UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

Commission file number 0-18676

COMMERCIAL NATIONAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

	PENNSYLVANIA	25-1623213
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

900 LIGONIER STREET	15650
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:                                                    (724) 539-3501

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $2 Par Value

(Title of Class)

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

Yes[ X ]    No [   ]

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in  Part III of the Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

  Yes [   ] No [X ]

The aggregate market value of registrant’s common stock held by

non-affiliates computed by reference to the price at which the common

stock was last sold, as of June 30, 2003, the last business day

of the registrant’s most recently completed second fiscal quarter.                                                                         $65,648,860                                                                                                                                                                                                                                                      

                                                                                                                                                                                       

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

DOCUMENTS INCORPORATED BY REFERENCE

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

Commercial National Financial Corporation
Form 10-K
INDEX
Part I		PAGE

ITEM 1.	Business	4
ITEM 2.	Properties	7
ITEM 3.	Legal Proceedings	7
ITEM 4.	Submission of Matters to a Vote of Security Holders	7
PART II
ITEM 5.	Market for Registrant's Common Stock Equity and Related   Stockholder Matters	7
ITEM 6.	Selected Financial Data	7
ITEM 7.	Management's Discussion and Analysis of Financial   Condition and Results of Operation	7
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	7
ITEM 8.	Financial Statements and Supplementary Data	7
ITEM 9.	Changes in and Disagreements with Accountants on Accounting   and Financial Disclosures	8
ITEM 9A.	Controls and Procedures	8
PART III
ITEM 10.	Directors and Executive Officers of the Registrant	8
ITEM 11.	Executive Compensation	8
ITEM 12.	Security Ownership of Certain Beneficial Owners and   Management	8
ITEM 13.	Certain Relationships and Related Transactions	9
ITEM 14.	Principal Accountant Fees and Services	9
PART IV
ITEM 15.	Exhibits, Financial Statement Schedules and Reports   On Form 8-K	9

PART I

Item 1.  Business

Description of Business

Commercial National Financial Corporation (the “Corporation”) is a Pennsylvania corporation and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and as a financial holding company under the Gramm Leach Bliley Act of 1999 (“GLB”).  Through its subsidiaries the Corporation is engaged in banking, trust and insurance agency operations.

The Bank Subsidiary

The Corporation is owner of 100% of the outstanding shares of common stock of Commercial Bank of Pennsylvania (the “Bank”). The Bank has been providing banking services since 1934. At the present time, two (2) banking offices are in operation in Latrobe, Pennsylvania, two (2) in Unity Township, Pennsylvania and one (1) each in Ligonier, West Newton, Greensburg, Norwin and Hempfield Township, Pennsylvania. All of these offices are within the boundaries of Westmoreland County, Pennsylvania. In addition, the building that houses the Bank’s downtown Latrobe banking office is the location of the Corporation's and the Bank's executive and administrative offices. The institution's operations center is located at the Latrobe Plaza in downtown Latrobe. This operations center also houses an in-house data processing system.

Each of the banking offices, except for downtown Latrobe and Greensburg, is equipped with 24 hour a day automatic teller machines (ATM).  Bank ATM units are also located on the campuses of Saint Vincent College in Unity Township and the University of Pittsburgh at Greensburg, the terminal of the Westmoreland County Airport in Unity Township, the reception lobby of the Latrobe Area Hospital in Latrobe, and an in-store machine in the Norvelt Open Pantry. A separate freestanding drive-up teller staffed banking facility is attached to the Lincoln Road office in downtown Latrobe. This facility also provides ATM service.

The Bank offers the full range of banking services normally associated with a general commercial banking business. Services include extending credit, providing deposit services, marketing non-deposit investments and offering financial counseling. The ATM system described above is a part of the Cirrus, Honor, Plus and Star networks, which provides the Bank's customers access to an extensive regional and national network. The Bank also has implemented a comprehensive electronic Online Banking system. By using a personal computer with internet access, customers can access their Commercial Bank accounts, perform common banking tasks and pay bills 24 hours a day, seven days a week, 365 days a year.

The Financial Services Subsidiaries

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

Gooder Agency, located in Ligonier, Pennsylvania, is a full service provider of insurance products for individuals and businesses. Gooder Agency represents fifteen national, regional and mutual insurance companies that allows it to provide new and existing customers with products and programs needed at competitive prices.

On October 1, 2003, the Corporation formed a trust company subsidiary and the Bank transferred its trust operations to such subsidiary. This subsidiary, Highview Trust Company (“HTC”), enables the Corporation to offer more investment products to its customers.  HTC provides a full range of trust services to its customers.

Competition

All aspects of the Corporation’s business are highly competitive. The Corporation’s subsidiaries compete with major financial institutions, several national and state banks, thrift institutions, credit unions, mortgage brokers, finance companies, insurance companies, investment companies and mutual funds.

Customers are generally influenced by convenience of location, quality of service, price of services and availability of products. The Corporation believes that its subsidiaries effectively compete with other financial service providers within its market area.

