sufficient to allow for any anticipated recovery in fair value. Gains and
        losses
        on the sale of securities are recorded on the trade date and are determined
        using the specific identification method.
  **Restricted
        Investments in Bank Stock**
  Federal
        law requires the Bank, a member institution of the Federal Home Loan Bank
        system, to hold stock of its district Federal Home Loan Bank according to
        a
        predetermined formula. This restricted stock is carried at cost.
  **Loans**
  Loans
        receivable that management has the intent and ability to hold for the
        foreseeable future or until maturity or payoff are stated at their outstanding
        unpaid principal balances. Interest income is accrued on the unpaid principal
        balance. Loan origination fees, net of associated direct costs, are deferred
        and
        recognized as an adjustment of the yield (interest income) of the related
        loans.
        The Corporation is generally amortizing these amounts over the contractual
        life
        of the loan.
  The
        accrual of interest is generally discontinued when the contractual payment
        of
        principal or interest has become 90 days past due or management has serious
        doubts about further collectibility of principal or interest, even though
        the
        loan is currently performing. A loan may remain on accrual status if it is
        in
        the process of collection and is either guaranteed or well secured. When
        a loan
        is placed on nonaccrual status, unpaid interest credited to income in the
        current year is reversed and unpaid interest accrued in prior years is charged
        against the allowance for loan losses. Interest received on nonaccrual loans
        generally is either applied against principal or reported as interest income,
        according to management’s judgment as to the collectibility of principal.
        Generally, loans are restored to accrual status when the obligation is brought
        current, has performed in accordance with the contractual terms for a reasonable
        period of time and the ultimate collectibility of the total contractual
        principal and interest is no longer in doubt.
   18
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        1 - Significant Accounting Policies (Continued)**
  **Allowance
        for Loan Losses**
  The
        allowance for loan losses is established through provisions for loan losses
        charged against income. Loans deemed to be uncollectible are charged against
        the
        allowance for loan losses, and subsequent recoveries, if any, are credited
        to
        the allowance.
  The
        allowance for loan losses is maintained at a level considered adequate to
        provide for losses that can be reasonably anticipated. Management’s periodic
        evaluation of the adequacy of the allowance is based on the Corporation’s past
        loan loss experience, known and inherent risks in the portfolio, adverse
        situations that may affect the borrower’s ability to repay, the estimated value
        of any underlying collateral, composition of the loan portfolio, current
        economic conditions and other relevant factors. This evaluation is inherently
        subjective as it requires material estimates that may be susceptible to
        significant revisions as more information becomes available.
  The
        allowance consists of specific, general and unallocated components. The specific
        component relates to loans that are classified as either doubtful, substandard
        or special mention. For such loans that are also classified as impaired,
        an
        allowance is established when the discounted cash flows (or collateral value
        or
        observable market price) of the impaired loan is lower than the carrying
        value
        of that loan. The general component covers non-classified loans and is based
        on
        historical loss experience adjusted for qualitative factors. An unallocated
        component is maintained to cover uncertainties that could affect management’s
        estimate of probable losses. The unallocated component of the allowance reflects
        the margin of imprecision inherent in the underlying assumptions used in
        the
        methodologies for estimating specific and general losses in the portfolio.
  A
        loan is
        considered impaired when, based on current information and events, it is
        probable that the Corporation will be unable to collect the scheduled payments
        of principal or interest when due according to the contractual terms of the
        loan
        agreement. Factors considered by management in determining impairment include
        payment status, collateral value and the probability of collecting scheduled
        principal and interest payments when due. Loans that experience insignificant
        payment delays and payment shortfalls generally are not classified as impaired.
        Management determines the significance of payment delays and payment shortfalls
        on a case-by-case basis, taking into consideration all of the circumstances
        surrounding the loan and the borrower, including the length of the delay,
        the
        reasons for the delay, the borrower’s prior payment record and the amount of the
        shortfall in relation to the principal and interest owed. Impairment is measured
        on a loan by loan basis for commercial and construction loans by either the
        present value of expected future cash flows discounted at the loan’s effective
        interest rate, the loan’s obtainable market price or the fair value of the
        collateral if the loan is collateral dependent.
  Large
        groups of smaller balance homogeneous loans are collectively evaluated for
        impairment. Accordingly, the Corporation does not separately identify individual
        consumer and residential loans for impairment disclosures, unless such loans
        are
        the subject of a restructuring agreement.
  **Off-Balance
        Sheet Financial Instruments**
  In
        the
        ordinary course of business, the Corporation has entered into off-balance
        sheet
        financial instruments consisting of commitments to extend credit and letters
        of
        credit. Such financial instruments are recorded in the balance sheet when
        they
        are funded.
  
