<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
900 LIGONIER STREET, LATROBE, PA 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, $2 PAR VALUE
Indicate by check mark 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 check mark 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 this Form 10-K or any amendment to this
Form 10-K. (x)
Aggregate market value of common stock held by
non-affiliates of registrant based on closing sale price
based on the NASDAQ National Market System on March 13, 1998. $46,400,277
Number of shares of common stock outstanding at March 13, 1998. 1,800,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to shareholders for
the fiscal year ended December 31, 1997 are incorporated by
reference into Parts I, II, and IV of this report. Portions of
the definitive Proxy Statement related to the annual meeting of
shareholders to be held April 21, 1998 are incorporated by
reference into Part III.
<PAGE>
Commercial National Financial Corporation
Form 10-K
INDEX
Part I
PAGE
ITEM 1. Business
Description of business................................ 3
Competition............................................ 4
Supervision and regulation............................. 4
Effects of Governmental Policies....................... 4
Consolidated Financial and Statistical Profile......... 5
ITEM 2. Properties............................................. 9
ITEM 3. Legal Proceedings...................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders.... 9
Executive Officers of the Registrant................... 10
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Security Holder Matters................................. 11
ITEM 6. Selected Financial Data................................. 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 11
ITEM 8. Financial Statements and Supplementary Data............. 11
ITEM 9. Disagreements on Accounting and Financial Disclosures... 11
PART III
ITEM 10. Directors and Executive Officers of the Registrant...... 12
ITEM 11. Executive Compensation.................................. 12
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 12
ITEM 13. Certain Relationships and Related Transactions.......... 12
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 13
<PAGE>
Part I
Item 1. BUSINESS
Description of Business
- -----------------------
The Commercial National Financial Corporation (the
"corporation") was incorporated under the laws of the
Commonwealth of Pennsylvania on July 1, 1990 and is registered as
a bank holding company under the Bank Holding Company Act of 1956
as amended. The corporation is owner of 100% of the outstanding
shares of common stock of Commercial National Bank of
Westmoreland County. This subsidiary bank and its predecessor
have been providing banking services since 1934. At the present
time, two (2) banking offices are in operation in Latrobe, two(2)
in Unity Township and one (1) each in Ligonier, West Newton,
Greensburg, Murrysville and Hempfield Township. The Murrysville
office began operations in July of 1996. An asset
management/trust department was established in 1994 and is
located in the building that houses the Greensburg banking
office. All of these offices are within the boundaries of
Westmoreland County, Pennsylvania. In addition, the building
which houses the 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. In November of 1997,
conversion of the former Plaza Hotel building officially became
our new corporate office center. The new center will eliminate
over-crowded work offices, organize work groups and provide space
for growth. Each of the banking offices, except for downtown
Latrobe and Greensburg, is equipped with twenty-four-hour-a-day
automatic teller machines and one (1) additional ATM unit each
is located on the campus of Saint Vincent College in Unity
Township, the terminal of the Westmoreland County Airport
in Unity Township and in the reception lobby of the Latrobe
Area Hospital in Latrobe. A separate freestanding drive-up teller
staffed banking facility is attached to our Lincoln Road office
in downtown Latrobe. This facility also provides ATM service.
The corporation's business activities are limited to holding
the stock of its subsidiary bank and the remaining discussion
pertains to the activities of that bank.
The subsidiary bank offers the full range of banking services
normally associated with the general commercial banking business.
Services include extending credit, providing deposit services,
marketing non-deposit investments and offering financial
counseling. The ATM system described earlier is a part of the
MAC and Cirrus networks which permits the bank's customers access
to an extensive regional and national network. The bank also has
implemented a comprehensive electronic home-banking system.
This product known as the Maxcess (at this point, there appears
a service mark) SM Account, provides our customers with the
option of paying bills through personal computer, screenphone,
touchtone phone and even rotary phone. During 1997, the Maxcess
(at this point, there appears a service mark)SM Check Card was
introduced. The card can be used by customers at ATMs and have
funds drawn electronically for purchases from merchants displaying
a Mastercard or MAC symbol.
[FN]
MAXCESS is a service mark of Commercial National Bank of
Westmoreland County
<PAGE>
Competition
- -----------
Throughout the subsidiary bank's service area, substantial
competition exists both for deposit and loan products. The
competitors range from branches of major Cleveland Ohio, Indiana,
Pittsburgh and Johnstown Pennsylvania based banks, several
independent banks headquartered in Westmoreland County, a
variety of thrift institutions and a number of credit unions.
Even though some portions of the thrift industry have experienced
fairly extensive restructuring, the level of competitive activity
in our service area remains strong. Competition for certificates
of deposit and money market deposits remains vigorous with the
representatives of insurance companies and securities brokers
soliciting customers in our market area. In addition,
out-of-area institutions including retailers continue to solicit
business for credit cards, residential mortgages and automobile
financing.
Supervision and Regulation
- --------------------------
As a result of the establishment of the holding company format,
the holding company and the subsidiary bank are subject to the
supervision of the following regulatory bodies: The Federal
Reserve Board, the Office of the Comptroller of the Currency, the
Securities and Exchange Commission, the Commonwealth of
Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation. 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.
Because the corporation and the bank confine their activities
within a single county, changes to intra and inter-state banking
regulations have had little impact inasmuch as the competitive
situation described earlier can not be altered significantly nor
is the corporation likely to take advantage of the broader
branching or merger options now available. The Federal Reserve
Board monitors holding company activity while the Office of the
Comptroller of the Currency is the corporation's primary banking
regulator. No restrictions or actions are currently pending
against the corporation or the bank.
Effects of Governmental Policies
- --------------------------------
In addition to the 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.
<PAGE>
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE
The data presented on the following pages provides additional
information to assist in reviewing the corporation's business
activities and must be read with the understanding that it is a
supplement to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the annual report to
shareholders for the year ended December 31, 1997 which is
incorporated herein by reference.
Securities Portfolio
- --------------------
The following table presents the composition of the securities
portfolio at year end for the years indicated:
<TABLE>
Amortized Cost at December 31
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U. S. Treasury securities and other
U. S. Government agencies and
corporations $81,067,566 $73,477,520 $77,094,930
Obligations of states and political
subdivisions 35,619,236 27,928,975 24,996,402
Other securities 1,330,300 933,200 944,700
---------- ---------- ----------
Total $118,017,102 $102,339,695 $103,036,032
============ ============ ============
</TABLE>
Loans
- -----
Final loan maturities excluding consumer installment and
mortgage loans and before unearned discount at December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
Within One-Five After
One Year Years Five Years Total
-------- ------ ---------- -----
<S> <C> <C> <C> <C>
Commercial and Industrial $ 9,574* $ 8,918 $ 560 $19,052
Real estate-construction 3,179 332 - 3,511
Other 5,320** 817 9,100 $15,237
------- ------ ------ -------
Totals $18,073 $10,067 $9,660 $37,800
======= ====== ====== =======
Loans at fixed interest rates $ 4,337 $1,217 $ 5,554
Loans at variable interest rates 5,730 364 6,094
------ ------ -------
$10,067 $1,581 $11,648
====== ====== =======
</TABLE>
* Includes $246M of Commercial credit cards.
** Includes $2.5 million PHEAA loans with no fixed maturity date.
<PAGE>
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE (continued)
Non-performing Loans
- --------------------
The following table details, for each of the most recent five
years, the year end amounts which were accounted for on a non-
accrual basis or were past due 90 days or more:
Dec. 31, 1997
Loans on non-accrual basis $ 23,172
Loans past due 90 days or more 659,078
Renegotiated loans 948,128
----------
Total $1,630,378
==========
Dec. 31, 1996
Loans on non-accrual basis $ 23,172
Loans past due 90 days or more 100,293
Renegotiated loans 1,024,550
----------
Total $1,148,015
==========
Dec. 31, 1995
Loans on non-accrual basis $ 569,564
Loans past due 90 days or more 89,824
Renegotiated loans 466,217
----------
Total $1,125,605
==========
Dec. 31, 1994
Loans on non-accrual basis $ 662,111
Loans past due 90 days or more 395,654
Renegotiated loans 158,057
----------
Total $1,215,822
==========
Dec. 31, 1993
Loans on non-accrual basis $ 211,526
Loans past due 90 days or more 65,485
Renegotiated loans 166,784
----------
Total $ 443,795
==========
At present no other loans which are outstanding present a serious
doubt in regard to the borrower's ability to comply with the
current loan repayment terms. As of December 31, 1997 the
corporation had no other real estate owned and no in-substance
foreclosures.
Effect of non-accrual loans on interest income during 1997 is as
follows:
Non-accrual
Loans
-------
Gross amount of interest that would have
been recorded at original rates $ 2,317
Less: Interest that was reflected in income -
--------
Net reduction to interest income $ 2,317
========
<PAGE>
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE (continued)
Summary of Loan Loss Experience
- -------------------------------
The table below provides an analysis of the allowancee for loan losses
for the five years ended December 31, 1997:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans outstanding at beginning of year,
net of unearned income $159,935,523 $144,288,002 $139,066,657 $125,575,221 $116,792,991
============ ============ ============ ============ ============
Average loans outstanding $169,849,234 $151,056,637 $142,697,066 $130,041,170 $123,225,194
Allowance for loan losses: ============ ============ ============ ============ ============
Balance, beginning of year $ 2,035,818 $ 2,081,700 $ 2,077,553 $ 1,968,014 $ 1,740,713
------------ ------------ ------------ ------------ ------------
Loans charged off:
Commercial, industrial & other 4,859 - - - -
Installment and charge card 437,003 170,719 97,089 46,873 50,794
Real estate 6,446 3,233 - 40,009 92,771
------- ------- ------ ------- -------
Total loans charged off 448,308 173,952 97,089 86,882 143,565
------- ------- ------ ------- -------
Recoveries:
Commercial, industrial & other - - - - -
Installment and charge card 22,669 23,070 10,884 7,637 10,866
Real estate 2,072 - 352 8,784 -
------- ------- ------ ------- -------
Total recoveries 24,741 23,070 11,236 16,421 10,866
------- ------- ------ ------- -------
Net loans charged off 423,567 150,882 85,853 70,461 132,699
Provision charged to expense 270,000 105,000 90,000 180,000 360,000
------- ------- ------- ------- -------
Balance, end of year $ 1,882,251 $ 2,035,818 $ 2,081,700 $ 2,077,553 $ 1,968,014
============ =========== =========== =========== ===========
Ratios:
Net charge-offs as a percentage
of average loans outstanding .25% .10% .06% .05% .11%
Allowance for loan losses
as a percentage of average loans
outstanding 1.11 1.35 1.46 1.60 1.60
</TABLE>
Management review and evaluation of loan loss experience and loan loss
potential on outstanding loans occurs on a monthly basis and is
considered in conjunction with current economic conditions and
the current requirements of the appropriate regulatory agencies.
As a result of this on-going study, management believes that the
reserve amount shown for December 31, 1997 is adequate to offset
the expense which may exist as a result of under
collateralization or uncollectibility.
<PAGE>
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE (continued)
Deposits
- --------
The following table presents average deposits by type and the
average interest rates paid as of 1997, 1996 and 1995:
<TABLE>
December 31,
1997 1996 1995
<CAPTION>
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 34,124,049 - % $ 32,920,490 - % $ 32,128,560 - %
Interest bearing demand 20,204,634 1.91 18,110,581 1.95 17,116,367 2.20
Money market 42,542,349 4.07 39,754,528 3.79 40,662,832 3.85
Savings 44,871,628 3.09 44,744,695 3.03 42,721,554 3.05
Time 108,744,105 5.41 97,004,511 5.34 92,126,830 5.44
------------ ----------- -----------
Total $250,486,765 3.75% $232,534,805 3.61% $224,756,143 3.67%
============ ============ ===========
</TABLE>
Remaining maturities of certificates of deposit $100,000 or more:
<TABLE>
December 31,
1997 1996 1995
<CAPTION>
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Remaining maturity:
3 months or less $12,602,770 40% $ 7,136,310 28% $ 5,614,025 27%
Over 3 through 6 months 4,452,058 14 2,830,951 11 1,313,545 6
Over 6 months through 12 months 2,628,559 8 2,047,722 8 1,628,908 8
Over 12 months 11,796,885 38 13,319,276 53 12,453,765 59
---------- -- ---------- -- ---------- --
Total $31,480,272 100% $25,334,259 100% $21,010,243 100%
========== ========== ==========
</TABLE>
<PAGE>
Item 2. Properties
----------
All of the corporation's banking and support facilities are owned
and free of liens and encumbrances with the exception of one (1)
banking office and an adjacent drive-up facility, both of which
are leased. All of the properties are used in their entirety for
banking 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 the bank. During 1997, existing corporate offices
expanded onto the third floor of the former Plaza Hotel property
which was immediately adjacent to and is now part the bank's
corporate headquarters. The first and second floors of the
building will be finished at a later date as the demand for
additional space becomes apparent.
Item 3. Legal Proceedings
-----------------
Other than proceedings which occur in the normal conduct of
business, there are no legal proceedings to which either the
corporation or the subsidiary bank is a party which will have any
material effect on the financial position of the corporation
and its subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
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.
<TABLE>
<CAPTION>
Name Age Present and Previous Positions
- ------------------------------------------------------------------
<S> <C> <C>
Louis A. Steiner 67 Chairman of the board
(1977 to present),
chief executive officer
(1977 to 1997)
Louis T. Steiner 36 Vice chairman and chief executive
officer (November 1997 to present)
vice chairman (December 1995 to
present), vice president (January
1994 to November 1995), assistant
vice president (January 1993 to
December 1993)
Gregg E. Hunter 39 Vice chairman and chief financial
officer (December 1995 to present),
vice president and chief financial
officer (January 1994 to November
1995), assistant secretary/treasurer
(January 1993 to November 1995),
assistant vice president and
controller (January 1993 to December
1993)
Edwin P. Cover 61 President and chief banking
officer (October 1989 to present)
Wendy S. Schmucker 29 Secretary/treasurer and vice president,
manager corporate administration
November 1997 to present), assistant
vice president and managing corporate
officer (December 1997 to present),
assistant secretary/treasurer and
corporate and financial administrative
officer (December 1995 to November 1996),
corporate administrator (January 1995
to November 1995) and administrative
assistant (February 1992 to December 1994)
Ryan M. Glista 30 Vice president and comptroller
(November 1997 to present),
assistant vice president and
controller (December 1995 to
(November 1997), corporate
accountant (June 1994 to
December 1995)
</TABLE>
<PAGE>
Part II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters
------------------------------------------------------------
Information appearing in the annual report to
shareholders for the fiscal year ended December 31, 1997
on page 20 is incorporated herein by reference in response
to this item. As of March 13, 1998 there were 526
shareholders of record of the registrant's common stock.
The number of beneficial shareholders is approximately 650.
Item 6. Selected Financial Data
-----------------------
Information appearing in the annual report to
shareholders for the fiscal year ended December 31, 1997
on page 21 is incorporated herein by reference in response
to this item.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Information appearing in the annual report to
shareholders for the fiscal year ended December 31, 1997
on page 22 is incorporated herein by reference in response
to this item.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following information appearing in the annual
report to shareholders for the fiscal year ended December
31, 1997 is incorporated herein by reference in response
to this item.
Annual
Report
Page
------
Report of Independent Certified Public Accountants................... 19
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996...... 6
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996, and 1995................................. 7
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995.................. 8
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.................................. 9
Notes to Consolidated Financial Statements........................ 10
Quarterly Summary of Financial Data (Unaudited)................... 20
Item 9. Disagreements on Accounting and Financial Disclosure
----------------------------------------------------
None.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Information appearing in the definitive proxy statement
related to the annual meeting of shareholders to be held
April 21, 1998 on pages 5 thru 7 and from part I of this
report on 10-K is incorporated herein by reference in
response to this item.
Based on a review of the applicable forms, there was no
director,officer or beneficial owner of more than 10
percent of common stock who failed to file on a timely basis
reports required by Section 16(a) of the 1934 Act during the
most recent fiscal year or prior years.