Supervision and Regulation

Introduction

The Corporation, the Bank and its non-banking subsidiaries are subject to extensive regulation by federal and state agencies.  The primary focus of these regulations is for the protection of depositors, federal deposit insurance funds and the banking system, not for the protection of security holders.  Set forth below is a brief description of certain laws which relate to the regulation of the Corporation and its subsidiaries.  The description is not meant to be complete and is qualified by reference to applicable laws and regulations.

Regulatory Agencies

Holding Company.  The Corporation, as a bank holding company and as a financial holding company is subject to regulation by the Federal Reserve Board (FRB), the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation (FDIC).  The nature of the supervision extends to such areas as safety and soundness, truth-in-lending, truth-in-savings, rate restrictions, consumer protection, permissible loan and securities activities, merger and acquisition limitations, reserve requirements, dividend payments and regulations concerning activities by corporate officers and directors.  No regulatory restrictions or actions are currently pending against the Corporation.

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

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

Holding Company Activities

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

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

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

Capital Requirements

Bank holding companies are required to be in compliance with the FRB’s risk-based capital standards. These standards require that (1) at least 50% of total capital must be “Tier 1 capital”. This consists primarily of common and certain other “core” equity 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 1 capital to average assets must be maintained. The PDB requires state chartered banks to maintain a 6% leverage capital and 10% risk based capital, defined substantially the same as the federal regulations. The Bank is subject to almost identical capital requirements adopted by the FDIC.

Effects of Governmental Policies

In addition to regulatory requirements, the Corporation and its subsidiary Bank are affected by the national economy and the influence on that economy exerted by governmental bodies through monetary and fiscal policies and their efforts to implement such policies.  In particular, the impact of the open market operations on interest rates, the establishment of reserve requirements and the setting of the discount rate will continue to affect business volumes and earnings. The exact nature or the full extent of this impact is almost impossible to predict; however, management continues to monitor these activities on a regular basis and seeks to modify its policies and procedures accordingly.

Employees

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

Executive Officers of the Corporation

The following table shows the names and ages of the current executive officers and the present and previous positions held by them for at least the past five years.

Name	Age	Present and Previous Positions
Gregg E. Hunter	45	Vice chairman, president and chief executive officer (February 2004 -
		present), Vice chairman and chief financial officer
		(December 1995 to January 2004)
Ryan M. Glista	36	Senior vice president and chief financial officer (February 2004 -
		present), Vice president/comptroller (December 1997
		to January 2004), assistant vice president/
		controller (December 1995 to November 1997)
Wendy S. Schmucker	35	Secretary/treasurer and senior vice president, division manager
		corporate administration (February 2004 – present) Secretary/treasurer
		and vice president, manager corporate administration (November
		1997 to January 2004)
Susan R. Skoloda	29	Vice president, corporate controls and community relations officer
		(March 2004 to present); assistant vice president (April 2001 to
		February 2004); assistant secretary/treasurer (April 1998 to present)

Item 2.  Properties

All of the Corporation’s facilities are owned with the exception of the Lincoln Road banking office and adjacent drive-up facility, the Norwin Hills banking office and the facility that houses Gooder Agency, which are leased. The lease agreement for the Gooder Agency property gives the Corporation a right of first refusal to purchase the property in the event it is available for sale. All of the properties are used in their entirety for banking and insurance agency purposes. In each case, the properties have been maintained in good repair, are well suited for their present use and appear to be adequate for the immediate needs of the Corporation and its subsidiaries. The locations of the Corporation’s real properties can be found in the Annual Report to Shareholders.

Item 3.  Legal Proceedings

Other than proceedings that occur in the normal conduct of business, there are no legal proceedings to which either the Corporation or the subsidiaries is a party that will have any material effect on the financial position of the Corporation or its subsidiaries.

Item 4.  Submission of Matters to a Vote of Security Holders

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

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Information appearing in the Annual Report to Shareholders for the fiscal year ended December 31, 2003 (the Annual Report) in the section titled “Common Stock Information” is incorporated herein by reference in response to this item.  As of March 24, 2004 there were 512 shareholders of record of the Corporation's common stock. The number of beneficial shareholders is approximately 864. 

We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of the Corporation to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future

Item 6. Selected Financial Data

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

Item 7.            Management's Discussion and Analysis of Financial Condition and Results of Operation

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

Item 7A.         Quantitative and Qualitative Disclosures About Market Risk

       

Information appearing in the Annual Report on in the section titled “Interest Sensitivity and Market Risk” is incorporated herein by reference.

Item 8.            Financial Statements and Supplementary Data

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

Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.         Controls and Procedures

Evaluation and Disclosure Controls and Procedures

The Corporation carried out an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act), as of December 31, 2003 (the “Evaluation Date”).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Corporation’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the applicable time period.

Changes in Internal Controls

There has not been any significant change in the Corporation’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect the Corporation’s internal control over financial reporting.  There were no significant deficiencies or material weakness identified in the internal control over financial reporting, and therefore no corrective actions were taken.

PART III

Item 10.         Directors and Executive Officers of the Registrant

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

The Corporation has adopted a Code of Ethics for Senior Financial Officers which is applicable to the Corporation’s principal executive officer and principal financial and accounting officer. A copy of such Code of Ethics has been filed as an exhibit to this Form 10-K.