  19
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        1 - Significant Accounting Policies (Continued)**
  **Foreclosed
        Real Estate**
  Foreclosed
        real estate is comprised of property acquired through a foreclosure proceeding
        or acceptance of a deed in lieu of foreclosure and loans classified as
        in-substance foreclosure. A loan is classified as in-substance foreclosure
        when
        the Bank has taken possession of the collateral regardless of whether formal
        foreclosure proceedings take place. Foreclosed real estate is initially recorded
        at fair value, net of estimated selling costs, at the date of foreclosure
        establishing a new cost basis. After foreclosure, valuations are periodically
        performed by management and the assets are carried at the lower of cost or
        fair
        value minus estimated costs to sell. Revenues and expenses from operations
        and
        changes in the valuation allowance are included in other expenses. Foreclosed
        real estate at December 31, 2006 and 2005 was $905,000 and $740,000,
        respectively, and is included in other assets.
  **Intangible
        Assets**
  The
        Corporation has amortizable intangible assets related to core deposit
        intangibles acquired in 2002 through the acquisition of a branch office.
        These
        intangible assets are being amortized on a straight-line basis over a period
        of
        ten years. The balance of these amortizable intangible assets at
        December 31, 2006 was $536,000 net of accumulated amortization of $439,000
        which is included in other assets. Amortization expense of $98,000, $98,000,
        and
        $145,000 was recorded for the years ended December 31, 2006, 2005, and
        2004, respectively. Included in the 2004 expense was $47,000 related to Gooder’s
        customer list. Amortization expense is estimated to be $98,000 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.
  **Bank
        Owned Life Insurance**
  The
        Corporation invests in bank owned life insurance (BOLI) as a source of funding
        for employee benefit expenses. BOLI involves the purchasing of life insurance
        by
        the Corporation on a chosen group of employees. The Corporation is the owner
        and
        beneficiary of the policies. This life insurance investment is carried at
        the
        cash surrender value of the underlying policies. Income from the investment
        in
        the policies is included in other income on the income statement.
  **Advertising
        Costs**
  The
        Corporation follows the policy of charging the costs of advertising to expense
        as incurred. Total advertising expense for the years ended December 31,
        2006, 2005 and 2004 was $183,000, $152,000, and $192,000, respectively.
  **Trust
        Operations**
  Trust
        income is recorded on the cash basis, which approximates the accrual basis.
        Securities and other property held by the Corporation in a fiduciary or agency
        capacity for customers of the Trust Department are not assets of the Corporation
        and, accordingly, are not included in the accompanying consolidated financial
        statements. Assets under management in the trust department totaled
        $163,633,000, $132,187,000 and $132,431,000 at December 31, 2006, 2005 and
        2004, respectively.
   20
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        1 - Significant Accounting Policies (Continued)**
  **Income
        Taxes**
  Deferred
        income tax assets and liabilities are determined based on the differences
        between financial statement carrying amounts and the tax basis of existing
        assets and liabilities. These differences are measured at the enacted tax
        rates
        that will be in effect when these differences reverse. Deferred tax assets
        are
        reduced by a valuation allowance when, in the opinion of management, it is
        more
        likely than not that some portion of the deferred tax assets will not be
        realized. As changes in tax laws or rates are enacted, deferred tax assets
        and
        liabilities are adjusted through the provision for income taxes. The Corporation
        and its subsidiaries file a consolidated federal income tax return.
  **Earnings
        per Share**
  Basic
        earnings per share have been calculated on the weighted average number of
        shares
        outstanding of 3,129,245 in 2006, 3,413,426 in 2005, and 3,422,881 in 2004.
        The
        Corporation currently maintains a simple capital structure, thus there are
        no
        dilutive effects on earnings per share.
  **Treasury
        Stock**
  The
        acquisition of treasury stock is recorded under the cost method. At the date
        of
        subsequent reissue, the treasury stock is reduced by the cost of such stock
        on
        the average cost basis, with any excess proceeds being credited to retained
        earnings.
  
 **Segment
        Reporting**
  The
        Corporation acts as an independent community financial services provider
        and
        offers traditional banking and related financial services to individual,
        business and government customers. The Corporation offers a full array of
        commercial and retail financial services, including the taking of time, savings
        and demand deposits, the making of commercial, consumer and mortgage loans
        and
        the providing of other financial services.
  Management
        does not separately allocate expenses, including the cost of funding loan
        demand, between the commercial and retail operations of the Corporation.
        As
        such, discrete information is not available and segment reporting would not
        be
        meaningful.
  **Statements
        of Cash Flows**
  For
        purposes of reporting cash flows, the Corporation has defined cash and cash
        equivalents as those amounts included in the balance sheet captions, “Cash and
        due from banks” and “Interest bearing deposits with banks.”
  **Transfers
        of Financial Assets**
  Transfers
        of financial assets are accounted for as sales, when control over the assets
        has
        been surrendered. Control over transferred assets is deemed to be surrendered
        when (1) the assets have been isolated from the Bank, (2) the transferee
        obtains
        the right (free of conditions that constrain it from taking advantage of
        that
        right) to pledge or exchange the transferred assets, and (3) the Bank does
        not
        maintain effective control over the transferred assets through an agreement
        to
        repurchase them before their maturity.
  