Item 11. Executive Compensation
----------------------
Information appearing in the definitive proxy statement
related to the annual meeting of shareholders to be
held April 21, 1998 on page 12 is incorporated
herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
------------------------------------------------------
Information appearing in the definitive proxy statement
related to the annual meeting of shareholders to be held
April 21, 1998 on page 8 is incorporated herein by
reference in response to this item.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Information appearing in the definitive proxy statement
related to the annual meeting of shareholders to be held
April 21, 1998 on page 15 is incorporated herein by
reference to this item.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
-------------------------------------------------------
(a)(1) Financial statements
All financial statements of the registrant as set forth
under Item 8 of this report on Form 10-K.
(2) Financial statement schedules are omitted as they are
not applicable.
Page Number or
(3) 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
13 Annual Report to Shareholders
for the Fiscal Year Ended
December 31, 1997
21 Subsidiary of the Registrant
22 Commercial National Financial Corporation 1998 Annual
Proxy Statement to Shareholders
27 Financial Data Schedule
(b) Report on Form 8-K
None
<PAGE>
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/ Louis A. Steiner
---------------------------------------
Louis A. Steiner, Chairman of the Board
March 23, 1998
<PAGE>
EXHIBIT INDEX TABLE OF CONTENTS
Exhibit
Number Description
- ------- ------------
21 Subsidiary of the Registrant
<PAGE>
Exhibit 21 - Subsidiary of Commercial National Financial Corporation
-------------------------------------------------------
Percent Ownership
By Registrant
-----------------
Commercial National Bank of Westmoreland County 100%
900 Ligonier Street
Latrobe, PA 15650
Nationally Chartered Bank
<PAGE>
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/ Louis A. Steiner MARCH 23, 1998
- --------------------
Louis A. Steiner, Chairman of the Board and Director
/s/ Louis T. Steiner MARCH 23, 1998
- --------------------
Louis T. Steiner, Vice Chairman of the Board and Director
/s/ Gregg E. Hunter MARCH 23, 1998
- -------------------
Gregg E. Hunter, Vice Chairman of the Board and Director
/s/ Edwin P. Cover MARCH 23, 1998
- ------------------
Edwin P. Cover, President and Director
/s/ Wendy S. Schmucker MARCH 23, 1998
- -------------------------
Wendy S. Schmucker, Secretary/Treasurer
/s/ William M. Charley MARCH 23, 1998
- --------------------
William M. Charley, Director
/s/ George A. Conti, Jr. MARCH 23, 1998
- ------------------------
George A. Conti, Jr., Director
/s/ Richmond H. Ferguson MARCH 23, 1998
- ------------------------
Richmond H. Ferguson, Director
/s/ Dorothy S. Hunter MARCH 23, 1998
- ---------------------
Dorothy S. Hunter, Director
/s/ Frank E. Jobe MARCH 23, 1998
- ------------------
Frank E. Jobe, Director
/s/ Roy M. Landers MARCH 23, 1998
- ------------------
Roy M. Landers, Director
/s/ John C. McClatchey MARCH 23, 1998
- ----------------------
John C. McClatchey, Director
/s/ Joseph A. Mosso MARCH 23, 1998
- -------------------
Joseph A. Mosso, Director
/s/ Debral L. Spatola MARCH 23, 1998
- -----------------------
Debra L. Spatola, Director
/s/ George V. Welty MARCH 23, 1998
- -------------------
George V. Welty, Director
/s/ C. Edward Wible MARCH 23, 1998
- -------------------
C. Edward Wible, Director
<PAGE>
(The following caption appears at the bottom of the page about
three-quarters of the way down.)
The corporation will provide without charge to any shareholder a
copy of its 1997 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
COMMERCIAL NATIONAL FINANCIAL CORPORATION 1997 ANNUAL REPORT
<PAGE>
(Front cover of the annual report. The corporate logo bearing the graphic of a
bank facade appears centered and taking up the first 1/4 of the page. Directly
under the logo, the title appears horizontally. The rest of the page bears the
the number 97 in large print and centered.)
<PAGE>
The inside front cover of the annual report is blank.
<PAGE>
Our Commitment To Those We Serve
(At this point in the 1997 annual report, the following text is depicted in
two column form with the first paragraph in the first column and the rest of
the text in the second column. Also, the corporate logo is inserted in the
upper righthand corner of each odd-numbered page of this annual report. The
form has been modified for electronic filing.)
In detailing the elements of our mission, the significant
components must be equally ranked regardless of their order of
presentation since substantial progress can be achieved only as
these elements interact harmoniously to advance the mission of
the corporation.
Our mission is to acquire, organize and manage the resources
required to offer personalized and professional financial
services in a manner that demonstrates our concern for
understanding and meeting the needs of the individuals, families,
businesses and other organizations in our marketplace.
In fulfilling our mission, we give constant consideration to
the well-being of our employees not only in terms of economic
benefit, but also by guaranteeing a working environment that...
- - encourages personal and professional development
- - fosters individual dignity and
- - demands the highest ethical standards
...so that each employee can experience a sense of satisfaction
in and personal identity with the accomplishments we achieve
together.
Our responsibility to the areas we are privileged to serve
requires our involvement as a corporation, as well as a
commitment by our employees and directors, to respond to
community development and improvement needs with a continual
investment of both time and funds.
All of our activities are carefully planned and professionally
conducted to provide our shareholders with a reasonable and
regular profit so that their ongoing investment will constantly
increase in value.
<PAGE>
(At this point in the 1997 annual report, page 2 is left intentionally blank.)
<PAGE>
(At this point and mostly throughout the rest of the annual report, the
text will be in three column format.)
To Our Sharholders
The year behind us is one in which we observed considerable change
at Commercial National Financial Corporation. This change resulted
in positive outcomes for our investors, customers and employees.
In the ever-evolving financial-services industry, a successful
business likewise must be willing to change, even eager to do so.
Such a company also must remain flexible enough to change
quickly if it expects to keep up with or stay ahead of the needs
of the varied markets it serves.
By maintaining the independence of Commercial National as we have
since its founding more than 63 years ago, we have strengthened our
ability to respond appropriately and in a more timely manner when
conditions change rapidly -- something many competitors have been
either reluctant or unable to do. The flurry of mergers and
acquisitions recently making the news offers ample testimony that
change in this business certainly will occur, whether the various
participants are prepared for it or not.
Changes in regulatory requirements also had their effects on their
on our business in 1997. Other commercial entities now can compete
for more of what we previously regarded as "traditional" banking
business. Insurance companies, securities brokers, credit unions
and even retail firms are offering products today that our
customers formerly could acquire from only traditional retail
banks.
On the other hand, such regulatory action also opened several new
opportunities for us. We were able to expand our business-
acquisition efforts in our Asset Management and Trust Division,
and we are preparing to take full advantage of other opportunities
as we plan our business-development efforts going forward.
During the year we also changed the way we do business internally.
After insufficient earnings in the first quarter, we streamlined
the responsibilities of our senior management staff to place
greater emphasis on business development at both the consumer
and commercial levels. The moves resulted in record earnings for
the next two quarters and record earnings at year-end.
For the first time in the company's history, we passed the $4 million
mark in net income, achieving a second consecutive year of record
earnings.
Influencing the successful results of 1997 were a number of initiatives
that either contributed directly to fee income or contained operating
expenses by improving efficiency. Among them were...
- - expansion of the Maxcess(at this point there appears a service mark)
SM Account electronic bill-payment service so customers could take
advantage of a fee schedule that more closely matched their
individual needs;
- - introduction of the Maxcess(at this point there appears a service
mark)SM Check Card which enables customers to access their accounts
electronically at automatic teller machines or merchant terminals
worldwide wherever the MasterCard(at this point there appears a
registered trademark)R or MAC(at this point there appears a registered
trademark)R logo is shown; and
- - development of an agent-bank credit-card program which essentially
was a duplicate of our own successful charge-card program, recreated
for an eastern Pennsylvania bank for which we maintain the outstanding
credit balances.
Other staff changes occurred at the executive level as Commercial National
prepares to enter a new century as a comprehensive financial-services
provider. In November, Chairman Louis A. Steiner retired from his post
as chief executive officer after 20 years of service in that capacity.
In his place, the board elected me to that post, a move that marks the
third generation of the family to provide leadership at the bank since
Louis C. Steiner, my grandfather, was named president in 1948.
We observed change at the board level, as well, with the retirements
of James A. Charley who served for 40 years and William W. Washnock
who serve for 28. Over those many years, their fellow directors and others
with whom they worked came to appreciate the reliable counsel of these
two area businessmen. We will miss their valuable contributions to the
board and extend our thanks for their dedicated service. At the same
time, we welcome Debra L. Spatola and George V. Welty who have joined
the board in their places.
While the year showed positive results from the changes outlined here,
we're never satisfied to rest on achievements of the past. Be assured
that as we work to improve your investment in the future, we will
remain vigilant to deal as best we can with a vigorous, yet in many
ways uncertain economy and continue to provide the excellent service
our stakeholders have come to expect.
Thank you for your continued confidence and support.
/s/ Louis T. Steiner
Louis T. Steiner
Chief Executive Officer
<PAGE>
Highlights of 1997
(At this point in the 1997 annual report, the following sentence appears in
large print at the top of the left column to start off the highlights of 1997.)
By strengthening vital
leadership and acquiring
new business, we worked to
ensure a productive future
for Commercial National
Financial Corporation
As 1997 closed, we realized a significant improvement in the
growth of net income, a change that we believe was the result
of several intitiatives that were implemented throughout the
year.
In the course of the year we...
- - extensively realigned key senior-management
responsibilities,
- - expanded our market territory,
- - broadened our service offerings,
- - enhanced sales-force effectiveness, and
- - decreased our tax burden.
In its own way, each of these adjustments contributed record
earnings that surpassed $4 million for the first time in the
history of the corporation.
OUR LEADERSHIP GREW TO INCLUDE
NEW IDEAS AND NEW FACES.
Recognizing that flexible and innovative leadership is important
to maintain the independence of a community banking company such
as ours, we took several steps in 1997 that further developed our
board of directors and streamlined and strengthened our management
team.
Two new directors, both from the Ligonier Valley, joined the board
in April. Debra L. Spatola, an area restaurateur, filled the seat
vacated by William W. Washnock, her father, who served for 28 years.
George V. Welty, a law-firm partner, replaced James A. Charley who
retired from the board after 40 years.
In May, we reassigned a number of senior-management responsibilities
to more clearly delineate the distinction between banking services,
risk management and administrative functions. The resulting
arrangement helped us to more keenly focus our efforts on securing
loans and deposits and to more closely concentrate on reducing the
net operating expenses of the corporation.
In December, four of our associates were promoted to provide even
more depth and diversity on our management team. Those advancing
in their careers at Commercial National included...
- - Ryan M. Glista
Vice President
Controller
- - Cheryl M. Letterio
Vice President
Manager, Compliance
- - Wendy S. Schmucker
Vice President
Manager, Corporate Administration
- - Thomas D. Watters
Vice President
Chief Auditor
Two other employees were specially recognized during the year for
their efforts to improve our performance. At our Employees'
Annual Meeting in May, the company presented its 1997 Chairman's
Award to...
- - Donna J. Daugherty
Eastgate Community Office Manager
for superior achievement in attaining various goals set for deposits,
loans and mutual-fund sales at her office. At the same meeting, the
bank's President's Award was conferred upon...
- - Roxanne Shadron
Information Specialist
Management Information Systems
for demonstrating remarkable initiative in implementing enrollment
procedures for our Maxcess(at this point in the 1997 report appears
a service mark)SM Account customers, particularly those using personal
computers.
OUR BUSINESS GREW WITH GOOD RESULTS
FOR CUSTOMERS AND SHAREHOLDERS.
In spite of exposure to foreign financial turbulence, the continuing
U.S. economic expansion provided us with not only a number of
challenges but also with a number of business opportunities. We
worked to successfully deal with the challenges and made necessary
adjustments to take advantage of the opportunities.
The year-end price of Commercial National stock appreciated
(At this point in the 1997 annual report, there appears a bar graph occupying
two-thirds space of the second column as set out in the following table.)
<TABLE>
<CAPTION>
Annual Share Price Appreciation
<S> <C>
1993 $13.33
1994 $17.83
1995 $20.13
1996 $36.00
1997 $36.50
</TABLE>
(At this point in the 1997 annual report, the following text runs along the
left of the bar graph occupying the remaining third of the column that the
graph did not use.)
only slightly in value from $36 in 1996 to $36.50 at the end of 1997.
Dividends paid on each share owned by investors showed significantly
more improvement, increasing by nearly 13 percent from $0.62 per share
last year to $0.70 per share in 1997.
Deposits grew
(At this point in the 1997 annual report, there appears two bar graphs
in succession occupying two-thirds space of the third column as set out
in the folowing tables.)
<TABLE>
<CAPTION>
Dividends Paid Per Share
<S> <C>
1993 $0.49
1994 $0.53
1995 $0.56
1996 $0.62
1997 $0.70
</TABLE>
<TABLE>
<CAPTION>
Deposit Base Growth
<S> <C>
1993 $213,754
1994 $219,561
1995 $230,736
1996 $238,808
1997 $260,690
</TABLE>
(At this point in the 1997 annual report, the following text runs along
the left of the bar graph occupying the remaining third of the column
that the graph did not use.)
by 9 percent in a relatively balanced manner reaching more than
$260 million by year-end. Because earnings-conscious customers
continually shopped for the best return on their funds, we
maintained competitive rates on interest-bearing deposits while
concentrating on attracting business with high-quality service,
more focused sales efforts and further refinement of our electronic
banking capabilities.
The notable growth experienced in
(At this point in the 1997 annual report, the following text is back
to full column width.)
non-interest-bearing checking volumes helped offset the high cost of
retaining and attracting investments in certificates of deposit.
Intense competition throughout the financial-services industry made
even more difficult our ability to acquire new business in volumes
great enough to offset the associated new operating expenses that
typically rise in proportion to such growth.
By soliciting
(At this point in the 1997 annual report, there appears a bar graph
occupying two-thirds space of the third column as set out in the following
table.)
<TABLE>
<CAPTION>
Loan Portfolio Growth
<S> <C>
1993 $125,935
1994 $139,367
1995 $144,523
1996 $160,048
1997 $183,639
</TABLE>
(At this point in the 1997 annual report, the following text runs along the
left of the bar graph occupying the remaining third of the column that the
bar graph did not use.)
more prospective borowers and by processing their loan applications
more responsively than did our competitors, our retail and commercial
sales staffs produced good-quality loan growth that exceeded expectations.
Loan volume
<PAGE>
(At this point in the 1997 annual report, the text appears back to full
three-column format.)
grew by more than 14 percent to $183 million. Commercial mortgages
jumped by almost $11 million, a 32 percent increase that accounted for
the greatest growth category, while commercial loans grew by about
$2 million or 11 percent. In all other loan types-personal, residential
mortgage and municipal-growth was evident although somewhat less dramatic.
Competition for good loan business was intense and became increasingly
difficult throughout the year, both because of the solid underwriting
standards we employ and because of the growing prevalence of personal
bankruptcy, which showed a marked escalation in our market area. Overall,
high-quality loan growth complemented well-balanced deposit growth to
generate positive results for the year.
Interest income in 1997 amounted to $21.9 million compared to $19.9
million a year ago, an increase of more than 9 percent. The results
(At this point in the 1997 annual report, there appears a bar graph,
occupying the full column width, as set in the following table.)
<TABLE>
<CAPTION>
Interest: Income, Expense & Net
<S> <C> <C> <C>
1993 $17,250 $6,149 $11,101
1994 $17,384 $6,445 $10,939
1995 $19,222 $8,252 $10,970
1996 $19,947 $8,445 $11,502
1997 $21,882 $9,677 $12,205
</TABLE>
<PAGE>
were negativley impacted, however, by a corresponding increase of nearly
15 percent in interest expense, which rose $1.2 million from the year
before.