Item 11.         Executive Compensation

The information contained in:  (i) the section titled “Executive Officer’s Compensation” in the Proxy Statement, with respect to executive compensation, (ii) the section titled “Compensation of Directors” in the Proxy Statement, with respect to director compensation, (iii) the information contained in the section titled “Executive Compensation Committee Report” in the Proxy Statement, (iv) the information contained in the section titled “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement, and (v) the information contained in the section titled “Performance Graph,” in the Proxy Statement, with respect to shareholder returns, are incorporated hereby by reference to this Item 11.  The stock performance graph and the Compensation Committee Report shall not be deemed to be “filed.”

Item 12.         Security Ownership of Certain Beneficial Owners and Management

The information contained in the sections titled “Beneficial Ownership of Common Stock” and “Beneficial Ownership by Officers, Directors and Nominees” in the Proxy Statement is incorporated herein by reference to this Item 12.

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

Equity Compensation Plan Information

		(a)		(b)		(c)
Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		____		____		________
Equity compensation plans not approved by security holders(1)		-		-		-
Total		-		-		-

⁽¹⁾ A Directors Call Program was established by the Bank in 2002 as an opportunity for directors to earn shares of common stock of the Corporation. Directors are awarded shares of common stock based on the number and type of referrals given to the Bank to increase its business volumes. The program is open to independent directors only. The following two directors were awarded shares of common stock under the program in 2003: John T. Babilya, one

  share; George V. Welty, seven shares.

Item 13.         Certain Relationships and Related Transactions

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

Item 14.          Principal Accountant Fees and Services

The information contained in the section titled “Auditor and Audit Fees” in the Proxy Statement is incorporated by reference to this Item 14.

PART IV

Item 15.         Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   The consolidated financial statements and exhibits listed below are filed as part of this report.  Financial statement schedules are omitted as they are not applicable.

(1)   The Corporation’s consolidated financial statements, the notes thereto and the report of the independent public accountants of the Annual Report and are incorporated herein by reference.

		Page Number or
Exhibit		Incorporated by
Number	Description	Reference to
3.1	Articles of Incorporation	Exhibit C to Form S-4
		Registration Statement
		Filed April 9, 1990
3.2	By-laws of Registrant	Exhibit D to Form S-4
		Registration Statement
		Filed April 9, 1990
3.3	Amendment to Articles of	Exhibit A to definitive
	Incorporation	Proxy Statement filed for
		the special meeting of
		shareholders held
		September 18, 1990
3.4	Amendment to Articles of	Exhibit A to definitive
	Incorporation	Proxy Statement filed for
		the meeting of
		shareholders held on
		April 15, 1997
10.1	Employment agreement between Gregg E. Hunter and Commercial Bank of Pennsylvania	Exhibit 10.1 to Form 10-Q for the Quarter ended September 30, 2003
10.2	Employment agreement between Louis T. Steiner and Commercial Bank of Pennsylvania	Exhibit 10.2 to Form 10-Q for the Quarter ended September 30, 2003
10.3	Mutual Release and Non-Disparagement Agreement between Commercial Bank of Pennsylvania and Louis T. Steiner	Filed herewith
13	Portions of the Annual Report to Shareholders for the Fiscal year Ended December 31, 2003	Filed herewith
14	Code of Ethics for Senior Financial Officers	Filed herewith
21	Subsidiaries of the Registrant	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed herewith
32.1	Section 1350 Certification of Chief Executive Officer	Filed herewith
32.2	Section 1350 Certification of Chief Financial Officer	Filed herewith

  Reports on Form 8-K

A Report on Form 8-K was filed on October 1, 2003 announcing the creation of a state-chartered trust company subsidiary, Highview Trust Company.

A Report on Form 8-K was filed on October 30, 2003 reporting the Corporation’s earnings release for the quarter ending September 30, 2003.

A Report on Form 8-K was filed on November 3, 2003 announcing growth expectations for 2004.

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
	COMMERCIAL NATIONAL FINANCIAL CORPORATION
	(Registrant)
	By:/s/ Gregg E. Hunter
	Gregg E. Hunter, Vice Chairman, President
	and Chief Executive Officer
March 26, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE AND CAPACITY		DATE
/s/ George V. Welty		March 16, 2004
George V. Welty, Chairman of the Board and Director
/s/ Gregg E. Hunter		March 16, 2004
Gregg E. Hunter, Vice Chairman of the Board, Director, Chief Executive Officer (principal executive officer)
/s/ Ryan M. Glista		March 16, 2004
Ryan M. Glista, Senior Vice President and Chief Financial Officer (principal financial and accounting officer)
/s/ Wendy S. Schmucker		March 16, 2004
Wendy S. Schmucker, Secretary/Treasurer
/s/ John T. Babilya		March 16, 2004
John T. Babilya, Director
/s/ George A. Conti, Jr.		March 16, 2004
George A. Conti Jr., Director
/s/ Richmond H. Ferguson		March 16, 2004
Richmond H. Ferguson, Director
/s/ Dorothy S. Hunter		March 16, 2004
Dorothy S. Hunter, Director
/s/ Frank E. Jobe		March 16, 2004
Frank E. Jobe, Director
		March 16, 2004
Roy M. Landers, Director
/s/ John C. McClatchey		March 16, 2004
John C. McClatchey, Director
/s/ Joseph A. Mosso		March 16, 2004
Joseph A. Mosso, Director
/s/ Joedda M. Sampson		March 16, 2004
Joedda M. Sampson, Director
/s/ Debra L. Spatola		March 16, 2004
Debra L. Spatola, Director
/s/ C. Edward Wible		March 16, 2004
C. Edward Wible, Director