  21
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        1 - Significant Accounting Policies (Continued)**
  **New
        Accounting Standards**
  In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48, “ Accounting
        for Uncertainty in Income Taxes—an interpretation of FASB Statement
        No. 109” (FIN 48), which clarifies the accounting for uncertainty in
        tax positions. This Interpretation requires that companies recognize in their
        financial statements the impact of a tax position, if that position is more
        likely than not of being sustained on audit, based on the technical merits
        of
        the position. The provisions of FIN 48 are effective for fiscal years beginning
        after December 15, 2006, with the cumulative effect of the change in accounting
        principle recorded as an adjustment to opening retained earnings. We
        do not
        believe the impact of adopting FIN
        48 on
        our financial statements will be significant.
  In
        September 2006, the FASB issued FASB Statement No. 157, *Fair
        Value Measurements* ,
        which
        defines fair value, establishes a framework for measuring fair value under
        GAAP,
        and expands disclosures about fair value measurements. FASB Statement
        No. 157 applies to other accounting pronouncements that require or permit
        fair value measurements. The new guidance is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and for interim
        periods within those fiscal years. We are currently evaluating the potential
        impact, if any, of the adoption of FASB Statement No. 157 on our
        consolidated financial position, results of operations and cash
        flows.
  On
        September 13, 2006, the Securities and Exchange Commission “SEC” issued
        Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides
        interpretive guidance on how the effects of the carryover or reversal of
        prior
        year misstatements should be considered in quantifying a potential current
        year
        misstatement. Prior to SAB 108, Companies might evaluate the materiality
        of
        financial-statement misstatements using either the income statement or balance
        sheet approach, with the income statement approach  focusing
        on new misstatements added in the current year, and the balance sheet approach
        focusing on the cumulative amount of misstatement present in a company’s balance
        sheet. Misstatements that would be material under one approach could be viewed
        as immaterial under another approach, and not be corrected. SAB 108 now requires
        that companies view financial statement misstatements as material if they
        are
        material according to either the income statement or balance sheet approach.
        The
        Corporation has analyzed SAB 108 and determined that upon adoption it will
        have
        no impact on the reported financial position or results of
        operations.
   In
        February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
        Financial Assets and financial Liabilities-Including an amendment of FASB
        Statement No. 115." SFAS No. 159 permits entities to choose to measure
        many financial instruments and certain other items at fair value. Unrealized
        gains and losses on items for which the fair value option has been elected
        will
        be recognized in earnings at each subsequent reporting date. SFAS
        No. 159 is effective for our Corporation on January 1, 2008. The
        Corporation is evaluating the impact that the adoption of SFAS No. 159 will
        have on our consolidated financial statements.
  
  
  22
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        2 - Cash and Due from Banks**
  Regulations
        of the Board of Governors of the Federal Reserve System impose uniform reserve
        requirements on all depository institutions with transaction accounts and
        non-personal time deposits. Reserves are maintained in the form of vault
        cash or
        a non-interest bearing balance held with the Federal Reserve Bank. The Bank
        also
        maintains deposits with the Federal Reserve Bank and other banks for various
        services such as check clearing. The required reserve at December 31, 2006
        and 2005 was approximately $4,913,000 and $4,921,000, respectively.
  
 **Note
        3 - Securities**
  The
        amortized cost and fair values of securities available for sale are as
        follows:
  **Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Fair**
                **Value****(In
                  Thousands)**
 
 **December
                  31, 2006:**Obligations
                  of states and political
                subdivisions
              
              **$**
              **5,419**
              
              **$**
              **35**
              
              **$**
              **(102**
              **)**
              **$**
              **5,352**Mortgage-backed
                  securities
              
              
              **72,720**
              
              
              **933**
              
              
              **(9**
              **)**
              
              **73,644**
 
 **$78,139**
              
              **$ 968**
              
              **(111)**
              
              **$78,996**
 
 **December
                  31, 2005:**Obligations
                  of U.S. Government
                agencies
              
              $
              2,026
              
              $
              -
              
              $
              (34
              )
              $
              1,992Obligations
                  of states and political
                subdivisions
              
              
              3,449
              
              
              54
              
              
              (111
              )
              
              3,392Mortgage-backed
                  securities
              
              
              59,708
              
              
              1,025
              
              
              -
              
              
              60,733
 
 $65,183
              
              $
              1,079
              
              
              (145
              )
              $
              66,117
 
 The
        amortized cost and fair value of securities at December 31, 2006 by
        contractual maturity, are shown below. Expected maturities will differ from
        contractual maturities because borrowers may have the right to call or prepay
        obligations with or without call or prepayment penalties.
  **Amortized**
                **Cost**
              
              **Fair**
                **Value****(In
                  Thousands)**
 
 Due
                  within one year
              
              **$**
              **100**
              
              **$**
              **98**Due
                  after one year through five years
              
              
              **2,971**
              
              
              **2,904**Due
                  after five years through ten years
              
              
              **2,348**
              
              
              **2,350**Due
                  after ten years
              
              
              **72,720**
              
              
              **73,644**
 
 **$78,139**
              
              **$78,996**
  23
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        3 - Securities (Continued)**
  Securities
        with amortized cost and fair values of $24,526,000 and $24,768,000,
        respectively, at December 31, 2006 and $16,309,000 and $16,467,000
        respectively, at December 31, 2005 were pledged to secure public deposits
        and for other purposes required or permitted by law.
  Gross
        gains of $148,000, $-0-, and $2,377,000 and gross losses of $123,000, $-0-,
        and
        $1,182,000 were realized on sales and calls of securities during 2006, 2005
        and
        2004, respectively.
  The
        following table shows the Corporation’s gross unrealized losses and fair value,
        aggregated by investment category and length of time that individual securities
        have been in a continuous unrealized loss position, at December 31, 2006
        and 2005:
  **December 31,
                  2006****Less
                  than 12 Months**
              
              **12
                  Months or More**
              
              **Total****Fair**
                **Value**
              
              
              **Unrealized
                  Losses**
              
              
              **Fair**
                **Value**
              
              
              **Unrealized
                  Losses**
              
              
              **Fair**
                **Value**
              
              
              **Unrealized
                  Losses****(In
                  Thousands)**
 
 Mortgage-backed
                  securities
              
              **$**
              **5,107**
              
              **$**
              **(9**
              **)**
              **$**
              **-**
              
              **$**
              **-**
              
              **$**
              **5,107**
              
              **$**
              **(9**
              **)**Obligations
                    of states and political subdivisions
              
              
              **2,431**
              
              
              **(39**
              **)**
              
              **1,885**
              
              
              **(63**
              **)**
              
              **4,316**
              
              
              **(102**
              **)**
 
 **$7,538**
              
              **$(48)**
              
              **$1,885**
              
              **$(63)**
              
              **$9,423**
              
              **$(111)**
 
 **December 31, 2005****(In Thousands)**
 
 Obligations
                  of U.S. Government agencies
              
              $
              -
              
              $
              -
              
              $
              1,992
              
              $
              (34
              )
              $
              1,992
              
              $
              (34
              )Obligations
                  of states and political subdivisions
              