Although earnings for the year reached a record level, the post-tax return
on average assets remained
(At this point in the 1997 annual report, there appears a bar graph occupying
two-thirds space of the first column as set out in the following table.)
<TABLE>
<CAPTION>
Post Tax Return On Average Assets
<S> <C>
1993 1.63%
1994 1.42%
1995 1.43%
1996 1.39%
1997 1.39%
</TABLE>
(At this point in 1997 annual report, the following text runs along the left
of the bar graph occupying the remaining third of the column that the graph
did not use.)
at 1.39 percent for the second consecutive year, principally because
of a higher provision to cover potential losses to bankruptcies and
because earnings were compared to a greater asset base. Corporate assets
grew by more than 14
(At this point in the 1997 annual report, the text goes back to full-column
width.)
percent to exceed $319 million compared to $278 million recorded
last year.
Further boosting earnings for the year were trust revenues of more than
$160,000, improved service-charge income and a reduction in the company's
effective tax rate, attributable to a securities-portfolio shift that
expanded our municipal-bond holdings. On the other hand, operating
expenses increased 5 percent, mostly because of higher personnel costs.
Steps to contain other operating expenses, though, remained firmly in place.
OUR MARKETING EFFORTS EXPANDED
TO OFFER NEW PRODUCTS IN NEW PLACES.
Keeping up with a changing marketplace meant changing the manner in
which we approached it. On a number of fronts, we intensified our
efforts to make sure customers and prospects knew about the full range
of services we could offer.
Early in the year, extensive direct-mail campaigns were conducted for
consumer-banking products in several key markets, and home-equity loans
and installment loans became the focus of another targeted mailing
project. A new adjustable-rate mortgage product also was introduced
in response to inquiries from borrowers. New business resulting from
the promotions started strongly and remained steady throughout the year.
By July, the Murrysville community office was serving a growing number
of maturing relationships-both consumer and commercial-after its first
full year of providing complete banking services for citizens in that
area of Westmoreland County.
We implemented an emergency low-interest loan program in August to help
area residents recover from the effects of a devastating tornado that
struck Derry Township. Because storm victims could not qualify for state
or federal relief since damages were limited to a relatively small area,
special below-prime-rate loans were made available to them.
The new Maxcess(at this point there appears a service mark)SM Check Card,
our exclusively branded debit card, was distributed to all qualifying
deposit-account customers in November. Though it looks like a credit card,
the Maxcess(at this point there appears a service mark)SM Card actually
works like an "electronic check," automatically drawing funds for each
transaction directly from the cardholder's checking account. More
versatile than a MAC(at this point there appears a registered trademark)R
card, it can be used both for transactions at automatic teller machines
and to pay for purchases wherever merchants display the MasterCard(at this
point there appears a registered trademark)R logo worldwide.
By year-end, our Asset Mangagement and Trust Division was managing more
than $50 million in assets and was providing annuity and insurance-based
products in addition to its array of traditional and non-traditional
investment services. In doing so, the division far exceeded goal
projections that were set at the time of its inception three years ago.
OUR INTEREST IN HELPING AREA
COMMUNITIES GREW WITH THE REST OF US.
Commercial National takes pride in its ability to meet the unique needs
of the communities it serves. In April, that feeling was substantiated
when the bank was awarded an "outstanding" rating for its Community
Reinvestment Act performance after evaluation by the Office of the
Comptroller of the Currency. The OCC noted that Commercial
National qualified for the rating by demonstrating "excellent
responsiveness to the credit needs of its assessment area," and by
"innovative and creative generation of significant community-
development lending, investments and services." The "outstanding"
rating is the highest possible score attainable and annually is
achieved by only one in four banks nationwide.
The corporation lent assistance in a number of of non-business venues,
as well. In August a $3,000 grant was awarded to the Chestnut Ridge
Chapter of American Red Cross to help with relief efforts extended
during the recovery from the Derry Township tornado, and in September
more than 80 area civic and charitable groups benefitted from more
than $100,000 in Commercial National contributions and pledges announced
at two Civic Group Appreciation Day events.
Finally at year's end, our Latrobe-based corporate headquarters staff
moved into renovated space in the historic former Plaza Hotel building
adjacent to our Latrobe banking and office facility, a move that kept
jobs downtown and provided room for more. Even with a complete interior
rehabilitation, much of the historic character of the outside appearance
was preserved to maintain the building's original masonry detailing and
romanesque characteristics reminiscent of turn-of-the-century commercial
construction in the downtown district.
By making such good investments in the communities in which we operate,
we believe that Commercial National further demonstrates the value it
places on the people who work to make this area such a remarkable place
to live and do business.
[FN]
MAC is a registered trademark of Money Access Service.
MasterCard is a registered trademark of MasterCard International
Incorporated.
MAXCESS is a service mark of Commercial National Bank of
Westmoreland County.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------
Cash and due from banks on demand $ 9,711,026 $ 8,839,707
Interest bearing deposits with banks 130,937 153,667
Securities available for sale 54,267,314 37,816,171
Securities held to maturity, market values of
$65,691,241 and $65,571,756 in 1997 and 1996 64,114,775 64,539,801
Loans 183,639,085 160,048,235
Unearned income (157,928) (112,712)
Allowance for loan losses (1,882,251) (2,035,818)
----------------------------
Net loans 181,598,906 157,899,705
----------------------------
Premises and equipment 5,990,786 4,802,465
Accrued interest receivable 2,445,164 2,144,723
Other assets 1,483,048 1,914,285
- -------------------------------------------------------------------------------
Total Assets $ 319,741,956 $ 278,110,524
============ ============
LIABILITIES
- -------------------------------------------------------------------------------
Deposits
Non-interest-bearing $ 35,968,693 $ 33,972,163
Interest-bearing 224,721,064 204,835,908
----------------------------
Total deposits 260,689,757 238,808,071
Short-term borrowings 17,850,000 1,400,000
Other liabilities 2,757,188 2,514,199
- -------------------------------------------------------------------------------
Total liabilities 281,296,945 242,722,270
----------------------------
Shareholders' Equity
- -------------------------------------------------------------------------------
Common stock, par value $2; 10,000,000 shares
authorized; 1,800,000 issued and outstanding 3,600,000 3,600,000
Retained earnings 34,604,120 31,777,511
Unrealized gain on securities
available for sale-net of deferred taxes
of $124,096 and $5,533 in 1997 and 1996 240,891 10,743
-----------------------------
Total Shareholders' Equity 38,445,011 35,388,254
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 319,741,956 $ 278,110,524
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Consolidated Statements of Income
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Interest Income
- -----------------------------------------------------------------------------
Interest and fees on loans $15,312,410 $13,549,080 $12,843,170
Interest and dividends on securities:
Taxable 4,827,530 4,914,451 4,803,344
Exempt from federal income taxes 1,694,422 1,391,106 1,335,649
Interest on deposits with banks 7,167 6,252 2,716
Interest on federal funds sold 40,363 86,678 237,595
- -----------------------------------------------------------------------------
Total interest income 21,881,892 19,947,567 19,222,474
Interest Expense 9,677,138 8,445,126 8,252,219
- -----------------------------------------------------------------------------
Net Interest Income 12,204,754 11,502,441 10,970,255
Provision for Loan Losses 270,000 105,000 90,000
- -----------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,934,754 11,397,441 10,880,255
Other Operating Income
- -----------------------------------------------------------------------------
Service charges on deposit accounts 572,124 511,418 480,833
Other service charges and fees 382,332 287,694 292,914
Net security gains 11,561 577 6,213
Trust department income 164,430 89,274 29,470
Other income 358,622 367,227 303,512
- -----------------------------------------------------------------------------
Total other operating income 1,489,069 1,256,190 1,112,942
-----------------------------------
Other Operating Expenses
- -----------------------------------------------------------------------------
Salaries and employee benefits 4,664,107 4,231,494 3,908,250
Net occupancy expense 543,407 492,414 446,947
Furniture and equipment expense 617,402 616,663 496,397
FDIC insurance expense 32,921 2,000 285,742
Pennsylvania shares tax 278,192 255,161 234,421
Other expenses 1,927,408 2,046,844 1,674,414
- -----------------------------------------------------------------------------
Total other operating expenses 8,063,437 7,644,576 7,046,171
-----------------------------------
Income Before Income Taxes 5,360,386 5,009,055 4,947,026
-----------------------------------
Income Tax Expense 1,273,777 1,252,589 1,253,833
- -----------------------------------------------------------------------------
Net Income $ 4,086,609 $ 3,756,466 $ 3,693,193
=========== =========== ===========
Net Income Per Common Share $ 2.27 $ 2.09 $ 2.05
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss) Total
Common Paid-in Retained on Securities Shareholders'
Stock Capital Earnings Available for Sale Equity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1995 $ 1,200,000 $ 2,400,000 $ 26,457,852 $(500,909) $ 29,556,943
Net income - - 3,693,193 - 3,693,193
Stock split in the form
of a dividend (Note 12) 2,400,000 (2,400,000) - - -
Cash dividends declared
($.56 per share) - - (1,008,000) - (1,008,000)
Net change in unrealized (loss)
on securities available for
sale - net of deferred taxes - - - 794,334 794,334
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 3,600,000 - 29,143,045 293,425 33,036,470
Net income - - 3,756,466 - 3,756,466
Cash dividends declared
($.62 per share) - - (1,122,000) - (1,122,000)
Net change in unrealized gain
on securities available for
sale - net of deferred taxes - - - (282,682) (282,682)
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 3,600,000 - 31,777,511 10,743 35,388,254
Net income - - 4,086,609 - 4,086,609
Cash dividends declared
($.70 per share) - - (1,260,000) - (1,260,000)
Net change in unrealized gain
on securities available for
sale - net of deferred taxes - - - 230,148 230,148
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 $3,600,000 $ - $34,604,120 $ 240,891 $38,445,011
========== =========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 4,086,609 $ 3,756,466 $ 3,693,193
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 593,862 591,288 505,614
Loss on sale of other real estate 6,446 - -
Provision for loan losses 270,000 105,000 90,000
Net (accretion) amortization of securities
and loan fees 153,615 158,210 (45,292)
Net security gains (11,561) (577) (6,213)
(Increase) decrease in interest receivable (300,441) 5,482 (80,771)
Increase in interest payable 198,258 63,088 351,725
Increase (decrease) in taxes payable 3,591 - (10,628)
(Increase) decrease in taxes receivable 98,177 (90,286) (7,891)
Deferred tax expense 115,735 52,019 40,618
Increase in other liabilities 41,140 47,875 38,297
Increase in other assets (174,276) (167,122) (114,343)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,081,155 4,521,443 4,454,309
- -----------------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in deposits with other banks 22,730 (71,016) (68,934)
Net (increase) decrease in federal funds sold - 5,425,000 (3,150,000)
Purchases of securities available for sale (34,966,171) (10,768,047) (12,805,938)
Purchases of securities held to maturity (11,702,873) (25,142,595) (11,517,282)
Maturities and calls of securities
available for sale 12,311,659 14,094,084 8,532,111
Proceeds from sales of securities
available for sale 6,488,260 16,651,647 -
Maturities and calls of securities
held to maturity 12,095,000 5,809,060 10,190,940
Net increase in loans (24,014,417) (16,177,469) (5,257,481)
Proceeds from the sale of other real estate 266,473 - -
Purchases of premises and equipment (1,782,183) (1,403,102) (757,492)
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (41,281,522) (11,582,438) (14,834,076)
- -----------------------------------------------------------------------------------------------
Financing Activities
Net increase in deposits 21,881,686 8,071,760 11,175,388
Net increase in short-term borrowings 16,450,000 1,400,000 -
Dividends paid (1,260,000) (1,122,000) (1,008,000)
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 37,071,686 8,349,760 10,167,388
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 871,319 1,288,765 (212,379)
Cash and cash equivalents at beginning of year 8,839,707 7,550,942 7,763,321
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,711,026 $ 8,839,707 $ 7,550,942
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,478,881 $ 8,382,038 $ 7,900,494
============ ============ ===========
Taxes $ 1,172,800 $ 1,294,000 $ 1,230,990
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Shareholders
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996, and 1995
- -----------------------------------------------------------
1. Summary of Significant Accounting Policies
General:
The accompanying consolidated financial statements include the
accounts of Commercial National Financial Corporation (the
corporation) and its wholly-owned subsidiary, Commercial
National Bank of Westmoreland County (the bank). All material
intercompany transactions have been eliminated.
The following summary of accounting and reporting policies is
presented to aid the reader in obtaining a better understanding
of the financial statements and related financial data of the
corporation and the bank contained in this report. Such policies
conform to generally accepted accounting principles (GAAP) and
to general practice within the banking industry. In preparing
financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and income and expenses during the reporting period.
Actual results could differ from those estimates.
Certain items of the consolidated financial statements for the
years ended December 31, 1996 and 1995, have been reclassified to
conform with the December 31, 1997 presentation. None of these
reclassifications affected net income.
Securities:
The corporation has adopted Statement of Financial Accounting
Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." This statement
addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be
classified in three categories and accounted for as follows:
(a) securities held to maturity,
(b) trading securities and
(c) securities available for sale.
Debt securities that the corporation has the positive intent
and ability to hold to maturity are classified as securities held
to maturity and are reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not
classified as either held to maturity securities or trading
securities are classified as securities available for sale and
are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
shareholders' equity.
Net gain or loss on the sale of securities is determined using
the specific identification method.
Loans:
Loans are stated at the principal amount outstanding. When a loan
becomes past due and doubt exists as to the ultimate collection
of principal and interest, the accrual of income is discontinued
and is only recognized at the time payment is received.
The corporation has adopted Financial Accounting Standards Board
Statement No. 114 "Accounting for Creditors for Impairment of a
Loan" (FAS 114) as amended by Statement No. 118 "Accounting By
Creditors for Impairment of a Loan Income Recognition and
Disclosures" (FAS 118). These statements address the accounting
by creditors, such as banks, for the impairment of certain loans.
The corporation considers a loan to be impaired when based on
information and events, it is probable that the corporation will
be unable to collect principal or interest due according to the
contractual terms of the loan. Loan impairment is measured based
on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at
the loans observable market price or the fair value of the
collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the
recorded investment in the loan. For loans other than those
that the corporation expects repayment through liquidation
of the collateral, when the remaining recorded investment
in the impaired loan is less than or equal to the present
value of the expected cash flows, income is recorded on a
cash basis.
Loan Fees:
Loan origination and commitment fees, net of associated direct
costs, are deferred and the net amount is amortized as an
adjustment to the related loan yield on the interest method,
generally over the contractual life of the related loans or
commitments.
Other Real Estate Owned:
Real estate, other than bank premises, is recorded at the lower
of cost or market at the time of acquisition. Expenses related
to holding the property, net of rental income, are charged
against earnings in the current period.
Allowance for Loan Losses:
The allowance for loan losses represents management's
estimate of an amount adequate to provide for losses which may be
incurred on loans currently held. Management determines the
adequacy of the allowance based on reviews of individual credits,
historical patterns of loan charge-offs and recoveries, industry
experience, current economic trends and other factors relevant
to the collectibility of the loans currently in the portfolio.
The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs.
<PAGE>
(At this point in the 1997 annual report, the text is still in three-
column format with the first column being full of text and the
second and third colums consisting of text only half the way down.
The last half of the second and third columns consist of a table
that will be recognized later on this page.)
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.
Income Taxes:
Certain income and expense items are accounted for in different
years for financial reporting purposes than for income tax
purposes. Deferred taxes are provided to recognize these
temporary differences. The principal items involved are
investment securities, employee benefit plans, provision for
loan losses, net deferred loan fees and costs, and depreciation
The effect on deferred taxes of a change in tax rates is
recognized in earnings in the period that includes the enactment
date. Income tax expense is not proportionate to earnings
before taxes, principally because a portion of revenues from
obligations of states and political subdivisions are
nontaxable.