EXHIBIT TABLE OF CONTENTS
Exhibit
Number	Description
10.3	Mutual Release and Non-Disparagement Agreement between Commercial Bank of Pennsylvania and Louis T. Steiner
13	Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 2003
14	Code of Ethics for Senior Financial Officers
21	Subsidiaries of the Registrant
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

 

Exhibit 21  -  Subsidiaries of Commercial National Financial Corporation

	State or Jurisdiction
Subsidiary	of Incorporation
Commercial Bank of Pennsylvania	Pennsylvania
Commercial National Insurance Services, Inc.	Pennsylvania
Gooder Agency, Inc.	Pennsylvania
Highview Trust Company	Pennsylvania

The Corporation will provide without charge to any shareholder a copy of its 2003 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

STOCK TRANSFER DEPARTMENT

P.O. BOX 429

LATROBE, PA  15650

 

Quarterly Summary of Financial Data (Unaudited)

The unaudited quarterly results of operations for the years ended December 31, 2003 and December 31, 2002 are as follows:

                                                                       

	(Dollars in Thousands, Except per Share Amounts)
	2003
	First	Second	Third	Fourth
	Quarter	Quarter	Quarter	Quarter
Interest income	$                   5,313	$                 5,028	$                 4,703	$                 4,751
Interest expense	1,717	1,650	1,562	1,596
Net interest income	3,596	3,378	3,141	3,155
Provision for loan losses	-	-	-	39
Net interest income after
provision for loan losses	3,596	3,378	3,141	3,116
Other income (including security
transactions)	906	1,070	982	1,031
Other expenses	3,037	3,068	3,107	3,235
Income before income taxes	1,465	1,380	1,016	912
Income tax expense	322	275	146	94
Net income	$                   1,143	$                 1,105	$                    870	$                    818
Earnings per share, basic	$                      ..33	$                    ..32	$                    ..25	$                    ..24

	2002
	First	Second	Third	Fourth
	Quarter	Quarter	Quarter	Quarter
Interest income	$                   5,782	$                 5,701	$                 5,874	$                 5,586
Interest expense	1,802	1,933	1,993	1,847
Net interest income	3,980	3,768	3,881	3,739
Provision for loan losses	39	163	96	-
Net interest income after
provision for loan losses	3,941	3,605	3,785	3,739
Other income (including security
transactions)	688	672	1,228	745
Other expenses	2,697	2,630	2,805	3,054
Income before income taxes	1,932	1,647	2,208	1,430
Income tax expense	536	449	478	410
Net income	$                   1,396	$                 1,198	$                 1,730	$                 1,020
Earnings per share, basic	$                      ..41	$                    ..35	$                    ..50	$                    ..30

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 Dividends
		High		Low		Per Share
2003
First Quarter		$          27.00		$          21.31		$             ..25
Second Quarter		34.19		25.25		..25
Third Quarter		26.18		23.01		..25
Fourth Quarter		26.51		23.10		..25
2002
First Quarter		$          18.75		$          16.65		$             ..25
Second Quarter		22.00		18.05		..25
Third Quarter		23.37		20.35		..25
Fourth Quarter		24.10		21.00		..25

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.”

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)
	2003	2002	2001	2000	1999
Total interest income	$         19,795	$         22,943	$         24,399	$         26,056	$           24,303
Total interest expense	6,525	7,575	9,716	11,705	10,013
Net interest income	13,270	15,368	14,683	14,351	14,290
Provision for loan losses	39	298	540	1,176	3,290
Net interest income after
provision for loan losses	13,231	15,070	14,143	13,175	11,000
Other operating income	3,989	3,333	2,555	2,305	1,936
Other operating expenses	12,447	11,186	10,094	9,429	9,245
Income before income taxes	4,773	7,217	6,604	6,051	3,691
Income tax expense	837	1,873	1,699	1,419	487
Net income	$           3,936	$           5,344	$           4,905	$           4,632	$             3,204
Per Share Data
Net income	$           1.14	$           1.56	$           1.43	$           1.32	$                ..90
Dividends declared	$           1.00	$           1.00	$             ..76	$             ..68	$                ..60
Average shares outstanding	3,441,556	3,425,858	3,432,389	3,511,603	3,578,894
At End of Period
Total assets	$       385,028	$       380,338	$       343,029	$       329,865	$         355,298
Securities	168,685	148,344	119,396	104,703	124,743
Loans and leases, net of unearned
income	187,382	169,030	202,335	207,022	204,839
Allowance for loan losses	2,462	2,707	2,814	2,737	1,919
Deposits	259,216	270,025	254,986	266,611	272,947
Long-term borrowings	55,000	55,000	35,000	10,000	25,000
Shareholders' equity	49,912	51,205	45,970	43,137	39,404
Key Ratios
Return on average assets	1.05%	1.46%	1.43%	1.32%	.95%
Return on average equity	7.73	11.02	10.90	11.21	7.50
Net loans-to-deposit ratio	71.34	61.59	78.25	78.00	74.34
Dividend payout ratio (dividends
declared divided by net income)	87.45	64.07	53.16	51.46	66.98
Equity-to-assets ratio (average
equity divided by average total             assets)	13.63	13.27	13.12	11.82	12.68