              
              562
              
              
              (40
              )
              
              1,776
              
              
              (71
              )
              
              2,338
              
              
              (111
              )
 
 $562
              
              $
              (40
              )
              $
              3,768
              
              $
              (105
              )
              $
              4,330
              
              $
              (145
              )
 
 At
        December 31, 2006, one mortgage-backed security and 12 obligations of state
        and
        political subdivisions were in unrealized loss positions. These unrealized
        losses are due to a change in interest rates subsequent to when the securities
        were purchased. At December 31, 2006, all debt securities with temporarily
        impaired losses have been rated by either Moody’s and/or S&P with an “A” or
        better debt rating. Management believes the unrealized losses are temporary
        and
        that the Corporation has the ability to hold the securities until maturity
        or
        market price recovery.
  
  24
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        4 - Loans**
  Loans
        are
        summarized as follows:
  **December
                  31,****2006**
              
              **2005****(In
                  Thousands)**
 
 Commercial
                  loans
              
              **$**
              **18,188**
              
              $
              18,275Real
                  estate loans:Commercial
              
              
              **65,786**
              
              
              60,794Construction
              
              
              **1,256**
              
              
              910Residential
              
              
              **128,364**
              
              
              115,294Municipal
                  loans
              
              
              **11,226**
              
              
              7,596Consumer
                  and other loans
              
              
              **4,509**
              
              
              3,948Net
                  unamortized costs
              
              
              **199**
              
              
              222
 
 **$229,528**
              
              $
              207,039
 
 **Note
        5 - Allowance for Loan Losses**
  Transactions
        in the allowance for loan losses are summarized as follows:
  **Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****(In
                  Thousands)**
 
 Balance,
                  January 1
              
              **$**
              **1,636**
              
              $
              1,855
              
              $
              2,462Loans
                  charged off
              
              
              **(60**
              **)**
              
              (155
              )
              
              (361
              )Recoveries
                  on previously charged off
                loans
              
              
              **20**
              
              
              301
              
              
              190Provision
                  (credit) for loan losses
              
              
              **210**
              
              
              (365
              )
              
              (436
              )
 
 Balance
                  at December 31
              
              **$**
              **1,806**
              
              $
              1,636
              
              $
              1,855
 
 During
        the Corporation’s first quarter 2005 evaluation, management considered the
        allowance for loan losses to be over allocated by $470,000. Due to this overage,
        the Corporation reduced the allowance for loan losses by $470,000. The overage
        was the result of the Corporation receiving $285,000 representing a recovery
        for
        a commercial loan charged off in a previous year. In addition, the Corporation
        received a pay-down on a classified loan, lowering the allowance requirements
        by
        an additional $185,000. The excess allocation was recorded as a credit in
        the
        provision for loan losses.
  During
        the Corporation’s second quarter 2004 evaluation, management considered the
        allowance for loan losses to be over allocated by $492,000. Due to this overage,
        the Corporation reduced the allowance for loan losses by $492,000. The reduction
        in the allowance consisted of specific allocations for several classified
        loans,
        totaling $3.2 million, which paid off during the first half of 2004. The
        excess
        allocation was recorded as a credit in the provision for loan losses.
   25
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        5 - Allowance for Loan Losses (Continued)**
  At
        December 31, 2006 and 2005, the total recorded investment in loans
        considered to be impaired was $4,437,000 and $2,670,000, respectively.
        The average recorded investment in impaired loans during 2006, 2005 and 2004
        was
        $6,125,000, $3,411,000, and $4,728,000, respectively. Impaired loans with
        balances of $3,612,000 and $511,000 at December 31, 2006 and 2005 had
        related allowance for loan losses of $338,000 and $161,000, respectively.
        Interest income on impaired loans of $489,000, $173,000, and $190,000 was
        recognized for cash payments received in 2006, 2005 and 2004, respectively.
  Loans
        on
        which the accrual of interest has been discontinued amounted to $561,000
        and
        $1,308,000 at December 31, 2006 and 2005, 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 $0 and $2,000 at December 31,
        2006 and 2005, respectively.
  
 **Note
        6 - Financial Instruments with Off-Balance Sheet Risk**
  The
        Corporation is a party to financial instruments with off-balance-sheet risk
        in
        the normal course of business to meet the financing needs of its customers.
        These financial instruments include commitments to extend credit, standby
        letters of credit and financial standby letters of credit. Those instruments
        involve, to varying degrees, elements of credit and interest rate risk in
        excess
        of the amount recognized in the balance sheet. The contract or notional amount
        of those instruments reflect the extent of involvement the Corporation has
        in
        particular classes of financial instruments. The Corporation does not issue
        any
        other instruments with significant off-balance-sheet risk.
  The
        Corporation's exposure to credit loss in the event of nonperformance by the
        other party to the financial instrument for commitments to extend credit,
        standby letters of credit and financial standby letters of credit written
        is
        represented by the contract or notional amount of those instruments. The
        Corporation uses the same credit policies in making such commitments and
        conditional obligations as it does for on-balance-sheet instruments. The
        following table identifies the contract or notional amount of those instruments:
  **December
                  31,******2006**                           
                  2005****(In
                  Thousands)**
 
 Financial
                  instruments whose contract amounts represent credit risk:Commitments
                  to extend credit, including unused lines of credit
              