Earnings per Share:
Earnings per share have been calculated on the weighted average
number of shares outstanding of 1,800,000 shares in 1997, 1996
and 1995. The weighted average number of shares outstanding has
been adjusted for the effect of a three-for-one stock split
effected in the form of a stock dividend more fully described in
Note 12.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (FAS 128). This statement redefines the standards for
computing earnings per share (EPS) previously found in Accounting
Principles Board opinion No. 15, "Earning Per Share." FAS 128
establishes new standards for computing and presenting EPS and
requires dual presentation of "basic" and "diluted" EPS on the
face of the income statement for all entities with complex
capital structures. Under FAS 128, basic EPS is to be computed
based upon income available to common shareholders and the
weighted average number of common shares outstanding for the
period. Diluted EPS is to reflect the potential dilution
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of
the corporation. FAS 128 also requires the restatement of all
prior-period EPS data presented. The corporation currently
maintains a simple capital structure, thus there are no dilutive
effects on earnings per share.
Cash and Cash Equivalents:
For purposes of reporting cash flows, the corporation has
defined cash and cash equivalents as those amounts included in
the balance sheet caption "Cash and due from banks on demand".
2. Cash and Due from Banks on Demand
Regulations of the Board of Governors of the Federal Reserve
System impose uniform reserve requirements on all depository
institutions with transaction accounts (checking accounts, NOW
accounts, etc.) and non-personal time deposits (deposits with
original maturities of 14 days or more). Reserves are maintained
in the form of vault cash or a non-interest-bearing balance held
with the Federal Reserve Bank. The bank also maintains deposits
with the Federal Reserve Bank and other banks for various
services such as check clearing. The amount so restricted at
December 31, 1997 and 1996 was $2,121,000 and $1,460,000,
respectively.
3. Securities
The amortized cost and estimated market values of securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale:
December 31, 1997
U.S. Treasury securities $21,186,113 $ 111,809 $ (36,037) $21,261,885
Obligations of U.S. Government
corporations and agencies 31,385,914 289,215 - 31,675,129
Other securities 1,330,300 - - 1,330,300
- ----------------------------------------------------------------------------------
$53,902,327 $ 401,024 $ (36,037) $54,267,314
=========== ========== ========== ===========
December 31, 1996
U.S. Treasury securities $36,866,694 $ 142,700 $(126,423) $36,882,971
Other securities 933,200 - - 933,200
- ----------------------------------------------------------------------------------
$37,799,894 $ 142,700 $(126,423) $37,816,171
=========== ========== ========== ===========
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
December 31, 1997
Obligations of U.S. Government
corporations and agencies $28,495,539 $ 162,837 $ (56,186) $28,602,190
Obligations of states and
political subdivisions 35,619,236 1,473,526 (3,711) 37,089,051
- -------------------------------------------------------------------------------------
$64,114,775 $1,636,363 $ (59,897) $65,691,241
=========== ========== ========== ===========
December 31, 1996
Obligations of U.S. Government
corporations and agencies $36,610,826 $ 221,087 $(118,826) $36,713,087
Obligations of states and
political subdivisions 27,928,975 1,000,289 (70,595) 28,858,669
- -------------------------------------------------------------------------------------
$64,539,801 $1,221,376 $(189,421) $65,571,756
=========== ========== ========== ===========
</TABLE>
(At this point in the 1997 annual report, the following text is in
one-column format measuring two columns wide.)
The amortized cost and estimated market values of securities at
December 31, 1997, by contractual maturity, are shown below.
Mortgage-backed security maturities are based upon their contractual
maturities. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
Securities Available Securities Held
for Sale to Maturity
- -----------------------------------------------------------------------------------
<CAPTION>
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within 1 year $ 5,493,707 $ 5,474,070 $ 6,665,755 $ 6,651,588
Due after 1 but within 5 years 26,684,678 26,883,935 24,888,183 25,419,188
Due after 5 but within 10 years - - 29,023,288 29,947,124
Due after 10 years 20,393,642 20,579,009 3,537,549 3,673,341
Equity securities 1,330,300 1,330,300 - -
- -----------------------------------------------------------------------------------
$53,902,327 $54,267,314 $64,114,775 $65,691,241
=========== =========== =========== ===========
</TABLE>
(The rest of the text on this page reverts back to three-column
format starting with the third column.)
Securities with amortized cost and market values, respectively,
of $13,883,365 and $14,183,281 at December 31, 1997 and $9,072,297
and $9,219,241 at December 31, 1996, were pledged to secure
public deposits and for other purposes required or permitted by
law.
Proceeds from sales and calls of securities were $13,608,361,
$20,730,381 and $4,280,940 during 1997, 1996 and 1995,
respectively. Gross gains of $20,187, $52,137 and $6,213 and
gross losses of $8,626, $51,560 and $0 were realized on those
sales and calls during 1997, 1996 and 1995, respectively.
Other securities consist of Federal Reserve Bank stock, an
equity security, with book and market values of $108,000 at
December 31, 1997 and 1996 and Federal Home Loan Bank stock, an
equity security, with book and market values of $1,222,300 and
$825,200 at December 31, 1997 and 1996, respectively.
The corporation did not hold any derivative financial
instruments such as futures, forwards, swap or option contracts
at December 31, 1997 or December 31, 1996. Also included in the
investment portfolio are mortgage-backed securities amounting to
$20,579,009 in 1997 and $0 in 1996 which are subject to prepayment
risk as a result of interest rate fluctuations.
The changes in net unrealized holding gain or loss on
securities available for sale that has been included in the
separate component of shareholders' equity for the year ended
December 31, is as follows:
(At this point in the 1997 annual report, a table appears measuring
two columns wide starting with the second column.)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross change in unrealized gain (loss)
on securities available for sale $ 348,711 $(428,308) $1,203,537
Deferred taxes 118,563 (145,626) 409,203
- -------------------------------------------------------------------------------
Net change in unrealized gain (loss)
on securities available for sale $ 230,148 $(282,682) $ 794,334
========== ========== ===========
</TABLE>
<PAGE>
4. Loans
Loans are summarized as follows:
(At this point, the following table measures two columns wide
in a three column format starting with the first column.)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Commercial loans $ 19,052,486 $ 17,115,404
Real estate loans - commercial 44,289,723 33,437,360
Real estate loans - construction 3,510,809 1,924,619
Real estate loans - other 95,570,632 86,045,874
Installment loans 6,219,577 6,542,365
Municipal loans 3,340,405 3,183,483
Other loans 11,655,453 11,799,130
- ------------------------------------------------------------------
$183,639,085 $160,048,235
============ ============
</TABLE>
(At this point, the following text is in one-column format
measuring two columns wide.)
The corporation's loan portfolio is collateralized with assets located
primarily within Western Pennsylvania. Although the corporation has a
diversified portfolio, exposure to credit loss can be adversely
impacted by downturns in local economic and employment
conditions.
5. Allowance for Loan Losses
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, $2,035,818 $ 2,081,700 $ 2,077,553
- ----------------------------------------------------------------------------------
Losses charged against allowance (448,308) (173,952) (97,089)
Recoveries on previously charged-off loans 24,741 23,070 11,236
Provision charged to operating expense 270,000 105,000 90,000
- ----------------------------------------------------------------------------------
Balance at December 31, $1,882,251 $ 2,035,818 $ 2,081,700
========== =========== ===========
</TABLE>
(At this point the following text is in three-column format occupying the
first column.)
Impairment of loans having recorded investments of $2,488,585
and $3,714,258 at December 31, 1997 and 1996, respectively,
has been recognized in conformity with FAS 114 as amended by
FAS 118. The average recorded investment in impaired loans during
1997, 1996 and 1995 was $3,231,563, $3,738,895 and $882,209,
respectively. The total allowance for loan losses related to these
loans was $256,826 and $780,185 at December 31, 1997 and 1996,
respectively. Interest income on impaired loans of $258,241,
$249,676 and $16,623 was recognized for cash payments received in
1997, 1996 and 1995, respectively.
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,
financial standby letters of credit, and commercial letters of
credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amount
of those instruments reflect the extent of involvement the
corporation has in particular classes of financial instruments.
The corporation does not issue any other instruments with
significant off-balance-sheet risk.
The corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit,
financial standby letters of credit, and commercial letters of
credit written is represented by the contract or notional amount
of those instruments. The corporation uses the same credit
policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The following table
identifies the contract or notional amount of those instruments.
(At this point, the following table is located at the bottom two-thirds
of the page occupying the second and third columns.)
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit $42,603,755 $39,560,751
Standby letters of credit $ 2,923,379 $ 4,747,174
Financial standby letters of credit $ 4,442,424 $ 2,764,412
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
(At this point, the following text is in three-column format with only
the first column being occupied.)
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.
Standby letters of credit, financial standby letters of credit,
and commercial letters of credit written are conditional
commitments issued by the corporation to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
(At this point the following text and tables appear in
one-column format measuring two columns wide. The text begins
at the top of the second column in a standard three column page.)
7. Premises and Equipment
The depreciation and amortization on premises and equipment charged to
operating expense amounted to $593,862 in 1997, and $591,288 in 1996.
The composition of premises and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Premises $5,827,969 $4,400,319
Leasehold improvements 214,866 214,866
Furniture and equipment 5,127,110 4,565,539
- ----------------------------------------------------------------
11,169,945 9,180,724
Less accumulated depreciation
and amortization 5,953,617 5,359,755
- ----------------------------------------------------------------
5,216,328 3,820,969
Business development site - 207,038
Land 774,458 774,458
- ----------------------------------------------------------------
$5,990,786 $4,802,465
========= =========
</TABLE>
8. Interest-Bearing Deposits
Interest-bearing deposits include certificates of deposit issued in
denominations of $100,000 or more which amounted to $31,480,272 and
$25,334,259 at December 31, 1997 and 1996. Interest expense related to
certificates of $100,000 or greater was $1,577,237, $1,213,126 and
$1,157,021, for the years ended December 31, 1997, 1996 and 1995,
respectively.
Interest bearing deposits at December 31, are detailed as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 44,637,868 $ 43,715,842
NOW accounts 12,644,010 11,925,963
Money Market NOW accounts 9,324,094 7,180,985
FIMM accounts 43,085,563 40,003,616
Time deposits 115,029,529 102,009,502
- ---------------------------------------------------------------------
$224,721,064 $204,835,908
=========== ===========
</TABLE>
Included in time deposits at December 31, 1997 were certificates of deposit
with the following scheduled maturities:
1998 $ 70,537,262
1999 24,383,943
2000 14,540,744
2001 3,068,209
2002 and thereafter 2,499,371
------------
$115,029,529
============
(At this point in the 1997 annual report, the folowing text and table
is in one-column format measuring three columns wide.)
9. Short-Term Borrowings
Short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased $ 6,850,000 $1,371,233 5.68% $1,400,000 $927,937 5.50%
Borrowings from
Federal Home Loan Bank 11,000,000 3,447,945 6.11% - - -
- ---------------------------------------------------------------------------------------------
$17,850,000 $4,819,178 5.99% $1,400,000 $927,937 5.50%
=============================================================================================
Maximum total at any
month-end $17,850,000 $2,450,000
=========== ==========
</TABLE>
At December 31, 1997 the corporation had approved but unused borrowing
with the Federal Home Loan Bank of $8,235,000.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
(At this point in the 1997 annual report, the following text and tables
are in one-column format measuring two columns wide.)
Interest expense on short-term borrowings for the years ended December
31 is detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased $ 77,888 $51,016 $365
Borrowings from Federal Home Loan Bank 210,607 - -
- ---------------------------------------------------------------------------
Total interest on short-term borrowings $288,495 $51,016 $365
===========================================================================
10. Employee Benefits 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 employees. The expense for
the employee benefit plans was $520,978, $474,692 and $418,058 for the
years ended December 31, 1997, 1996 and 1995.
11. Income Taxes
The balance sheets include approximately $555,486 and $671,221 of net
deferred tax asset at December 31, 1997 and 1996, respectively. The
corporation has not established a valuation allowance as it is management's
belief that it has adequate taxable income and carry backs to realize the
net deferred tax asset. The components of the net deferred tax asset at
December 31, 1997 and 1996 are as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Allowancee for loan losses $ 481,160 $ 533,373
Accrued benefits 194,035 204,054
Deferred loan fees 53,695 38,322
Premises and equipment 2,199 -
- ------------------------------------------------------------------
Total deferred tax assets 731,089 775,749
Securities accretion 51,507 90,935
Unrealized gain on securities
available for sale 124,096 5,533
Premises and Equipment - 8,060
- ------------------------------------------------------------------
Total deferred tax liabilities 175,603 104,528
- ------------------------------------------------------------------
Net deferred tax asset $555,486 $671,221
======= =======
</TABLE>
The total tax provision or credit for financial reporting purposes differs
from the amount computed by applying statutory rates to income before income
taxes. The differences for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rates $1,822,531 $1,703,079 $1,681,989
Increase (decrease) resulting from:
Non-taxable interest and dividend income (626,324) (516,972) (483,214)
Non-deductible interest expense 79,904 61,313 54,373
Other (2,334) 5,169 685
- -----------------------------------------------------------------------------------
Total tax provision $1,273,777 $1,252,589 $1,253,833
========= ========= =========
</TABLE>
(At this point, the text reverts back to the three-column format beginning in
third column.)
12. Stock Split
On February 20, 1996, the Board of Directors approved a three-for-one
stock split effected in the form of a stock dividend to shareholders of
record on March 20, 1996. The stock split in the form of a stock dividend
has been given retroactive effect and per share data for all prior periods
presented has been restated.
13. Fair Value of Financial Instruments
Below are various estimated fair values at December 31, 1997 and 1996, 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 held to maturity and securities
available for sale are based
<PAGE>
Commercial National Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
(At this point in the 1997 annual report, the following text and table
is in three-column format occupying the about two-thirds of the first
and second columns.)
on quoted market prices, if available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
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. The
carrying amount of accrued interest is considered a reasonable estimate of
fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Many of the corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore, the commitment
amounts do not necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows and difficulty in
predicting the timing of such cash flows, fair values were not estimated for
these instruments.
DEPOSIT LIABILITITES: For deposits which are payable on demand at the
reporting date, representing all deposits other than time deposits,
management estimated that the carrying value of such deposits is a
reasonable estimate of fair value. The carrying amounts of variable-rate
time deposit accounts and certificates of deposit approximate their fair
values at the report date. Fair values of fixed-rate time deposits are
estimated by discounting the future cash flows using interest rates currently
being offered and a schedule of aggregate expected maturities. The carrying
amount of accrued interest payable approximates its fair value.
SHORT-TERM BORROWINGS: The carrying amounts for short-term borrowings
approximate the estimated fair value of such liabilities.
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short term investments $ 9,841,963 $ 9,841,963 $ 8,993,374 $ 8,993,374
Securities available for sale 54,267,314 54,267,314 37,816,171 37,816,171
Securities held to maturity 64,114,775 65,691,241 64,539,801 65,571,756
Loans, net of reserve 181,598,906 188,390,885 157,899,705 155,624,937
Accrued interest receivable 2,445,164 2,445,164 2,144,723 2,144,723
Financial liabilities
Deposits $260,689,757 $261,978,797 $238,808,071 $240,177,568
Short-term borrowings 17,850,000 17,850,000 1,400,000 1,400,000
Accrued interest payable 1,340,412 1,340,412 1,142,154 1,142,154
- ----------------------------------------------------------------------------------------------------
</TABLE>
(At this point the following two paragraphs occupy the first two columns
and begin directly under the preceding table about two-thirds
of the way down the page. The table appears at the bottom of the page and
occupies the second and third columns of a three-column page.)
14. Related Party Transactions
Some of the corporation's or the bank's directors, principal officers,
principal shareholders, and their related interests had transactions with
the bank in the ordinary course of business during 1997. All loans and
commitments to loans in such transactions were made on substantially the
same terms, including collateral and interest rates, as those prevailing at
the time for comparable transactions. In the opinion of management, these
transactions 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
$631,928 and $1,207,988 at December 31, 1997 and 1996.