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, 2003, 2002 and 2001. This information should be read in conjunction with the consolidated financial statements and related footnotes for the years under review.

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

All material intercompany transactions have been eliminated in consolidation.

The Corporation reported net income of $3.9 million or $1.14 per share for the year ended 2003 compared to $5.3 million or $1.56 per share for the year ended 2002. The Corporation’s return on average assets for 2003 and 2002 were 1.05% and 1.46%, respectively. Return on average equity for the same two periods were 7.73% and 11.02%, respectively.

The decrease in net income was due to higher net operating expense and a decline in net interest income. A more detailed discussion of the net interest income decline is included below under the heading Net Interest Income.

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 2003 and 2002, net interest income was $13.3 and $15.4 million, respectively. The related tax-equivalent net interest margin for these two years was 4.19% and 4.81%, respectively. The decline in the margin is mostly due to the decrease in yield earned on interest-earning assets. Other factors that can affect the Corporation’s operating results are activity in the loan loss provision and components of non-interest income and non-interest expense.

The year 2003 marked some changes with the Corporation’s subsidiaries. In July, the Corporation’s banking subsidiary changed from a national to a state banking charter. This change will allow the Bank to compete on a more equal basis with most of its local competition and reduce semi-annual regulatory assessments. In October, the Corporation formed HTC as a state-chartered trust company subsidiary, and then transferred the Bank’s trust operations to HTC. The creation of this new subsidiary was intended to enable each of the Corporation’s subsidiaries to offer customers a more concentrated focus in its particular financial services sector (banking, insurance and trust).

With its recent changes in management, the Corporation now intends to focus on Bank operations and growing the Corporation through traditional loans and deposits supplemented by offering trust products to customers in its marketplace. Management anticipates continued pressure on net interest income. Loans and deposits will continue to be competitively priced by the Corporation with the intention of acquiring profitable market share. Operating expenses will be scrutinized more closely for the purpose of offsetting a potential decline in net interest income.

Total assets of the Corporation were $385.0 million on December 31, 2003 compared to $380.3 million on December 31, 2002. Increases in investments and loans offset the decrease in cash and interest bearing deposit accounts (IBDs). The decline in IBDs provided the necessary funding for investment and loan growth.

Financial Condition

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

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 $18.4 million in 2003 over the total of $169.0 million at the end of 2002. This increase was due largely to a residential loan promotion that commenced during the fourth quarter of 2002.  This promotion resulted in an increase of $20.2 million in residential mortgage loans. Total commercial and commercial mortgage loans decreased $1.5 million due to the lingering effects of the sluggish economy in the Corporation’s market area.

Total investment securities increased $20.3 million during 2003. All of the Corporation’s securities are held as available for sale. These securities consist of mortgage-backed securities, tax-free municipal bonds, U.S. government agency securities, Federal Home Loan Bank stock and individual bank stocks. 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, 2003, total deposits decreased $10.8 million from December 31, 2002 to $259.2 million. This decrease is partly due to the Corporation’s reluctance to match competitor pricing of money market and certificate of deposit accounts. In an effort to mitigate this decline in deposits, the Corporation elected, in October 2003 to offer competitive certificate of deposit rates to attract more deposits. To that end, the Corporation experienced deposit growth of $1.9 million in the fourth quarter of 2003.

Total short-term borrowings increased $17.5 million in 2003. The additional short-term borrowings consisted of $15.0 million in a 30 day advance from the Federal Home Loan Bank (FHLB) and $2.5 million in federal funds purchased. These borrowings funded purchases of securities during the fourth quarter of 2003. The Corporation’s intent is to reduce its short-term borrowings over time with monthly cash flow from securities and loan payments.

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

Shareholders’ equity was $49.9 million on December 31, 2003 compared to $51.2 million on December 31, 2002, a decrease of $1.3 million. The change in shareholders’ equity consists of net income of $3.9 million being offset by unrealized losses in securities of $1.1 million, dividends declared of $3.4 million and treasury stock purchases of $0.7 million.  Book value per common share at year-end 2003 decreased by 1.9% to $14.55 from $14.82 at year-end 2002.

Results of Operations

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

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

Net Interest Income

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

The low loan interest rate environment also impacted investment income as nationwide refinancing activity produced heavy prepayments on the Corporation’s mortgage backed securities portfolio. The Corporation reinvested the proceeds of these prepayments into lower yielding investments, which included federal funds sold and municipal and mortgage-backed securities.