              **$**
              **31,467**
              
              $
              41,342Standby
                  letters of credit
              
              
              **420**
              
              
              399Financial
                  standby letters of credit
              
              
              **3,434**
              
              
              3,768
 
  26
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        6 - Financial Instruments with Off-Balance Sheet Risk (Continued)**
  Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Since many of the commitments are expected to expire without being
        drawn upon, the total commitment amounts do not necessarily represent future
        cash requirements. The Corporation evaluates each customer's credit worthiness
        on a case-by-case basis. The amount of collateral obtained, if deemed necessary
        by the Corporation upon extension of credit, is based on management's credit
        evaluation of the counter party. Collateral held varies but may include accounts
        receivable, inventory, property, plant and equipment and income-producing
        commercial properties.
  Outstanding
        letters of credit written are conditional commitments issued by the Corporation
        to secure the performance of a customer to a third party. The majority of
        these
        standby letters of credit expire within the next twelve months. The credit
        risk
        involved in issuing letters of credit is essentially the same as that involved
        in extending other loan commitments. The Corporation requires collateral
        supporting these letters of credit as deemed necessary. The maximum undiscounted
        exposure related to these commitments at December 31, 2006 was $3,854,000
        and the approximate value of underlying collateral upon liquidation that
        would
        be expected to cover this maximum potential exposure was $3,550,000. The
        amount
        of the liability as of December 31, 2006 and 2005 for guarantees under
        standby letters of credit issued is not material.
  
 **Note
        7 - Premises and Equipment**
  The
        composition of premises and equipment at December 31, 2006 and 2005 is as
        follows:
  **2006**
              
              **2005****(In
                  Thousands)**
 
 Land
              
              **$**
              **437**
              
              $
              437Premises
              
              
              **5,789**
              
              
              5,789Leasehold
                  improvements
              
              
              **229**
              
              
              229Furniture
                  and equipment
              
              
              **5,436**
              
              
              6,491**11,891**
              
              
              12,946Accumulated
                  depreciation and amortization
              
              
              **(8,005**
              **)**
              
              (8,645
              )
 
 **$
                  3,886**
              
              $
              4,301
 
 Depreciation
        and amortization expense was $525,000, $664,000, and $760,000 for the years
        ended December 31, 2006, 2005 and 2004, respectively.
   27
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        8 - Interest Bearing Deposits**
  Interest
        bearing deposits include time deposits issued in denominations of $100,000
        or
        more which amounted to $34,047,000 and $26,360,000 at December 31, 2006 and
        2005, respectively.
  Interest
        bearing deposits at December 31, 2006 and 2005 are detailed as follows:
  **2006**
              
              **2005****(In
                  Thousands)**
 
 Savings
                  accounts
              
              **$**
              **53,236**
              
              $
              45,379NOW
                  accounts
              
              
              **20,944**
              
              
              21,561Money
                  market accounts
              
              
              **24,022**
              
              
              28,820Time
                  deposits
              
              
              **130,019**
              
              
              112,224
 
 **$228,221**
              
              $
              207,984
 
 Time
        deposits at December 31, 2006 had the following scheduled maturities (in
        thousands):
  2007
              
              **$**
              **78,559**2008
              
              
              **24,714**2009
              
              
              **17,727**2010
              
              
              **6,062**2011
              
              
              **2,957**
 
 **$ 130,019**
 
 **Note
        9 - Short-Term Borrowings**
  Short-term
        borrowings at December 31, 2006 and 2005 consisted of federal funds
        purchased of $5,000,000 and $0, repectectively
  **The
        outstanding balances and related information of short-term borrowings are
        summarized as follows:**
  **Years
                Ended December
                31,****2006                            
                  2005****(in Thousands)**
 
 Average
                  balance during the year
              
              **$**
              **2,533**
              
              $
              1,501Average
                  interest rate during the year
              
              
              **5.37**
              **%**
              
              2.60
              %Maximum
                  month-end balance
              
              **$**
              **10,000**
              
              $
              9,519Weighted
                  average interest rate at end of the year
              
              
              **5.38**
              **%**
              
              -
              %
 
 At
        December 31, 2006, the Corporation had approved but unused funding
        availability from lines of credit of $26,000,000.
   28
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  
 **Note
        10 - Long-Term Borrowings**
  There
        were no long-term borrowings outstanding at December 31, 2006 and 2005.
        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. The maximum
        borrowing capacity from the FHLB at December 31, 2006 is $194,041,000.
  
 **Note
        11 - Employee Benefit Plans**
  The
        Corporation sponsors an employee profit sharing plan available to all employees
        with at least one year of service. The Corporation contributes to the plan,
        as
        determined by the Board of Directors, in an amount not to exceed 15% of
        compensation of eligible participants. The Corporation also has a supplemental
        retirement plan for certain retired employees. The expense for the employee
        benefit plans was $235,000, $254,000, and $249,000 for the years ended
        December 31, 2006, 2005 and 2004, respectively.
   29
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        12 - Comprehensive Income**
  Accounting
        principles generally require that recognized revenue, expenses, gains and
        losses
        be included in net income. Although certain changes in assets and liabilities,
        such as unrealized gains and losses on available for sale securities, are
        reported as a separate component of the equity section of the balance sheet,
        such items, along with net income, are components of comprehensive
        income.
  The
        components of other comprehensive income(loss) and related tax effects for
        the
        years ended December 31, 2006, 2005 and 2004 are as follows:
  **2006**
              
              **2005**
              
              **2004****(In
                  Thousands)**
 
 Unrealized
                  losses
                on
                  securities available for sale
              