The following is an analysis of loans to those parties whose loan
balances exceeded $60,000 for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------
<S> <C>
Balances at January 31, $1,055,482 $ 645,824
Advances 144,516 918,073
Repayments (672,744) (508,415)
- --------------------------------------------------------------------------
Balances at December 31, $ 527,524 $1,055,482
=========== ===========
</TABLE>
(At this point the following text is back to three-column format
beginning at the third column.)
15. Capital Requirements and Dividend Restrictions
The corporation and the bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the corporation and the bank must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set forth in
the tables below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined). Management believes, as
of December 31, 1997, that the corporation and the bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the
regulatory agencies categorized the corporation and the bank as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the corporation and the bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
those notifications that management believes have changed those categories.
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Corrective Action Provisions:
- ----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Commercial National Financial Corp. $40,086,369 21.7% $14,779,213 >8.0% $18,474,016 >10.0%
Commercial National Bank 40,070,753 21.7% 14,780,286 >8.0% 18,475,358 >10.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (To Risk Weighted Assets)
Commercial National Financial Corp. 38,204,118 20.7% 7,389,606 >4.0% 11,084,410 >6.0%
Commercial National Bank 38,188,502 20.7% 7,390,143 >4.0% 11,085,215 >6.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to Average Assets)
Commercial National Financial Corp. 38,204,118 12.4% 12,345,867 >4.0% 15,432,334 >5.0%
Commercial National Bank 38,188,502 12.4% 12,346,264 >4.0% 15,432,830 >5.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Commercial National Financial Corp. $37,364,798 23.5% $12,729,070 >8.0% $15,911,338 >10.0%
Commercial National Bank 37,376,189 23.5% 12,727,982 >8.0% 15,909,977 >10.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to Risk Weighted Assets)
Commercial National Financial Corp. 35,377,510 22.2% 6,364,535 >4.0% 9,546,803 >6.0%
Commercial National Bank 35,389,069 22.2% 6,363,991 >4.0% 9,545,986 >6.0%
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to Average Assets)
Commercial National Financial Corp. 35,377,510 12.9% 11,004,924 >4.0% 13,756,155 >5.0%
Commercial National Bank 35,389,069 12.9% 11,004,737 >4.0% 13,755,922 >5.0%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(At this point the following text occupies two columns of the three column
format. It begins in the first column a little more than three-quarters of
the way down the page.)
The amount of funds available to a parent from its subsidiary bank is
limited for all national banks by restrictions imposed by the Comptroller of
the Currency. Dividends from the bank were restricted not to exceed
$8,160,114 at December 31, 1997. These restrictions have not had, and are
not expected to have, a significant impact on the corporation's ability to
meet its cash obligations.
<PAGE>
16. Condensed Financial Information fo Commercial National Financial Corporation
(Parent Only)
<TABLE>
Balance Sheets
- -----------------------------------------------------------------------
<CAPTION>
December 31,
1997 1996
----------------------------
<S> <C> <C>
Assets:
Cash $ 62,524 $ 6,004
Investment in subsidiary 38,429,394 35,399,813
- -----------------------------------------------------------------------
$ 38,491,918 $ 35,405,817
=========== ===========
Liabilities and shareholders' equity:
Accounts payable $ 46,907 $ 17,563
Shareholders' equity 38,445,011 35,388,254
- -----------------------------------------------------------------------
$ 38,491,918 $ 35,405,817
=========== ===========
</TABLE>
<TABLE>
Statements of Income and Changes in Retained Earnings
- ------------------------------------------------------------------------
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Dividends and fees from subsidiary $ 1,380,000 $ 1,194,000 $ 1,080,000
Expenses 78,824 120,051 86,096
------------------------------------------
1,301,176 1,073,949 993,904
Applicable tax benefit (14,000) 16,331 4,793
------------------------------------------
1,287,176 1,090,280 998,697
Equity in undistributed earnings of subsidiary 2,799,433 2,666,186 2,694,496
------------------------------------------
Net income 4,086,609 3,756,466 3,693,193
Retained earnings January 1, 31,777,511 29,143,045 26,457,852
Dividends paid (1,260,000) (1,122,000) (1,008,000)
------------------------------------------
Retained earnings December 31, $34,604,120 $31,777,511 $29,143,045
========== ========== ==========
</TABLE>
<TABLE>
Statements of Cash Flows
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,086,609 $ 3,756,466 $ 3,693,193
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization - - 7,439
Equity in undistributed earnings of subsidiary (2,799,433) (2,666,186) (2,694,496)
Increase (decrease) in accounts payable 29,344 (10,438) 1,292
--------------------------------------
Net cash provided by operating activities 1,316,520 1,079,842 1,007,428
--------------------------------------
Financing activities:
Dividends paid (1,260,000) (1,122,000) (1,008,000)
--------------------------------------
Net increase (decrease) in cash 56,520 (42,158) (572)
Cash at beginning of year 6,004 48,162 48,734
--------------------------------------
Cash at end of year $ 62,524 $ 6,004 $ 48,162
=========== ========== ==========
</TABLE>
<PAGE>
(At this point, the following text is in the second and third columns of the
three-column format. The address to the Board and shareholders is located
at the top of first column.)
Board of Directors and Shareholders
Commercial National Financial Corporation and Subsidiary
Latrobe, PA
Report of Stokes Kelly & Hinds, LLC Independent Certified Public Accountants
- --------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Commercial
National Financial Corporation and Subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in share-
holders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 subsidiary as of
December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Stokes Kelly & Hinds, LLC
January 23, 1998
Pittsburg, Pennsylvania
Logo
Stokes Kelly & Hinds, LLC
Certified Public Accountants & Business Advisors
Management's Statement on Financial Reporting
- ---------------------------------------------
The management of Commercial National Financial Corporation and its
subsidiary, Commercial National Bank of Westmoreland County, is
responsible for the preparation, content and integrity of the
financial statements contained in this annual report and all other
information in the other sections of the annual report, including
amounts that must necessarily be based on management's judgements
and estimates. Management believes that the financial statements
have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis to reflect, in all respects,
the substance of events and transactions that should be included,
and that the other information in the annual report is consistent
with those financial statements. In meeting its responsibility for
the reliability of the financial statements, management depends upon
the bank's accounting system and related internal accounting controls.
This system is designed to provide reasonable assurance that assets
are safeguarded and that transactions are properly recorded and
executed in accordance with management's authorization. This system
is augmented by written policies and procedures and by examinations
performed by our internal audit staff which reports to the Board
of Directors through the Board's Audit Committee.
The appointment of the independent certified public accountants for
the corporation and its subsidiary is recommended by the Audit
Committee, approved by the Board of Directors and ratified by
the shareholders of the corporation. The Audit Committee, composed
solely of outside directors, meets on a scheduled basis with the
internal auditors and, as requested, with the independent auditors
to discuss and review the scope and findings of their respective
audits. The independent auditors and the internal auditors each
have full access to the Audit Committee, without management present,
to discuss internal accounting control, accounting, auditing and
financial reporting matters.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Quarterly Summary of Financial Data (Unaudited)
- ----------------------------------------------------------------
The unaudited quarterly results of operations for the years ended
December 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $5,142,007 $5,433,657 $5,525,009 $5,781,219
Interest expense 2,223,218 2,366,278 2,487,579 2,600,063
---------------------------------------------
Net interest income 2,918,789 3,067,379 3,037,430 3,181,156
Provision for loan losses 45,000 60,000 75,000 90,000
---------------------------------------------
Net interest income after
provision for loan losses 2,873,789 3,007,379 2,962,430 3,091,156
Other income (including security
transactions) 342,300 385,032 383,687 378,050
Other expenses 2,040,982 2,022,832 1,914,980 2,084,643
---------------------------------------------
Income before taxes 1,175,107 1,369,579 1,431,137 1,384,563
Applicable income taxes 284,000 327,000 347,000 315,777
- ------------------------------------------------------------------------------------
Net income $ 891,107 $1,042,579 $1,084,137 $1,068,786
========= ========= ========= =========
Earnings per share $ .50 $ .58 $ .60 $ .59
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $4,897,339 $4,894,723 $4,919,409 $5,236,096
Interest expense 2,088,163 2,043,732 2,126,999 2,186,232
---------------------------------------------
Net interest income 2,809,176 2,850,991 2,792,410 3,049,864
Provision for loan losses 15,000 30,000 30,000 30,000
---------------------------------------------
Net interest income after
provision for loan losses 2,794,176 2,820,991 2,762,410 3,019,864
Other income (including security
transactions) 323,099 316,316 303,758 313,017
Other expenses 1,862,543 1,795,397 1,804,547 2,182,089
---------------------------------------------
Income before taxes 1,254,732 1,341,910 1,261,621 1,150,792
Applicable income taxes 322,000 335,000 318,000 277,589
- ------------------------------------------------------------------------------------
Net income $ 932,732 $1,006,910 $ 943,621 $ 873,203
========= ========= ========= =========
Earnings per share $ .52 $ .56 $ .52 $ .49
========= ========= ========= =========
</TABLE>
(At this point, the text is located in the lefthand column about three
quarters down the page. A table appears to the right of the text
occupying the second and third columns.)
Common Stock Information
The following table sets forth the high and low sales prices for
the common stock, as reported on The Nasdaq Stock Market, Inc.
and the cash dividends declared per share on the common stock for
the periods indicated.
Commmercial National Financial Corporation stock is traded in the
over-the-counter market on The Nasdaq Stock Market, Inc., under
the trading symbol "CNAF" with an additional descriptive listing of
"CmclNt."
<TABLE>
<CAPTION>
Cash Dividend
1997 High Low Per Share
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $37.00 $34.00 $ .16
Second Quarter 37.00 34.50 .18
Third Quarter 37.00 34.50 .18
Fourth Quarter 36.50 35.25 .18
</TABLE>
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $21.33 $20.42 $ .143
Second Quarter 31.50 21.33 .16
Third Quarter 31.75 29.50 .16
Fourth Quarter 37.00 31.50 .16
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiary
- --------------------------------------------------------
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.
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 15,312,410 $ 13,549,080 $ 12,843,170 $ 12,250,168 $ 11,022,466
Interest and dividends on securities 6,521,952 6,305,557 6,138,993 5,807,222 5,928,570
Interest on money market investments 47,530 92,930 240,311 326,188 299,063
- -------------------------------------------------------------------------------------------------------------
Total interest income 21,881,892 19,947,567 19,222,474 17,383,578 17,250,099
Interest Expense
Deposits 9,388,643 8,394,110 8,251,854 6,444,799 6,148,966
Short-term borrowings 288,495 51,016 365 - -
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 9,677,138 8,445,126 8,252,219 6,444,799 6,148,966
- -------------------------------------------------------------------------------------------------------------
Net interest income 12,204,754 11,502,441 10,970,255 10,938,779 11,101,133
Provision for loan losses 270,000 105,000 90,000 180,000 360,000
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,934,754 11,397,441 10,880,255 10,758,779 10,741,133
Other operating income 1,489,069 1,256,190 1,112,942 1,015,791 1,008,388
Other operating expenses 8,063,437 7,644,576 7,046,171 7,138,659 6,644,317
- -------------------------------------------------------------------------------------------------------------
Income before taxes 5,360,386 5,009,055 4,947,026 4,635,911 5,105,204
Applicable income taxes 1,273,777 1,252,589 1,253,833 1,150,991 1,351,201
- -------------------------------------------------------------------------------------------------------------
Net income $ 4,086,609 $ 3,756,466 $ 3,693,193 $ 3,484,920 $ 3,754,003
============ ============ ============ ============ ============
Per Share Data
Net income $ 2.27 $ 2.09 $ 2.05 $ 1.94 $ 2.09
Dividends declared $ .70 $ .62 $ .56 $ .53 $ .49
Average shares outstanding (a) 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000
At End of Period
Total assets $319,741,956 $278,110,524 $266,176,018 $251,141,709 $243,526,543
Securities 118,382,089 102,355,972 103,480,616 96,675,122 91,935,870
Loans and leases, net of
unearned income 183,481,157 159,935,523 144,288,002 139,066,657 125,575,221
Allowance for loan losses 1,882,251 2,035,818 2,081,700 2,077,553 1,968,014
Deposits 260,689,757 238,808,071 230,736,311 219,560,923 213,753,679
Shareholders' equity 38,445,011 35,388,254 33,036,470 29,556,943 28,005,748
Key Ratios
Return on average assets 1.39% 1.39% 1.43% 1.42% 1.63%
Return on average equity 11.14 11.02 11.80 12.15 14.41
Net loans-to-deposit ratio 69.66 66.12 61.63 62.39 57.83
Dividend payout ratio (dividends
declared divided by net income) 30.83 29.87 27.29 27.55 23.65
Equity-to-assets ratio (average equity
divided by average total assets) 12.47 12.64 12.13 11.72 11.31%
</TABLE>
[FN]
(a) Retroactively adjusted for a three-for-one stock split in the form of a
dividend declared in February 1996.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- -----------------------------------------------------------
(At this point, the following text occupies the first and second columns
of the three column text. The third column is blank.)
INTRODUCTION
The purpose of this discussion and the accompanying financial data is to
provide aid in understanding and evaluating the financial condition and
results of operations of Commercial National Financial Corporation (the
corporation) for the years ending on December 31, 1997, 1996 and 1995.
This information should be read in conjunction with the consolidated
financial statements and related footnotes for the years under review.
In February 1996, the Board of Directors authorized a three-for-one stock
split effected in the form of a stock dividend. All per share data has
been restated to allow meaningful comparison with prior periods.
All material intercompany transactions have been eliminated in
consolidation.
RESULTS OF OPERATIONS
Net income for 1997 was $4,086,609, compared to $3,756,466 in 1996 and
$3,693,193 in 1995. Earnings per share were $2.27 in 1997 compared to
1996's earnings of $2.09 per share. In 1995, earnings per share were
$2.05.
Return on average assets was 1.39% in 1997, 1.39% in 1996 and 1.43% in
1995. For the same years return on average equity was 11.14%, 11.02% and
11.80%, respectively.
NET INTEREST INCOME
The largest segment of earnings is represented by net interest income
which is calculated by deducting the interest paid on interest-bearing
liabilities from the interest received on interest-earning assets. In
1997, net interest income was $12,204,754 compared to $11,502,441 in 1996
and $10,970,255 in 1995.
Average earning assets grew $23,235,041 in 1997, $10,364,280 in 1996 and
$12,892,411 in 1995. Average interest-bearing liabilities increased
$20,639,642 in 1997, $7,908,162 in 1996 and $8,374,092 in 1995. The return
on earning assets, calculated on a tax-equivalent basis, equaled 8.14% in
1997 compared to 8.06% in 1996 and 8.08% in 1995. The cost-of-funds rate
was 4.36% in 1997, 4.21% in 1996 and 4.28% in 1995. The tax-equivalent
net interest margin was 4.69% in 1997, 4.77% in 1996 and 4.74% in 1995.