For 2003, total deposits declined by $10.8 million to $259.2 million from $270.0 million at the end of 2002. This decline, combined with lower interest rates, resulted in a $1.0 million decrease in interest expense for 2003.

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

In 2002, net interest income was $15.4 million compared to $14.7 million in 2001. The increase was attributable to a $2.1 million decrease in interest expense, which more than offset a $1.4 million decrease in interest income. This was due to the Corporation’s ability to reprice liabilities at a faster rate than assets.

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 2003, 2002 and 2001.

COMMERCIAL NATIONAL FINANCIAL CORPORATION

Financial Comparisons

Consolidated Average Balance Sheet, Interest Income/Expense and Rates

(Dollars in Thousands)

	2003				2002			2001
			Interest			Interest			Interest
	Average		Income/	Yield or	Average	Income/	Yield or	Average	Income/	Yield or
	Balance		Expense	Rate(a)	Balance	Expense	Rate(a)	Balance	Expense	Rate (a)
Interest-earning assets
Loans (b)(c) net of         unearned income	$     183,628		$     11,390	6.36%	$   187,428	$   13,533	7.38%	$   206,681	$      16,665	8.23%
Taxable securities	108,162		6,835	6.32	111,966	8,130	7.26	80,777	6,161	7.63
Non-taxable securities	34,611		1,400	6.13	21,063	1,058	7.61	18,077	924	7.75
Interest-bearing deposits         with banks	2,172		41	1.89	5,278	49	0.93	9,592	364	3.79
Federal funds sold	12,330		129	1.05	11,147	173	1.55	6,613	285	4.31
Total earning assets	340,903		19,795	6.10	336,882	22,943	7.06	321,740	24,399	7.84
Non-interest-earning assets
Cash	7,879				8,007			7,695
Allowance for loan         losses	(2,685)				(2,879)			(2,671)
Other assets	27,399				23,394			16,044
Total non-interest-             earning assets	32,593				28,522			21,068
Total assets	$     373,496				$   365,404			$   342,808
Liabilities and Shareholders’ Equity
Interest-bearing deposits
NOW accounts	$    24,151		35	0.14	$     22,952	99	0.43	$     20,480	140	0.68
Money market accounts	43,948		327	0.74	46,793	717	1.53	38,500	1,154	3.00
Savings deposits	56,200		412	0.73	55,369	801	1.45	46,003	1,101	2.39
Time deposits	86,059		2,789	3.24	89,490	3,381	3.78	108,841	5,670	5.21
Short-term borrowings	3,976		49	1.23	1,496	30	1.98	2,917	95	3.27
Long-term borrowings	55,000		2,913	5.29	48,602	2,547	5.24	30,384	1,556	5.12
Total interest-bearing             liabilities	269,334		6,525	2.42	264,702	7,575	2.86	247,125	9,716	3.93
Non-interest-bearing     deposits	49,584				48,579			47,412
Other liabilities	3,656				3,647			3,283
Shareholders' equity	50,922				48,476			44,988
Total non-interest             bearing funding
sources	104,162				100,702			95,683
Total liabilities and
shareholders' equity	$     373,496				$   365,404                                        $342,807,943			$   342,808
Net interest income and net
yield on interest earning     assets			$     13,270	4.19%		$   15,368	4.81%		$      14,683                           $14,350,887	4.82%

(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.

                             

The following table illustrates the impact and interaction of rate and volume changes for the years under review:

Analysis of Year-to-Year Changes in Net Interest Income

(Dollars in Thousands)

	2003 Change from 2002			2002 Change from 2001
	Total	Change Due	Change Due	Total	Change Due	Change Due
	Change	To Volume	To Rate	Change	To Volume	To Rate                                                                to Volume                                                                to Rate
Interest-earning assets
Loans net of unearned income	$           (2,143)	$              (274)	$        (1,869)	$           (3,132)	$           (1,552)	$        (1,580)
Securities
Taxable	(1,295)	(276)	(1,019)	1,969	2,379	(410)
Non-taxable	342	681	(339)	134	154	(20)
Interest-bearing deposits with            banks	(8)	(29)	21	(315)	(164)	(151)
Federal funds sold	(44)	18	(62)	(112)	195	(307)
Total interest income	(3,148)	120	(3,268)	(1,456)	1,012	(2,468)
Interest-bearing liabilities
Deposits	(1,435)	(99)	(1,336)	(3,067)	30	(3,097)
Short-term borrowings	19	50	(31)	(65)	(46)	(19)
Long-term borrowings	366	341	25	991	932	59
Total interest expense	(1,050)	292	(1,342)	(2,141)	916	(3,057)
Net interest income	$           (2,098)	$              (172)	$         (1,926)	$                685	$                  96	$              589

Other Operating Income and Expense

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

Total other operating income for 2002 was $3.3 million, an increase of $620,000 from $2.6 million in 2001. The increase included a gain of $470,000 from the sale of one of the Bank’s branch offices. This branch, located in Murrysville, Pennsylvania, failed to reach management’s performance expectations and was no longer within the geographic scope of the Corporation’s long-range plan. Income from bank-owned life insuranceincreased $85,000 due to an additional investment of $5.0 million during 2002. Asset management and trust income during 2002 was $541,000, which represented an increase of $84,000 over 2001. Service charges on deposit accounts declined $41,000 to $737,000 for 2002. Lower fees collected from overdrawn accounts contributed to this revenue decrease. Other service charges and fees decreased by $59,000 from 2001’s level of $750,000.  The reasons for this decrease were lower volumes of fees and commissions collected from various loan and deposit product offerings by the Corporation.