              **$**
              **(52**
              **)**
              $
              (2,235
              )
              $
              (1,311
              )Less
                  reclassification adjustment for gains realized in income
              
              
              **(25**
              **)**
              
              -
              
              
              (1,195
              )**Net
                  Unrealized Losses**
              
              
              **(77**
              **)**
              
              (2,235
              )
              
              (2,506
              )Tax
                  effect
              
              
              **(26**
              **)**
              
              (760
              )
              
              (852
              )**Net
                  of Tax Amount**
              
              **$**
              **(51**
              **)**
              $
              (1,475
              )
              $
              (1,654
              )
 
 **Note
        13 - Lease Commitments**
  The
        Corporation rents offices under operating leases that expire through 2016.
        Lease
        expense amounted to $98,000, $140,000, and $121,000 in fiscal years 2006,
        2005,
        and 2004, respectively. Maturities of operating lease obligations at
        December 31, 2006 are as follows (in thousands):
  2007
              
              
              **$101**2008
              
              
              **101**2009
              
              
              **101**2010
              
              
              **92**2011
              
              
              **79**Thereafter
              
              
              **140**
 
  30
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        14 - Income Taxes**
  The
        components of the net deferred tax liability at December 31, 2006 and 2005
        are as follows:
  **2006**
              
              **2005****(In
                  Thousands)**
 
 Allowance
                  for loan losses
              
              **$**
              **305**
              
              $
              233Accrued
                  benefits
              
              
              **68**
              
              
              78Other
              
              
              **2**
              
              
              2**Total
                  Deferred Tax Assets**
              
              
              **375**
              
              
              313Deferred
                  loan fees
              
              
              **68**
              
              
              76Securities
                  accretion
              
              
              **13**
              
              
              51Unrealized
                  net gain on securities available for sale
              
              
              **291**
              
              
              317Depreciation
              
              
              **189**
              
              
              133**Total
                  Deferred Tax Liabilities**
              
              
              **561**
              
              
              577**Net
                  Deferred Tax Liability**
              
              **$**
              **(186**
              **)**
              $
              (264
              )
 
 The
        income tax provision for the years ended December 31, 2006, 2005 and 2004
        is summarized as follows:
  **2006**
              
              **2005**
              
              **2004****(In
                  Thousands)**
 
 Current
              
              **$**
              **1,058**
              
              $
              787
              
              $
              230Deferred
              
              
              **(52**
              **)**
              
              430
              
              
              (439
              )**$**
              **1,006**
              
              $
              1,217
              
              $
              (209
              )
 
 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, 2006, 2005 and 2004
        are as follows:
  **2006**
              
              **2005**
              
              **2004****(In
                  Thousands)**
 
 Tax
                  at statutory rates
              
              **$**
              **1,348**
              
              $
              1,562
              
              $
              140Increase
                  (decrease) resulting from:Tax-exempt
                  income
              
              
              **(214**
              **)**
              
              (219
              )
              
              (317
              )Non-deductible
                  interest expense
              
              
              **21**
              
              
              18
              
              
              31Increase
                  in investment in life insurance
              
              
              **(158**
              **)**
              
              (154
              )
              
              (156
              )Writedown
                  of non-deductible goodwill
              
              
              **-**
              
              
              -
              
              
              47Other
              
              
              **9**
              
              
              10
              
              
              46**$**
              **1,006**
              
              $
              1,217
              
              $
              (209
              )
 
  31
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        15 - Fair Value of Financial Instruments**
  Below
        are
        various estimated fair values at December 31, 2006 and 2005, as required by
        Statement of Financial Accounting Standards No. 107 (FAS 107). Such information,
        which pertains to the Corporation’s financial instruments, is based on the
        requirements set forth in FAS 107 and does not purport to represent the
        aggregate net fair value of the Corporation. It is the Corporation’s general
        practice and intent to hold its financial instruments to maturity, except
        for
        certain securities designated as securities available for sale, and not to
        engage in trading activities. Many of the financial instruments lack an
        available trading market, as characterized by a willing buyer and seller
        engaging in an exchange transaction. Therefore, the Corporation had to use
        significant estimations and present value calculations to prepare this
        disclosure.
  Changes
        in the assumptions or methodologies used to estimate fair values may materially
        affect the estimated amounts. Also, management is concerned that there may
        not
        be reasonable comparability between institutions due to the wide range of
        permitted assumptions and the methodologies in absence of active markets.
        This
        lack of uniformity gives rise to a high degree of subjectivity in estimating
        financial instrument fair values.
  The
        following methods and assumptions were used by the Corporation in estimating
        financial instrument fair values:
  **Cash
        and Short-Term Investments**
  The
        carrying amounts for cash and short-term investments approximate the estimated
        fair values of such assets.
  **Securities**
  Fair
        values for securities available for sale are based on quoted market prices,
        if
        available. If quoted market prices are not available, fair values are based
        on
        quoted market prices of comparable instruments.
  **Restricted
        Investments in Bank Stock**
  The
        carrying amounts of restricted investments in bank stock approximate the
        estimated fair value of such assets.
  **Loans
        Receivable**
  Fair
        values of variable rate loans subject to frequent repricing and which entail
        no
        significant credit risk are based on the carrying values. The estimated fair
        values of other loans are estimated by discounting the future cash flows
        using
        interest rates currently offered for loans with similar terms to borrowers
        of
        similar credit quality.
  **Deposits**
  For
        deposits which are payable on demand at the reporting date, representing
        all
        deposits other than time deposits, management estimated that the carrying
        value
        of such deposits is a reasonable estimate of fair value. Fair values of time
        deposits are estimated by discounting the future cash flows using interest
        rates
        currently being offered and a schedule of aggregate expected
        maturities.
  **Short-Term
        Borrowings**
  The
        carrying amounts for short-term borrowings approximate the estimated fair
        value
        of such liabilities.
   32
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        15 - Fair Value of Financial Instruments (Continued)**
  **Accrued
        Interest Receivable and Payable**
  The
        carrying amount of accrued interest receivable and payable is considered
        a
        reasonable estimate of fair value.
  **Off-Balance
        Sheet Instruments**
  The
        fair
        value of commitments to extend credit and for outstanding letters of credit
        is
        estimated using the fees currently charged to enter into similar agreements,
        taking into account market interest rates, the remaining terms and present
        credit worthiness of the counterparties.
  The
        carrying amounts and fair values of the Corporation’s financial instruments as
        of December 31 are presented in the following table:
  **December
                  31, 2006**
              