<PAGE>
<TABLE>
Financial Comparisons
Consolidated Average Balance Sheet, Interest Income/Expense and Rates
<CAPTION>
1997 1996 1995
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)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets
Loans(b)(c) net of
unearned income $169,849,234 $15,312,410 9.06% $151,056,637 $13,549,080 9.01% $142,697,066 $12,843,170 9.03%
Taxable securities 77,615,939 4,827,530 6.22 78,491,319 4,914,451 6.26 76,008,652 4,803,344 6.32
Non-taxable securities 32,285,316 1,694,422 7.95 26,118,891 1,391,106 8.07 24,174,102 1,335,649 8.37
Interest-bearing deposits
with banks 110,211 7,167 6.50 127,222 6,252 4.91 56,764 2,716 4.78
Federal funds sold 738,219 40,363 5.47 1,569,809 86,678 5.52 4,063,014 237,595 5.85
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 280,598,919 21,881,892 8.14 257,363,878 19,947,567 8.06 246,999,598 19,222,474 8.08
Non-interest-earning Assets
Cash 6,572,767 6,182,888 5,957,428
Allowance for loan losses (1,950,574) (2,080,108) (2,094,558)
Other assets 9,039,928 8,241,254 7,296,555
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-
earning assets 13,662,121 12,344,034 11,159,425
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $294,261,040 $269,707,912 $258,159,023
============ ============ ============
Liabilities and Shareholders' Equity
Interest-bearing Deposits
NOW accounts $ 20,204,634 386,186 1.91 $ 18,110,581 353,404 1.95 $ 17,116,367 375,977 2.20
Money Market accounts 42,542,349 1,732,133 4.07 39,754,528 1,506,643 3.79 40,662,832 1,565,552 3.85
Savings deposits 44,871,628 1,387,360 3.09 44,744,695 1,357,140 3.03 42,721,554 1,302,544 3.05
Time deposits 108,744,105 5,882,964 5.41 97,004,511 5,176,923 5.34 92,126,830 5,007,781 5.44
Short-term borrowings 4,819,178 288,495 5.99 927,937 51,016 5.50 6,507 365 5.61
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 221,181,894 9,677,138 4.36 200,542,252 8,445,126 4.21 192,634,090 8,252,219 4.28
Non-Interest-bearing Liabilities and Capital
Non-interest-bearing deposits 34,124,049 32,920,490 32,128,560
Other liabilities 2,255,578 2,156,953 2,094,590
Shareholders' equity 36,699,519 34,088,217 31,301,783
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-bearing
funding sources 73,079,146 69,165,660 65,524,933
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $294,261,040 $269,707,912 $258,159,023
=========== =========== ===========
Net Interest Income and
Net Yield on Interest-
earning Assets $12,204,754 4.69% $11,502,441 4.77% $10,970,255 4.74%
=========== =========== ===========
</TABLE>
[FN]
(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.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ------------------------------------------------------------
(At this point, a table appears at the top and occupies the first third
of the page.)
The following table illustrates the impact and interaction of rate and
volume changes for the years under review:
<TABLE>
Analysis of Year-to-Year Changes in Net Interest Income
-----------------------------------------------------------------------------
1997 Change from 1996 1996 Change from 1995
-----------------------------------------------------------------------------
<CAPTION>
Total Change Due Change Due Total Change Due Change Due
Change to Volume to Rate Change to Volume to Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets
Loans net of unearned income $1,763,330 $1,685,609 $ 77,721 $ 705,910 $ 752,387 $ (46,477)
Securities
Taxable (86,921) (54,809) (32,112) 111,107 156,891 (45,784)
Non-taxable 303,316 328,427 (25,111) 55,457 107,452 (51,995)
Interest-bearing deposits with banks 915 (836) 1,751 3,536 3,371 165
Federal funds sold (46,315) (45,917) (398) (150,917) (145,796) (5,121)
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 1,934,325 1,912,474 21,851 725,093 874,305 (149,212)
Interest-bearing Liabilities
Deposits 994,533 704,298 290,235 142,256 299,300 (157,044)
Short-term borrowings 237,479 213,932 23,547 50,651 51,686 (1,035)
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 1,232,012 918,230 313,782 192,907 350,986 (158,079)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 702,313 $ 994,244 $(291,931) $ 532,186 $ 523,319 $ 8,867
========== ========== ========= ========== ========== ===========
</TABLE>
[FN]
Included in interest income are loan fees of $212,453 in 1997,
$227,189 in 1996 and $135,065 in 1995.
(At this point, the following text reverts back to three-column format.)
The provision for loan losses is the amount added to
the allowance against which actual loan losses are charged. The
amount of the provision is determined by an analysis of the
loan portfolio's size, quality and risk potential as compared
to the size of the allowance itself. The amount of the provision
was $270,000 in 1997, $105,000 in 19965 and $90,000 in 1995.
For each of the same years the net charge-off against the
allowance for loan losses was $423,567, $150,882 and $85,853,
respectively. On December 31, 1997 the allowance for
loan losses equaled 1.03% of total loans compared to 1.27% at
the end of 1996 and 1.44% at the end of 1995. Loans which were
past due 90 days or more, or were on non-accrual equaled 0.89%
of total loans on December 31, 1997, 0.08% on December 31,
1996 and 0.46% on December 31, 1995. The corporation's policy
is to place loans on a non-accrual basis when they become 90
days past due provided that the loan is well collateralized
and gives evidence of a reasonable likelihood for full
collection. During the review of the loan portfolio,
management did not note any trends such as industry
uncertainties which raise concerns regarding future adverse
impact on operating results, liquidity or capital resources.
NON-INTEREST INCOME AND EXPENSE
In 1997, total non-interest income increased $232,879 to
$1,489,069 from $1,256,190 in 1996. Asset management and trust
income grew $75,156 to $164,430. Service charges on deposit
accounts increased $60,706 to $572,124. Other service charges
and fees increased by $94,638 to $382,332. Net gains on sold
and called investments amounted to $11,561. Other income
decreased by $8,605 to $358,622. In 1995, total non-interest
income was $1,112,942.
Non-interest expense in 1997 was $8,063,437. This represented
an increase of $418,861 over 1996's non-interest expense which
totaled $7,644,576. The major area contributing to this
increase was personnel expense which rose $432,613. The large
increase in personnel expense was offset, somewhat, by a
decrease in other expense which decreased by $119,436. Major
items attributed to this decrease were the lack of costs
associated this year versus last year in the promoting and
advertising of a new community office and the Maxcess(at this
point, there appears a service mark)SM Account, our comprehensive
electronic home-banking product. Net occupancy expense increased
$50,993 and furniture and equipment expense rose only $739.
Pennsylvania shares tax increased $23,031 over 1996. Non-interest
expense in 1995 was $7,046,171.
Income tax expense was $1,273,777 in 1997, $1,252,589 in 1996
and $1,253,833 in 1995. The effective tax rate was 23.76%,
25.01% and 25.35%, respectively. The corporation's sizeable
municipal bond holdings continued to favorably influence
income tax expense levels.
LIQUIDITY
Liquidity measurements attempt to evaluate the corporation's
ability to meet the cash-flow needs of its depositors and
borrowers. The primary source of liquidity is deposit growth.
Additional liquidity is provided by the maturity of
investments in loans and securities and the 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. Supplemental external
funding sources have been established
<PAGE>
(At this point in the 1997 annual report, the following text
is still in three-column format but only occupies the top
third of the page. The remaining page is depicts a table of
Loans by Classification)
and are available to meet both short- and long-term funding
needs.
On December 31, 1997, total deposits were $21,881,686 greater
than on December 31, 1996. Interest-bearing deposits grew
$19,885,156 in 1997 while demand deposits increased
$1,996,530. The total deposit growth of 1997 was
primarily attributable to favorable interest rate conditions
and the closing of a branch by one of our competitors in the
area.
During the same period, total loans, net of unearned income, grew
by $23,545,634. Competition for high-quality loans remained intense
throughout 1997. Real-estate-secured loan products led in dollar-volume
increases. Commercial loans also posted a significant increase from
year-end 1996.
The amortized cost of the corporation's securities portfolio increased
$15,677,407 and was $118,017,102 on December 31, 1997. On that same
date, the estimated market value of the entire securities portfolio was
$119,958,555 which was higher than amortized cost by $1,941,453 and
represented the net of $2,037,387 gross unrealized gains less $95,934
gross unrealized losses. On December 31, 1997 the amount of securities
which would reach maturity within one year was $12,159,462 as compared
to $16,951,290 at the end of the previous year.
The following tables present a five-year summary of loan classifications
and the maturity distribution of securities at December 31, 1997.
<TABLE>
<CAPTION>
Loans by Classification on December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------
Per Per Per Per Per
Amount Cent Amount Cent Amount Cent Amount Cent Amount Cent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 19,052,486 10% $ 17,115,404 11% $ 14,494,356 10% $ 9,794,172 7% $ 10,090,751 8%
Real estate - commercial 44,289,723 24 33,437,360 21 32,460,803 23 32,108,097 23 30,627,685 24
Real estate - construction 3,510,809 2 1,924,619 1 1,523,490 1 1,637,794 1 1,470,076 1
Real estate - other 95,570,632 52 86,045,874 54 79,910,652 55 80,702,169 58 70,708,911 56
Consumer - installment 6,219,577 4 6,542,365 4 4,803,258 3 5,535,248 4 5,733,348 5
Municipal 3,340,405 2 3,183,483 2 1,332,403 1 1,350,655 1 1,179,097 1
Other 11,655,453 6 11,799,130 7 9,998,413 7 8,238,730 6 6,124,966 5
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $183,639,085 100% $160,048,235 100% $144,523,375 100% $139,366,865 100% $125,934,834 100%
Unearned Income (157,928) (112,712) (235,373) (300,208) (359,613)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans,
net of unearned income $183,481,157 $159,935,523 $144,288,002 $139,066,657 $125,575,221
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiary
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- -------------------------------------------------------------
(At this point the first quarter of the page is a table followed by three-
column text in the second quarter of the page. The third quarter is another
table followed by more text in the last quarter of the page.)
<TABLE>
Maturity Distribution of Securities on December 31, 1997
<CAPTION>
U.S. Treasury State & Total Weighted
& other U.S. Govt. Political Other Amortized Average
Agencies & Corp. Subdivisions(1) Securities Cost Yield
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within 1 year $11,994,380 $ 165,082 $ - $ 12,159,462 5.40%
After 1 but within 5 years 42,707,994 8,864,867 - 51,572,861 6.62
After 5 but within 10 years 5,971,550 23,051,738 - 29,023,288 7.47
After 10 years 20,393,642 3,537,549 - 23,931,191 7.22
No fixed maturity - - 1,330,300 1,330,300 6.22
- -------------------------------------------------------------------------------------------------------
$81,067,566 $35,619,236 $1,330,300 $118,017,102 6.82%
=========== =========== ========== ============ =====
</TABLE>
[FN]
(1) Yield on tax-exempt obligations has been computed on a fully
tax-equivalent basis (using statutory federal income tax rate of 34%)
INTEREST SENSITIVITY
One of the desired goals of investment management is to
achieve a balance between the need for consistent income
growth and the risks inherent in achieving a portion of
that income through managed maturity imbalances between
interest-earning assets and interest-bearing liabilities.
These relationships are generally so complex that exact
measurement of the impact of interest rate changes is
virtually impossible. However, an indication of an
institution's vulnerability to such changes can be roughly
gauged through the measurement and analysis of the so-
called "gap" or the difference between the dollar volumes
of assets and liabilities eligible for repricing within a
variety of time periods. When the amount of the assets so
defined is greater than the liabilities, the gap is labeled
positive and the institution's interest rate spread will
widen and earnings will respond favorably to a general rise
in interest rates. The opposite relationship produces a
negative gap and the interest rate spread will increase and
earnings will show a favorable response in a declining rate
environment.
<TABLE>
Interest Sensitivity Analysis (In Thousands)
<CAPTION>
0-30 Days 31-90 Days 91-180 Days 181-365 Days 1-5 Yrs Over 5 Yrs
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Securities $ 5,489 $ 2,500 $ 6,788 $ 8,476 $ 53,042 $ 40,393
Federal funds sold and
deposits with banks 131 - - - - -
Loans 44,743 4,082 4,869 8,814 70,571 50,560
- ------------------------------------------------------------------------------------------------------
Total interest-sensitive
assets 50,363 6,582 11,657 17,290 123,613 90,953
Interest-bearing liabilities:
Certificates of deposit 12,594 17,224 18,872 21,687 44,190 351
Other interest-bearing
liabilities - 6,566 6,566 10,980 68,236 17,455
Short-term borrowings 7,350 6,000 1,500 3,000 - -
- ------------------------------------------------------------------------------------------------------
Total interest-sensitive
liabilities 19,944 29,790 26,938 35,667 112,426 17,806
- ------------------------------------------------------------------------------------------------------
Interest sensitivity gap $30,419 $(23,208) $(15,281) $(18,377) $ 11,187 $73,147
======= ========= ========= ========= ========== =======
Cumulative gap $30,419 $ 7,211 $ (8,070) $(26,447) $ (15,260) $57,887
======= ========= ========= ========= ========== =======
Ratio of cumulative gap to
earning assets 10.07% 2.39% (2.67%) (8.75%) (5.05%) 19.16%
======== ========= ========= ========= ========== =======
</TABLE>
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 our loan
review staff. These reviews include the analysis of credit quality,
diversification of industry, compliance to policies and procedures,
and an analysis of current economic conditions.
In the management of its credit portfolio, the corporation
emphasizes the importance of the collection of loans as well as
asset and earnings diversification. The corporation immediately
<PAGE>
At this point in the 1997 annual report, the following page is
in three-column format)
recognizes as a loss, all credits judged to be uncollectible and has
established an allowance for loan losses that may exist in the
loan portfolio at a point in time, but have not been specifically
identified.
For analytical purposes, the following table sets forth an
allocation of the allowance for loan losses on December 31,
1997 and December 31, 1996 according to the categories indicated:
<TABLE>
Allocation of the Allowance for Loan Losses
(dollar amounts in thousands)
<CAPTION>
1997 1996
----------------------------------------------------
<S> <C> <C>
Commercial, Industrial, Financial,
Agricultural and Tax Free $ 555 $ 881
Residential mortgages 231 138
Loans to individuals 622 577
Off-balance sheet items 138 96
Year 2000 141 -
Unallocated 195 344
----------------
Total $1,882 $2,036
====== ======
Reserve as a percentage
of average total loans 1.11% 1.35%
======= =======
</TABLE>
CAPITAL RESOURCES
Shareholders' equity grew $3,056,757 during 1997 and was
$38,445,011 on December 31, 1997 compared to $35,388,254 on
December 31, 1996. Unrealized gains on securities available for
sale on December 31, 1997 temporarily increased shareholders'
equity by $240,891. The retained earnings retention rate was
69.17% in 1997 as compared to 70.13% in 1996.
The shareholders' equity or the capital base represents the
investment by the corporation's owners either initially or
through retention of earnings (net after income tax less
dividend payments). This investment acts as a safeguard against
future uncertainties. The amount of capital which is deemed
appropriate is dependent upon an assessment of the
corporation's total assets, the quality of its loans and
securities, its historical earnings record, its business
prospects for the near and long term, the management and
information systems in place and the general competence and
abilities of the corporation's management.
On December 31, 1997, the corporation's capital (not including
the allowance for loan losses) amounted to $38,445,011
or 12.02% of total assets. The inclusion of the allowance
increases the capital ratio to 12.61%. On the same basis of
calculation, these ratios were 12.72% and 13.46% respectively
on December 31, 1996.
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. The final ruling on section 305 of the Federal
Deposit Insurance Corporation Improvement Act regarding
interest rate risk capital requirements indicates that although
no measures or capital charges are required presently, insured
financial institutions must still monitor their interest rate
risk position in conjunction with close supervision from the
appropriate regulatory agency.
As of December 31, 1997, the corporation had Tier I and total
equity capital to risk adjusted asset ratios of 20.68% and
21.70%, respectively. The leverage ratio was 12.38%. At
December 31, 1996, the corporation had Tier I and total equity
capital to risk adjusted assets ratios of 22.23% and 23.48%,
respectively.
<TABLE>
The table below presents the corporation's capital position on December 31, 1996
(dollar amounts in thousands)
<CAPTION>
Percent
of Adjusted
Amount Assets
-------------------------------------------------------------
<S> <C> <C>
Tier I capital 38,204 20.68
Tier I capital requirement 7,390 4.00
Total equity capital 40,086 21.70
Risk-based requirement 14,779 8.00
-------------------------------------------------------------
Leverage capital 38,204 12.38
Leverage requirement 12,346 4.00
</TABLE>
INFLATION AND CHANGING PRICES
Inflation can have significance to a banking institution
because of its implication for the interest rate environment
and its influence on personnel expenses and the costs of
supplies and materials needed for day to day operations.
Because such a large portion of the corporation's assets and
liabilities are represented by monetary investments,
inflationary impact tends to be dampened except for the
dislocation caused by maturity variances. Management efforts to
gauge and control these variables have been discussed earlier
under rate sensitivity. The inflationary effect on non-interest
expenses is monitored closely by management and consistent
attention is given to controlling these cost areas in an
attempt to limit their increase to levels which are lower than
the rate of asset growth.