Total other operating expense increased $1.2 million to $12.4 million for 2003 compared to $11.2 million in 2002. Personnel expense increased $566,000 or 10% in 2003. Factors contributing to this increase were the Gooder Agency acquisition, wage increases, higher health insurance premiums and payroll taxes. Net occupancy expense increased by $90,000 in 2003 due to increased depreciation of check imaging equipment and rental expense from the addition of the Norwin and Gooder Agency offices for full year 2003. Other expenses increased $834,000 in 2003 to $3.5 million. Amortization of intangible assets and expenses associated with the acquisition and operation of Gooder Agency were the primary reasons for this increase

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

Other expense increased by $611,000 to $2.7 million. Increases in advertising, ATM/debit cards, stationary and printing, employee training and other real estate expenses along with the deposit premium amortization expense relating to the newly acquired branch office led to this increase in other expenses.

Income tax expense was $837,000 in 2003, $1,873,000 in 2002 and $1,699,000 in 2001. The effective tax rate in those years was 17.54%, 25.95% and 25.73%, respectively. The effective tax rate for 2003 decreased due to higher tax-free income in relation to lower taxable income when compared to 2002. Due to the reasons stated above, the Corporation is now in an alternative minimum tax position. Management is attempting to rectify this position by reducing tax-free income while increasing taxable income during 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, 2003, the Corporation had available funding of approximately $105.0 million at the FHLB with an additional $30.0 million of short-term funding available through federal funds lines of credit.

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

Cash flows used for investing activities totaled $27.3 million in 2003 compared to cash used in 2002 of $11.2 million. Increases in net loans to customers and net securities purchases in 2003 were offset by a decrease in federal funds sold and an increase in securities prepayments.

Cash flows from financing activities decreased $24.6 million in 2003 due mostly to no issuance of long-term debt in 2003. An increase in short-term borrowings offset by a decrease in total deposits made up the remaining difference in financing activity.

In the first quarter of 2004, the Corporation repositioned the investment portfolio to address its alternative minimum tax position.

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	Total
Long-term debt	$     -	$10,000	$   -	$45,000	$55,000
Capital lease obligations	$  49	$       61	$   -	$          -	$     110
Operating lease obligations	$119	$     139	$58	$     228	$     544

Off-Balance Sheet Arrangements

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

The Corporation’s financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk and interest rate risk.  These commitments consist mainly of loans approved but not yet funded, unused lines of credit and letters of credit made under the same standards as on-balance sheet instruments.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party.  Unused commitments at December 31, 2003 were $34.8 million.  Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation.  Management believes that any amounts actually drawn upon can be funded in the normal course of operations.

The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Time deposits of $100,000 or more at December 31, 2003 are as follows:

	Amount	Percent
Remaining maturity:
3 months or less	$        4,127	19%
Over 3 through 6 months	616	3
Over 6 months through 12 months	1,213	6
Over 12 months	15,152	72
Total	$    21,108	100%

The following table shows final loan maturities excluding consumer installment and mortgage loans and before unearned income at December 31, 2003 (in thousands):

	Within		One-Five	After
	One Year		Years	Five Years	Total
Commercial and industrial	$             4,422		$            5,773	$               3,735	$        13,930
Real estate-construction	1,108		-	-	1,108
Other	2,584	*	714	9,503	12,801
Totals	$            8,114		$              6,487	$             13,238	$        27,839
Loans at fixed interest rates			$              3,845	$             13,138
Loans at variable interest rates			2,642	100
			$              6,487	$             13,238

   *    Includes $1.0 million Pennsylvania Higher Education Assistance Agency loans with no fixed maturity date.

The following tables present a five-year summary of loan classifications and the maturity distribution of securities at December 31, 2003.

Loans by Classification at December 31,
(Dollars in Thousands)
	2003		2002		2001		2000		1999
Cent                                            Amount                                            Cent                                            Amount                                            Cent                                            Amount                                            Cent                                            Amount                                            Cent
Commercial	$  14,802	8%	$  12,725	7%	$  17,251	9%	$  25,802	12%	$  23,069	11%
Real estate - commercial	51,006	27	54,618	32	71,699	35	66,052	32	59,387	29
Real estate - construction	1,108	1	976	1	1,629	1	2,381	1	4,276	2
Real estate - other	106,121	57	86,048	51	95,796	47	100,347	48	99,770	49
Consumer - installment	1,405	1	1,922	1	2,486	1	3,434	2	4,396	2
Municipal	10,622	5	10,078	6	10,990	6	7,114	4	4,290	2
Other	2,179	1	2,635	2	2,555	1	2,892	1	9,772	5
Total loans	187,243	100%	169,002	100%	202,406	100%	208,022	100%	204,960	100%
Net unamortized
costs/(fees)	139		28		(71)		(65)		(121)
Total loans, net of
costs/(fees)	$187,382		$169,030		$202,335		$207,957		$204,839