              **December
                  31, 2005****Carrying
                Amount**
              
              
              **Fair**
                **Value**
              
              
              **Carrying
                  Amount**
              
              
              **Fair**
                **Value****(In
                  Thousands)**
 
 Financial
                  assets:Cash
                  and short-term investments
              
              **$**
              **10,156**
              
              **$**
              **10,156**
              
              $
              29,831
              
              $
              29,831Securities
                  available for sale
              
              
              **78,996**
              
              
              **78,996**
              
              
              66,117
              
              
              66,117Restricted
                  investments in bank stock
              
              
              **1,180**
              
              
              **1,180**
              
              
              1,013
              
              
              1,013Net
                  loans receivable
              
              
              **227,722**
              
              
              **224,513**
              
              
              205,403
              
              
              201,516Accrued
                  interest receivable
              
              
              **1,044**
              
              
              **1,044**
              
              
              862
              
              
              862
 
 Financial
                  liabilities:Deposits
              
              **$**
              **293,920**
              
              **$**
              **292,178**
              
              $
              277,009
              
              $
              275,109Short-term
                  borrowings
              
              
              **5,000**
              
              
              **5,000**
              
              
              -
              
              
              -Accrued
                  interest payable
              
              
              **1,240**
              
              
              **1,240**
              
              
              854
              
              
              854Off-balance
                  sheet financial instruments
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              -
 
 **Note
        16 - Related Party Transactions**
  Some
        of
        the Corporation's or the Bank’s directors, principal officers, and their related
        interests had transactions with the Bank in the ordinary course of business.
        All
        loans and loan commitments in such transactions were made on substantially
        the
        same terms, including collateral and interest rates, as those prevailing
        at the
        time for comparable transactions with others. In the opinion of management,
        these transactions with related parties do not involve more than normal risk
        of
        collectibility or present other unfavorable features. It is anticipated that
        further such extensions of credit will be made in the future. The aggregate
        amount of credit extended to these directors and principal officers was
        approximately $1,179,000 and $769,000 at December 31, 2006 and 2005,
        respectively.
   33
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        16 - Related Party Transactions (Continued)**
  The
        following is an analysis of loans to those parties whose loan balances exceeded
        $60,000 during the year ended December 31, 2006 (in thousands):
  Balances
                  at January 1
              
              
              
              **$346**Advances
              
              
              
              **443**Repayments
              
              
              
              **(47)**Balances
                  at December 31
              
              
              
              **$742**
 
 **Note
        17 - Capital Requirements and Regulatory Restrictions**
  The
        Bank
        is subject to legal limitations on the amount of dividends that can be paid
        to
        the Corporation. The Pennsylvania Banking Code restricts the payment of
        dividends, generally to the extent of its retained earnings.
  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, 2006, that the Corporation and the
        Bank meet all capital adequacy requirements to which they are subject.
  As
        of
        December 31, 2006, the most recent notification from the regulatory
        agencies categorized the Bank as well capitalized under the regulatory framework
        for prompt corrective action. To be categorized as well capitalized, the
        Bank
        must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
        ratios as set forth in the table below. There are no conditions or events
        since
        those notifications that management believes have changed those categories.
   34
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        17 - Capital Requirements and Regulatory Restrictions (Continued)**
  The
        following table presents the risk-based and leverage capital amounts and
        ratios
        at December 31, 2006 and 2005 for the Corporation and the
        Bank:
  **Actual**
              
              **For
                  Capital Adequacy Purposes**
              
              **To
                  be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio****(Dollars
                  in Thousands)**
 
 **As
                  of December 31, 2006**Total
                  capital (to risk-weighted assets):Commercial
                  National Financial Corp.
              
              **$37,908**
              
              17.8
              **%**
              **$****3****17,049**
              
              **3****8.0**
              **%**
              **N/A**
              
              **3****10.0**
              %Commercial
                  Bank
              
              **37,879**
              
              17.8
              
              **3****17,050**
              
              **3****8.0**
              
              **$****3****21,312**
              
              **3****10.0**Tier
                  1 capital (to risk-weighted assets):Commercial
                  National Financial Corp.
              
              **36,102**
              
              16.9
              
              **3****8,525**
              
              **3****4.0**
              
              **N/A**
              
              **3****6.0**Commercial
                  Bank
              
              **36,073**
              
              16.9
              
              **3****8,525**
              
              **3****4.0**
              
              **3****12,787**
              
              **3****6.0**Tier
                  1 capital (to average assets):Commercial
                  National Financial Corp.
              
              **36,102**
              
              10.8
              
              **3****13,404**
              
              **3****4.0**
              
              **N/A**
              
              **3****5.0**Commercial
                  Bank
              
              **36,073**
              
              10.8
              
              **3****13,404**
              
              **3****4.0**
              
              **3****16,754**
              
              **3****5.0**
 
 
 **As
                  of December 31, 2005**Total
                  capital (to risk-weighted assets):Commercial
                  National Financial Corp.
              