ASSESSMENT OF FUTURE ENVIRONMENT
Management has not identified nor is aware of any internal
matter or external condition, including potential regulatory
recommendations, which could have a critical impact on the
corporation's ability to continue its present business
activities or adversely impair future operating results other
than the Year 2000 issue. The Year 2000 problem is the result
of computer programs being written using two digits rather
than four to define the applicable year. Based on a recent
management assessment, the corporation believes the costs
associated with addressing the problem are not expected to
have a material adverse impact on the corporation's
financial position. The corporation has been devoting and will
continue to devote the necessary time and resources to resolve
the Year 2000 issue in a timely manner.
Certain interest rate movements will continue to influence
ongoing earnings levels. Even though the exact impact of these
factors cannot be predicted, the corporation believes that
given its financial strength and stability, it will be able to
meet these situations in a positive manner.
<PAGE>
(This page is left intentionally blank.)
<PAGE>
Commercial National Financial Corporation
CORPORATE OFFICERS
- -------------------------------------------------------------------------
Louis A. Steiner Chairman of the Board
Louis T. Steiner Vice Chairman and Chief Executive Officer
Gregg E. Hunter Vice Chairman and Chief Financial Officer
Edwin P. Cover President and Chief Banking Officer
Wendy S. Schmucker Vice President and Secretary/Treasurer
Ryan M. Glista Vice President and Comptroller
CORPORATE DIRECTORS
- -------------------------------------------------------------------------
William M. Charley Gregg E. Hunter Debra L. Spatola
Retired, Vice Chairman and Vice President,
former consultant Chief Financial Officer Laurel Valley Foods, Inc.
Super Valu Stores of the Bank
George A. Conti, Jr. Frank E. Jobe Louis A. Steiner
Attorney at Law Retired, Chairman of the Board
former Executive Vice
President of the Bank
Edwin P. Cover Roy M. Landers Louis T. Steiner
President and Retired, Vice Chairman and
Chief Banking Officer former Executive Vice Chief Executive Officer
of the Bank President, R & L of the Bank
Development Co.
Richmond H. Ferguson John C. McClatchley George V. Welty
Attorney at Law C.E.O. Attorney, Partner,
JCM Industries Flickinger & Welty
Dorothy S. Hunter Joseph A. Mosso C. Edward Wible
Vice President Retired, Certified Public Accountant
Latrobe Foundry former President, Horner Wible & Associates,
Machine & Supply Co. Mosso's Pharmacy, Inc. Certified Public Accountants
All corporate directors also serve as directors of
Commercial National Bank of Westmoreland County
DIRECTORS EMERITUS
- ----------------------------------------------------------------------------
James A. Charley William W. Washnock
<PAGE>
Commercial National Bank of Westmoreland County
BANK OFFICERS
- -----------------------------------------------------------------------------
Chairman of the Board Louis A. Steiner
- --------------------------------
Vice Chairman/Chief Executive Officer Louis T. Steiner
- -------------------------------------
Vice Chairman/Chief Financial Officer Gregg E. Hunter
- -------------------------------------
President/Chief Banking Officer Edwin P. Cover
- -------------------------------
Senior Vice Presidents
- ----------------------------------------------------------------------
Donna L. Belluchie Philip S. Pettina
Vice Presidents
- ----------------------------------------------------------------------
Wayne H. Freed Martin E. May Keith M. Visconti
Ryan M. Glista Cheryl M. Letterio Thomas D. Watters
William N. Hamilton Jr. Michael J. Palko
James E. Harris Wendy S. Schmucker
Assistant Vice Presidents
- -----------------------------------------------------------------------
Karen E. Burick Alan J. Sulek
Michael L. Matthews Phyllis S. Yesh*
Community Office Managers
- -------------------------------------------------------------------------
Donna J. Daugherty Eric J. Sarn Thomas E. Sylvester
Debra Gras Michael A. Schmidt Patricia L. Torrance
Service Officers
- --------------------------------------------------------------------------
Douglas P. Arndt H. Alan Hamill Kristin Rossi
Lisa A. Ball Judy A. Hoffer Jakub S. Sadowski
Jennifer M. Baum David A. Kammerdiener Marsha J. Salley
Linda L. Bellich Gina M. Kovatch Roxanne Shadron
Eleanor A. Bridge Jonna M. Kundla Jennifer L. Sopcisak
Linda A. Burns Dina M. Lauricia Laura A. Steiner
Judith J. Ciocco Sharon M. Lewis Jerome M. Supko
Karen J. Ciocco Charles H. McDowell Gerald F. Updyke
Kathy S. Claycomb Kelly R. Moreman Cynthia M. Varner
Shirley M. Conway Richard A. Morhack Rebecca J. Weiner
Ezio C. Curcio William W. Rice II Jodi L. Zyvith
Marilyn T. Findish Susan F. Robb
Virginia E. Halucka Elizabeth M. Rosa
[FN]
* also serve as community office manager
<PAGE>
COMMUNITY ADVISORY BOARDS
- -------------------------------------------------------------------------------
Greensburg Ligonier Murrysville West Newton
Patrick A. Love Richard L. Beattie Walter F. Baczkowski Robert D. Austin
Barry W. Morris Jean E. Case August I. Bondi John T. Babilya
Edward J. Smith John C. Horrell Fred C. Honsberger Linda L. Lunt
John N. Ward Barry R. Shebeck Leonard L. Poliziani Dee M. Taylor
OFFICE LOCATIONS
- -------------------------------------------------------------------------------
Corporate Headquarters Latrobe Murrysville
900 Ligonier Street 900 Ligonier Street 4785 Old William Penn
P.O. Box 429 P.O. Box 429 Highway
Latrobe, PA 15650 Latrobe, PA 15650 P.O. Box 4
724/539-3501 724/539-3501 Murrysville, PA 15668
724/539-0816 (Fax) 724/539-0816 (Fax) 724/733-4888
724/733-7110 (Fax)
Asset Management and Lawson Heights
Trust Division Route 981 at Terry Way Pleasant Unity
19 North Main Street P.O. Box 429 Routes 981 and 130
Greensburg, PA 15601 Latrobe, PA 15650 P.O. Box 503
724/836-7670 724/539-9774 Pleasant Unit, PA 15676
724/836-7675 (Fax) 724/539-3523 (Fax) 724/423-5222
724/423-1155 (Fax)
Courthouse Square Ligonier West Newton
19 North Main Street 201 West Main Street 109 East Main Street
Greensburg, PA 15601 P.O. Box 528 P.O. Box 219
724/836-7699 Ligonier, PA 15668 West Newton, PA 15089
724/836-7675 (Fax) 724/238-9538 724/872-5100
724/238-9530 (Fax) 724/872-5143 (Fax)
Eastgate Lincoln Road
Georges Station Road Lincoln Road Shopping Center
P.O. Box 3206 P.O. Box 429
Greensburg, PA 15601 Latrobe, PA 15650
724/836-7600 724/537-9980
724/836-7604 (Fax) 724/537-9982 (Fax)
In addition to the full-service MAC machines located at all Commercial
National Bank offices indicated above (except Latrobe and Courthouse Square),
additional ATMs are available for your 24-hour banking convenience at Latrobe
Area Hospital, Saint Vincent College and Westmoreland County Airport. All are
linked to the national Cirrus, Honor and Plus networks and also accept
MasterCard, Visa, Discover and American Express for cash advances.
TOUCH TONE TELLER 24-hour banking service WEBSITE
- ------------------------------------------------------------------------
724/537-9977 Further information on
FREE from Blairsville, Derry Commercial National Bank
Greensburg, Kecksburg, Latrobe of Westmoreland County
Ligoner and New Alexandria. now is available at
1-800-803-BANK www.cnbthebank.com
FREE from all other locations.
<PAGE>
Commercial National Financial Corporation
- -----------------------------------------------------------------------
Stock Informaion
- -----------------------------------------------------------------------
The common stock of Commercial National Financial Corporation is traded
in the over-the-counter market on The Nasdaq Stock Market, Inc. under the
trading symbol "CNAF" with an additional descriptive newspaper listing of
"CmclNt."
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 Keefe, Bruyette & Woods, Inc. Ryan, Beck & Co.
100 Light Street Two World Trade Center 220 South Orange Ave.
Baltimore, MD 21202 New York, NY 10048 West Orange, NJ 07052
800-638-7411 800-966-1559 973-597-6020
FJ Morrissey & Co Inc. M.H. Meyerson & Co.
Suite 1420 34th Floor
1700 Market Street 525 Washington Boulevard
Philadelphia, PA 19103 Jersey City, NJ 07303
800-842-8928 800-333-3113
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)
More general shareholder inquiries also may be directed to this department.
Form 10-K
- -----------------------------------------------------------------------------
The corporation will provide without charge to any
shareholder a copy of its 1997 Annual Report on Form 10-K as
required to be filed with the Securities and Exchange
Commission. Requests should be made in writing to:
Commercial National Financial Corporation
P.O. Box 429
Latrobe, PA 15650
<PAGE>
(The inside of the back cover is intentionally left blank.)
<PAGE>
(The following appears in the upper left corner of the back cover along
with the corporate logo)
Commercial National Financial Corporation
900 Ligonier Street
P.O. Box 429
Latrobe, PA 15650
<PAGE>
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Latrobe, Pennsylvania
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 21, 1998
TO THE SHAREHOLDERS:
Notice is hereby given that the annual meeting of shareholders
of Commercial National Financial Corporation will be held at its office,
900 Ligonier Street, Latrobe, Pennsylvania, on Tuesday, April 21, 1998
at 2:00 P.M. for the following purposes.
1. Election of five (5) directors each for a term of three (3)
years; and
2. Ratification of the appointment of Stokes Kelly & Hinds, LLC
as independent auditors for the corporation; and
3. Transaction of such other business as may come properly
before the meeting, and any adjournment or postponement
thereof.
Only those shareholders of record as of the close of business on
March 20, 1998 shall be entitled to notice of and to vote at the meeting.
Enclosed are a proxy statement, a form of proxy and an addressed return
envelope. Please mark, date, sign and return the proxy promptly in the
envelope whether or not you plan to attend the meeting in person. If you
do attend the meeting, you may then withdraw your proxy and vote in person.
Your prompt response will be appreciated.
By Order of the Board of Directors
/s/ Wendy S. Schmucker
Wendy S. Schmucker, Secretary
March 20, 1998
<PAGE>
The inside of the front cover is left intentionally blank.
<PAGE>
COMMERCIAL NATIONAL FINANCIAL CORPORATION
900 Ligonier Street
Latrobe, Pennsylvania 15650
________________________________________
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON April 21, 1998
GENERAL
This proxy statement is provided for the solicitation of
proxies by the board of directors of Commercial National
Financial Corporation (the corporation), a Pennsylvania business
corporation and bank holding company, for use at the annual
meeting of shareholders on April 21, 1998 and at any and all
adjournments or postponements thereof. This proxy statement and
the form of proxy, together with the annual report to
shareholders for 1997, are being mailed on March 23, 1998, or as
soon thereafter as possible, to all shareholders entitled to vote
at the annual meeting.
The only class of stock of the corporation presently issued
and outstanding is common stock. The total number of shares of
common stock entitled to vote at the annual meeting is 1,800,000
and only those shareholders of record at the close of business on
March 20, 1998 are entitled to vote.
The shares of stock represented by each proxy properly
signed and returned to the corporation prior to the date of the
annual meeting, will be voted in the manner set forth in this
proxy statement and in accordance with the instructions marked on
the proxy enclosed.
A shareholder who returns a proxy may revoke it at any time
before it is voted, by delivering a written notice of revocation
to Wendy S. Schmucker, secretary of the corporation, or by
executing a later dated proxy and giving written notice thereof
to the secretary of the corporation or by voting in person at the
meeting after giving written notice to the secretary of the
corporation.
The cost of preparing, printing, and soliciting proxies will
be paid by the corporation. In addition to the use of the mails,
certain directors, officers and employees of the corporation may
solicit proxies personally by telephone or by telegraph.
Arrangements will be made with brokerage houses and other
custodians, fiduciaries and nominees to forward proxy
solicitation materials to the beneficial owners of stock held of
record by these persons, and, upon request therefore, the
corporation will reimburse them for reasonable forwarding
expenses.
At the meeting, the shareholders will (i) act upon the
proposal to elect as directors the five (5) persons set forth in
this proxy statement each in a class of directors as set forth
below; (ii) ratify the appointment of Stokes Kelly & Hinds, LLC as
independent auditor for the corporation; and (iii) act upon any
other business as may be properly brought before the meeting.
The board of directors of the corporation recommends the
election, as directors, of the five (5) nominees listed in this
proxy statement. The nominees receiving the highest number of
votes cast, including votes cast cumulatively, shall be elected
directors. For all other purposes, other than election of
directors, each share of stock is entitled to one vote.
Under the by-laws of the corporation, the presence, in
person or by proxy, of shareholders entitled to cast at least a
majority of the votes which all shareholders are entitled to
cast, shall constitute a quorum.
<PAGE>
ELECTION OF DIRECTORS
The by-laws of the corporation provide that the board of
directors shall consist of not less than three (3) directors, and
shall be classified into three (3) classes, each class to be
elected for a term of three (3) years. The board of directors,
within the limits set in the by-laws, may from time to time fix
the number of directors and the respective classifications. The
number of directors to constitute the entire board has been fixed
by the board of directors at fifteen (15) with five (5) directors
in each of three (3) classes. At the annual meeting, there shall
be elected five (5) directors as a class to serve until the
annual meeting of shareholders in the year 2001. The proxies
intend to vote for the election of the nominees listed on the
proxy and in this proxy statement. All of the nominees are now
and have been directors of the corporation and of Commercial
National Bank of Westmoreland County (the bank).
Other nominations for director may be made in accordance
with procedures set forth in section 9.1 of the by-laws of the
corporation which require written notice to the secretary of the
corporation of any such nomination at least sixty (60) days prior
to the date of any meeting of the shareholders for the election
of directors. Such notice shall contain the following information
to the extent known by the notifying shareholder:
a. the name, address, and age of each proposed nominee;
b. the principal occupation of each proposed nominee;
c. the number of shares of the corporation owned by each
proposed nominee;
d. the total number of shares of the corporation that
will be voted for each proposed nominee;
e. the name and address of the notifying shareholder; and
f. the number of shares of common stock of the corporation
owned by the notifying shareholder.
Nominations not made within the foregoing procedures may be disregarded
by the chairman at the annual shareholders' meeting.
Each nominee has consented to be named and to serve as a
director, if elected. If any nominee becomes unable to serve as
a director, the proxies named in the proxy will vote for a
substitute nominee selected and recommended by the board of
directors of the corporation.
The names and ages of the nominees, and the year each
nominee began continuous service as a director of the
corporation, together with the principal occupation of each at
present and for at least the previous five (5) years, are as
follows:
<PAGE>
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
------ ----------------- ------- ------
<S> <C> <C> <C>
George A. Conti, Jr. 58, attorney-at-law 2001 1996
Edwin P. Cover 61, president and chief 2001 1990
banking officer of the
corporation and the bank
Frank E. Jobe 76, retired, former 2001 1990
executive vice president
of the bank
Roy M. Landers 69, retired, former 2001 1990
executive vice president,
R & L Development Company,
land development
C. Edward Wible 52, CPA, Horner-Wible & 2001 1995
Associates, Certified Public
Accountants
</TABLE>
No nominee is a director of any company, other than the
corporation, which is required to file reports with the
Securities and Exchange Commission.
<PAGE>
CONTINUING DIRECTORS
The remaining ten (10) directors, named below, will continue
to serve in their respective classes. The following table, based
in part on information received from the respective directors and
in part on the records of the corporation, sets forth information
regarding each continuing director as of February 14, 1998.