Maturity Distribution of Securities at December 31, 2003
(In Thousands)
		State and		Total	Weighted
	U.S. Govt.	Political	Other	Amortized	Average
	Agencies & Corp.	Subdivisions (1)	Securities	Cost	Yield
Within 1 year	$   3,037	$   1,384	$         -	$    4,421	2.44%
After 1 but within 5 years	8,588	10,642	-	19,230	3.27
After 5 but within 10 years	-	9,927	-	9,927	5.76
After 10 years	101,970	22,318	-	124,288	6.10
Equity securities and
restricted bank stock	-	-	5,144	5,144	2.17
	$113,595	$44,271	$5,144	$163,010	5.52%

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

Included in U.S. Government Agencies are mortgage-backed securities. These securities carry an amortized cost of $102.0 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.

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 on 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, 2003.

	Interest Sensitivity Analysis (In Thousands)
			0-30 Days		31-90 Days		91-180 Days		181-365 Days		1-5 Years		Over 5 Years
Interest-earning assets
Securities			$       2,933		$      5,405		$       7,397		$       15,712		$      75,031		$    51,387
Federal funds sold and
other deposits with            banks			764		-		-		-		-		-
Loans			23,548		3,386		4,549		11,469		80,961		60,614
Total interest-sensitive
assets			27,245		8,791		11,946		27,181		155,992		112,001
Interest-bearing liabilities
Certificates of deposit			5,476		8,817		9,321		12,242		38,863		13,591
Other interest-bearing            liabilities			-		4,752		4,752		6,776		23,550		33,360
Other term borrowings			17,450	-	5,000		-		-		25,000		25,000
Total interest-sensitive
liabilities			22,926		18,569		14,073		19,018		87,413		71,951
Interest sensitivity gap			$       4,319		$    (9,778)		$      (2,127)		$        8,163		$      68,579		$        40,050
Cumulative gap			$       4,319		$    (5,459)		$     (7,586)		$            577		$      69,156		$      109,206
Ratio of cumulative gap to
earning assets			1.26%		(1.59)%		(2.21)%		0.17%		20.15%		31.82%

Loan and security assumptions are based upon contractual maturity and prepayment estimates. Included in interest-bearing liabilities 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 Corporations’ market area. Additionally, the timing and degree of repricing on assets and liabilities may vary significantly as interest rates change. As a result of these deficiencies, the Corporation supplements this analysis with computer simulations that project the impact of changing interest rates on earnings.

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

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, 2004.

	% Change in Projected	% Change in Projected
Change in	Baseline	Economic
Interest Rates	Net Interest Income	Value of Capital
+200 basis points	(2.8%)	(8.9%)
+100 basis points	(3.6%)	(2.0%)
-100 basis points	(5.2%)	(8.2%)
-200 basis points	(12.9%)	(12.9%)

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. Credit is only to be granted to reputable borrowers believed to be reputable and only when supported by acceptable financial information consistent with underwriting standards.

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

The amount of the provision for loan losses was $39,000 in 2003, $298,000 in 2002 and $540,000 in 2001. The decrease in the provision is due to the reduction in “impaired” loans and management’s assessment of the risk inherent in the remaining loan portfolio. For each of the same years, the net charge-off against the allowance for loan losses was $284,000, $405,000 and $462,000, 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 the five years ended December 31, 2003:

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

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, financial condition of the borrower, 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 amount shown for December 31, 2003 is adequate to offset the losses which may exist as a result of under collateralization or uncollectibility.

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

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:

December 31, 2003
Loans on non-accrual basis	$ 2,332
Loans past due 90 days or more	5
Renegotiated loans	-
Total	$ 2,337
December 31, 2002
Loans on non-accrual basis	$ 2,679
Loans past due 90 days or more	3
Renegotiated loans	-
Total	$ 2,682
December 31, 2001
Loans on non-accrual basis	$ 2,492
Loans past due 90 days or more	123
Renegotiated loans	60
Total	$ 2,675
December 31, 2000
Loans on non-accrual basis	$   358
Loans past due 90 days or more	208
Renegotiated loans	171
Total	$   737
December 31, 1999
Loans on non-accrual basis	$   518
Loans past due 90 days or more	187
Renegotiated loans	493
Total	$ 1,198

Loans that were past due 90 days or more, or were on non-accrual represented 1.25% of total loans on December 31, 2003, 1.59% on December 31, 2002 and 1.29% on December 31, 2001. 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, 2003, $867,000 of non-accrual loans were paying principal or principal and interest with payments recognized on a cash basis. At present, no other outstanding loans present a serious doubt in regard to the borrower's ability to comply with the current loan repayment terms. As of December 31, 2003, the Corporation had $1.0 million in foreclosed real estate.