              $44,046
              
              22.3
              **%**
              $315,825
              
              38.0
              **%**
              N/A
              
              310.0
              %Commercial
                  Bank
              
              44,038
              
              22.3
              
              315,823
              
              38.0
              
              $319,780
              
              310.0Tier
                  1 capital (to risk-weighted assets):Commercial
                  National Financial Corp.
              
              42,410
              
              21.4
              
              37,912
              
              34.0
              
              N/A
              
              36.0Commercial
                  Bank
              
              42,402
              
              21.4
              
              37,912
              
              34.0
              
              311,868
              
              36.0Tier
                  1 capital (to average assets):Commercial
                  National Financial Corp.
              
              42,410
              
              13.3
              
              312,757
              
              34.0
              
              N/A
              
              35.0Commercial
                  Bank
              
              42,402
              
              13.3
              
              312,757
              
              34.0
              
              315,947
              
              35.0
 
 
 
  35
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        18 - Condensed Financial Information of Commercial National Financial
        Corporation (Parent Only)**
  **Statements
        of Financial Condition**
  **December
                  31,****2006**
              
              **2005****(In
                  Thousands)**
 
 **Assets**Investment
                  in bank subsidiary
              
              **$**
              **37,199**
              
              $
              43,652Investment
                  in other subsidiaries
              
              
              **32**
              
              
              32Other
                  assets
              
              
              **21**
              
              
              21**Total
                  Assets**
              
              **$**
              **37,252**
              
              $
              43,705**Liabilities
                  and Shareholders’ Equity**Liabilities
              
              **$**
              **23**
              
              $
              44Shareholders’
                  equity
              
              
              **37,229**
              
              
              43,661**Total
                  Liabilities and Shareholders’ Equity**
              
              **$**
              **37,252**
              
              $
              43,705
 
 **Statements
        of Income**
  **Years
                  Ended December 31,****2006**
              
              
              **2005**
              
              
              **2004****(In
                  Thousands)**
 
 Dividends
                  from subsidiaries
              
              **$**
              **9,339**
              
              $
              2,901
              
              $
              3,977Other
              
              
              **-**
              
              
              
              
              
              3Net
                  securities gains
              
              
              **-**
              
              
              -
              
              
              29Fees
                  from bank subsidiary
              
              
              **592**
              
              
              418
              
              
              493Expenses
              
              
              **(561**
              **)**
              
              (409
              )
              
              (501
              )**9,370**
              
              
              2,910
              
              
              4,001Income
                  taxes
              
              
              **11**
              
              
              15
              
              
              -**9,359**
              
              
              2,895
              
              
              4,001Equity
                  in (excess of) undistributed earnings of subsidiaries
              
              
              **(6,401**
              **)**
              
              482
              
              
              (3,380
              )**Net
                  Income**
              
              **$**
              **2,958**
              
              $
              3,377
              
              $
              621
  36
 ***Commercial
            National Financial Corporation***
 **Notes
            to Consolidated Financial Statements**
  **Note
        18 - Condensed Financial Information of Commercial National Financial
        Corporation (Parent Only) (Continued)**
  **Statements
        of Cash Flows**
  **Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****(In
                  Thousands)**
 
 **Cash
                Flows from Operating Activities**Net
                  income
              
              
              
              
              **$**
              **2,958**
              
              $
              3,377
              
              $
              621Adjustments
                  to reconcile net income to
                net
                  cash provided by operating
                activities:Net
                  security gains
              
              
              
              
              
              **-**
              
              
              -
              
              
              (29
              )Equity
                  in (excess) of undistributedearnings
                  of subsidiaries
              
              
              
              
              
              **6,401**
              
              
              (482
              )
              
              3,380Increase
                  in other assets
              
              
              
              
              
              **-**
              
              
              (11
              )
              
              (10
              )Increase
                  (decrease) in liabilities
              
              
              
              
              
              **(20**
              **)**
              
              17
              
              
              (10
              )**Net
                  Cash Provided by Operating Activities**
              
              
              
              
              
              **9,339**
              
              
              2,901
              
              
              3,952**Cash
                  Flows from Investing Activities**Proceeds
                  from sale of securities
              
              
              
              
              
              -
              
              
              -
              
              
              829Investment
                  in subsidiaries
              
              
              
              
              
              -
              
              
              -
              
              
              (991
              )**Net
                  Cash Used in Investing Activities**
              
              
              
              
              
              -
              
              
              -
              
              
              (162
              )**Cash
                  Flows from Financing Activities**Dividends
                  paid
              
              
              
              
              
              (2,511
              )
              
              (2,901
              )
              
              (3,423
              )Purchase
                  of treasury stock
              
              
              
              
              
              (6,828
              )
              
              -
              
              
              (421
              )**Net
                  Cash Used in Financing Activities**
              
              
              
              
              
              (9,339
              )
              
              (2,901
              )
              
              (3,844
              )**Net
                  Increase (Decrease) in Cash**
              
              
              
              
              
              -
              
              
              -
              
              
              (54
              )**Cash
                  - Beginning**
              
              
              
              
              
              **-**
              
              
              -
              
              
              54**Cash
                  - Ending**
              
              
              
              
              **$**
              **-**
              
              $
              -
              
              $
              -
 
 
 
  37
 ***Commercial
              National Financial Corporation***
 **Notes
              to Consolidated Financial Statements**