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
------ --------------- ------- -----
<S> <C> <C> <C>
Richmond H. Ferguson 66, attorney at law 1999 1990
Dorothy S. Hunter(1) 73, vice president 1999 1990
Latrobe Foundry Machine
& Supply Company
John C. McClatchey 60, CEO, JCM Industries, 1999 1990
manufacturer of hardwood
lumber and pallets
Joseph A. Mosso 66, retired, former 1999 1990
president Mosso's Pharmacy,
Inc. (1997 - present),
president, Mosso's Pharmacy
Inc. (1990 - 1997)
Louis T. Steiner(2) 36, vice chairman and chief 1999 1995
executive officer of the
corporation and bank (1997 -
present), vice chairman of the
corporation and bank (1995 -
1997), vice president of
the bank (1994-1995), assistant
vice president of the bank
(1993-94),
William M. Charley 81, retired, former 2000 1990
consultant, Super Valu
Stores
Gregg E. Hunter(3) 39, vice chairman and chief 2000 1995
financial officer of the
corporation and bank (1995 -
present), assistant secretary/
treasurer of the corporation
(1993 - 1995), vice president/
chief financial officer of
bank (1994 - 1995), assistant
vice president/controller of
the bank (1993 - 1994)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
---- --------------- ------- -----
<S> <C> <C> <C>
Debra L. Spatola 41, vice president, 2000 1997
Laurel Valley Foods, Inc.
Louis A. Steiner(4) 67, chairman of the board 2000 1990
of the corporation and
bank (1997 - present),
chairman of the board and
chief executive officer
of the corporation and
bank (1990 - 1997)
George V. Welty 51, attorney, partner 2000 1997
Flickinger and Welty
</TABLE>
[FN]
(1) Dorothy S. Hunter, director, is the sister of Louis A.
Steiner, director; mother of Gregg E. Hunter,
director; and aunt of Louis T. Steiner, director.
(2) Louis T. Steiner, director, is the son of Louis A. Steiner,
director; nephew of Dorothy S. Hunter, director;
and cousin of Gregg E. Hunter, director.
(3) Gregg E. Hunter, director, is the son of Dorothy S. Hunter,
director; nephew of Louis A. Steiner, director;
and cousin of Louis T. Steiner, director.
(4) Louis A. Steiner, director, is the brother of Dorothy S.
Hunter, director; father of Louis T. Steiner, director;
and uncle of Gregg E. Hunter, director.
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of February 14, 1998, the
name and address of each person who owns of record, or who is
known by the board of directors, to be the beneficial owner of
more than five percent (5%) of the outstanding common stock, the
number of shares beneficially owned by such person, and the
percentage of the outstanding common stock so owned.
<TABLE>
<CAPTION>
Percent of
Outstanding
Amount and Nature Common Stock
Name and Address of of Beneficial Beneficially
Beneficial Owner Ownership Owned
- ------------------- ----------------- ------------
<S> <C> <C>
Louis A. Steiner 298,245 (1) 16.57%
R. D. 2, Box 197
Ligonier, PA 15658
Dorothy S. Hunter 91,500 (2) 5.08%
P. O. Box 28
Latrobe, PA 15650
Gregg E. Hunter 105,090 (3) 5.84%
P. O. Box 3
Latrobe, PA 15650
George A. Conti, Jr. 114,132 (4) 6.34%
101 North Main Street
Greensburg, PA 15601
</TABLE>
[FN]
(1) Includes 111,915 shares held directly by Mr. Steiner; 450
shares held by his spouse, Barbara J. Steiner; 120,000 shares
held by Latrobe Foundry Machine & Supply Company and 65,880
shares held by Ridge Properties, Inc. Louis A. Steiner is the
president of each company.
(2) Includes 1,500 shares held directly by Mrs. Hunter and
90,000 shares held as co-trustee, The Hunter Stock Trust, with
shared voting and investment power.
(3) Includes 15,090 shares held directly by Mr. Hunter and
90,000 shares held as co-trustee, The Hunter Stock Trust, with
shared voting and investment power.
(4) Includes 1,500 shares held in street name by Mr. Conti; 132
shares held as co-trustee of the Conti Trust, with shared voting
and investment power; 39,630 shares held as trustee of the
Corazzi Trust and 72,870 shares held as trustee of the Iorio
Trust, each with sole voting and investment power.
<PAGE>
BENEFICIAL OWNERSHIP BY OFFICERS, DIRECTORS AND NOMINEES
The following table sets forth as of February 14, 1998, the
amount and percentage of the common stock beneficially owned by
each director, nominee, named executive officer, and all
executive officers and directors of the corporation as a group.
<TABLE>
<CAPTION>
Name of Amount and Nature
Individual or of Beneficial Percent
Identity of Group Ownership (1) (2) of Class
----------------- ----------------- ---------
<S> <C> <C>
William M. Charley 8,115 .45%
George A. Conti, Jr. 114,132(3) 6.34%
Edwin P. Cover 5,100 .28%
Richmond H. Ferguson 2,910 .16%
Dorothy S. Hunter 91,500(4) 5.08%
Gregg E. Hunter 105,090(5) 5.84%
Frank E. Jobe 15,150 .84%
Roy M. Landers 17,600 .98%
John C. McClatchey 1,500 .08%
Joseph A. Mosso 12,120 .67%
Debra L. Spatola 600 .03%
Louis A. Steiner 298,245(6) 16.57%
Louis T. Steiner 10,716 .60%
George V. Welty 990 .06%
C. Edward Wible 1,000 .06%
All executive officers and
directors as a group
(15 directors, 5 officers,
16 persons in total) 594,798 33.04%
</TABLE>
[FN]
(1) The securities "beneficially owned" by an individual are
determined in accordance with the definitions of "beneficial
ownership" set forth in the general rules and regulations of
the Securities and Exchange Commission and may include
securities owned by or for the individual's spouse and minor
children and any other relative who has the same home, as
well as securities to which the individual has or shares
voting or investment power or has the right to acquire
beneficial ownership within sixty (60) days after
February 14, 1998. Beneficial ownership may be disclaimed
as to certain of the securities.
(2) Information furnished by the directors and the corporation.
(3) Includes 1,500 shares held in street name by Mr. Conti; 132
shares held as co-trustee of the Conti Trust, with shared
voting and investment power; 39,630 shares held as trustee
of the Corazzi Trust and 72,870 shares held as trustee of
the Iorio Trust, each with sole voting and investment power.
(4) Includes 1,500 shares held directly by Mrs. Hunter and
90,000 shares held as co-trustee, The Hunter Stock Trust,
with shared voting and investment power.
(5) Includes 15,090 shares held directly by Mr. Hunter and
90,000 shares held as co-trustee, The Hunter Stock Trust,
with shared voting and investment power.
(6) Includes 111,915 shares held directly by Mr. Steiner; 450
shares held by his spouse, Barbara J. Steiner; 120,000
shares held by Latrobe Foundry Machine & Supply Company and
65,880 shares held by Ridge Properties, Inc. Louis A.
Steiner is the president of each company.
<PAGE>
CUMULATIVE VOTING FOR DIRECTORS
The Articles of Incorporation of the corporation provide
that cumulative voting rights shall exist with respect to the
election of directors. Each shareholder entitled to vote shall
have the right to vote the number of shares owned, for as many
persons as there are directors to be elected in each class, or to
cumulate such shares and give one nominee the whole number of
such votes, or distribute the votes among any two or more
nominees in each class. For all other purposes, each share is
entitled to one vote. Management of the corporation reserves the
right to instruct the proxy holders to vote cumulatively.
DIRECTORS' MEETINGS AND COMMITTEES
It is the policy of the corporation that the directors of
the corporation also serve as the directors of the bank. During
1997 the board of the corporation met six (6) times and the board
of the bank met twelve (12) times.
The board of the corporation has an audit committee which
consists of the same persons who serve on the audit committee of
the bank. The audit committee of the corporation met during 1997
at the same times and performed the same functions as the audit
committee of the bank described below. The corporation does not
have a nominating committee. The function of a nominating
committee is performed by the full board.
The corporation has an executive compensation committee
whose functions are described in the following text in the executive
compensation report. In 1997 the committee met two (2) times.
<PAGE>
COMMITTEES OF THE BOARD OF THE BANK
The by-laws of the bank provide for an audit committee,
executive committee, and asset quality committee. The bank does
not have a nominating committee. That function is performed by
the full board. The bank does not have a compensation committee,
that function is performed by the executive compensation
committee of the corporation.
The audit committee currently consists of John C. McClatchey,
George A. Conti, Jr., and C. Edward Wible, all directors, appointed
by the board. The committee meets quarterly, or more often as
needed, with the internal auditor and staff to review all controls,
internal procedures and other matters deemed appropriate. The
trust audit committee reviews all controls and procedures of the
trust division and the committees of the trust division. The
committee meets with the bank's independent auditors as it deems
necessary not less often than annually. During 1997 the committee
held four (4) meetings.
The executive committee consists of the chairman, Louis A.
Steiner; the vice chairmen, Gregg E. Hunter and Louis T. Steiner;
and the president, Edwin P. Cover; together with directors
William M. Charley, Dorothy S. Hunter, Roy M. Landers and
Joseph A. Mosso. The committee meets monthly to review long- and
short-term operating plans for the bank and related matters and
prepare recommendations for appropriate board consideration and
action. During 1997 the committee held twelve (12) meetings.
The asset quality committee consists of the chairman,
Louis A. Steiner; the vice chairmen, Gregg E. Hunter and Louis T.
Steiner; the president, Edwin P. Cover, together with directors
Richmond H. Ferguson, Frank E. Jobe and Debra L. Spatola. The
committee meets quarterly to monitor loan and securities
investments to assure conformance with internal policy and all
applicable governmental regulations. During 1997 the committee
held four (4) meetings.
The trust committee and trust investment committee, each
consists of not less than five (5) members appointed by the
chairman of the board. The members of each committee are
chairman, Louis A. Steiner; vice chairman, Louis T. Steiner;
president, Edwin P. Cover; and directors Frank E. Jobe and
George V. Welty; together with Barry A. Morris and Edward J.
Smith advisory board members. Each committee meets monthly,
concurrently, to monitor and review all activities and functions
of the trust division. During 1997 the committees held twelve
(12) meetings.
ATTENDANCE AT MEETINGS
During 1997 all directors at least 75% of the combined total
of meetings of the board of directors and each committee of
which they were a member.
COMPENSATION OF DIRECTORS
Directors of the corporation are not paid a fee. Directors
of the bank are paid a fee of $400 for attendance at meetings of
the board of directors of the bank, and in addition, directors
who are not also officers of the bank are paid $190 for
attendance at monthly meetings and $270 for attendance at
quarterly meetings of the committees of the bank.
<PAGE>
EXECUTIVE COMPENSATION REPORT
To Our Shareholders:
Compensation for the executives of the corporation and its
wholly-owned subsidiary, the bank, is set and paid at the bank
level. The executive compensation committee had the
responsibility and authority to establish executive compensation
for 1997.
The executive compensation committee is composed of three
independent non-employee directors, none of whom are former
officers of the corporation or the bank. The committee is
responsible for setting executive officer salaries and
authorizing executive participation in the employee incentive
programs. The following report describes the actions of the
committee regarding the compensation paid to the executive
officers by the bank during 1997. No compensation was paid by
the corporation to its executive officers.
The bank's executive salary structure is based upon
independent banking industry surveys which focus on banks similar
in size, scope and geographic region to the bank. In addition,
the relative value of each management position to every other
management position is determined by the human resources
department. Using this data, a base salary, midpoint and range
is established for each position. The midpoint serves as a base
salary target for executives performing their jobs competently.
In general, the bank's base salary midpoints are above the median
of relevant competitive institutions. Salary increases are based
on individual performance and actual salary level relative to the
midpoint of the incumbent's salary range.
Salary decisions are based on performance criteria which
include the corporation's earnings over the previous five-year
period and the executive's success in managing risk, optimizing
income, controlling operating costs, improving service quality,
developing management leadership and strengthening the
institution's competitive position. The committee also considers
the extent to which such goals as after-tax income as a
percentage of average total assets, annual total asset growth,
and the capital ratios were met.
The annual performance pay and incentive bonus are dependent
on the bank's performance relative to pre-set financial targets
based on after-tax return on average assets for the year.
Executives also participate in the corporation's employee
profit sharing plan described elsewhere in the proxy statement.
On December 10, 1996, the committee set the 1997
compensation for Louis A. Steiner, chairman and CEO, and Edwin P.
Cover, president and CBO, as shown in this proxy statement. The
compensation reported consists of base salaries and other
compensation paid in 1997 and annual bonuses and profit sharing
earned in 1997 as determined by the bank's 1997 performance.
EXECUTIVE COMPENSATION COMMITTEE
William M. Charley
Joseph A. Mosso
Roy M. Landers
<PAGE>
EXECUTIVE OFFICERS' COMPENSATION
The corporation has not paid compensation of any kind to any
officer of the corporation. All compensation was paid by the
bank, the subsidiary of the corporation.
The following table sets forth certain information regarding
compensation received by each person who served as chief executive
officer during 1997 and the remaining executive officers of the
corporation whose total annual salary and bonus exceeded $100,000
for the period indicated.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
<CAPTION>
Name And Profit
Principal Position Year Salary Bonus Sharing
- ------------------ ----- ------ ----- -------
<S> <C> <C> <C> <C>
LOUIS A. STEINER(1)
Chairman - board of 1997 118,524 5,962 18,642
directors & chief
executive officer of 1996 109,148 5,754 17,234
the corporation and
the bank 1995 96,619 5,748 15,301
LOUIS T. STEINER(1)
Vice chairman and 1997 73,555 4,403 11,634
chief executive
officer of the 1996 56,690 4,008 9,060
corporation and
bank 1995 39,485 3,713 6,464
EDWIN P. COVER
President & chief 1997 169,891 7,105 24,000
banking officer
of the corporation 1996 164,655 6,967 22,500
and the bank
1995 147,136 7,151 22,500
</TABLE>
[FN]
Louis A. Steiner served as chairman and chief executive officer through
period ending November 1, 1997 and continues as chairman; Louis T.
Steiner served as vice chairman and assumed the position of chief
executive officer effective November 1, 1997.
<PAGE>
PERFORMANCE GRAPH
(Graphic material has been omitted from this section. The information
is being presented in tabular form.)
The following graph compares the corporation's cumulative total
shareholder returns with the performance of the Nasdaq Stock Market
Index (U.S. Companies) and with the Nasdaq Bank Stocks Index.
<TABLE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
<CAPTION>
DATE CNFC NASDAQ U.S. CO. NASDAQ BANKS
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 109.08 114.79 114.04
1994 150.24 112.21 113.63
1995 174.34 158.70 169.22
1996 317.15 195.19 223.41
1997 327.73 239.53 377.44
</TABLE>
[FN]
Assumes that the value of the investment in CNFC Common Stock and
each index was $100 on December 31, 1992 and that all dividends were
reinvested.
<PAGE>
PROFIT SHARING PLAN
The Employee Profit Sharing Retirement Plan (the plan) of
the bank was created in 1977 and restated in 1984. The plan
covers all employees who are employed for at least 1,000 hours
per year beginning on the first day of the month after completing
one year of service with the bank. The amount to be contributed
is determined by the board of directors of the bank and is a
percentage of the net profits of the bank. The total amount of
the annual contribution cannot exceed fifteen percent (15%) of
the total eligible compensation paid by the bank to all
participating employees. There are no contributions made by the
participating employees.
The plan provides for the determination of an account for
each participating employee with notice of the amount in that
account to be given to the participating employee annually.
Distributions under the plan can be made to participating
employees upon retirement (either normal or early retirement as
defined in the plan), at death or disability of the participating
employee or upon severing employment if either partially or fully
vested. The plan provides for percentage vesting of twenty
percent (20%) for the first full three years of service increasing
annually thereafter to one hundred percent (100%) vesting after
seven (7) full years of participation. The plan provides rules
in the event it becomes top-heavy. The funds contributed into
the plan by the bank will be administered and invested by and
under the discretion of the trustees (not less than three) who
are appointed by the directors of the bank.
It is not possible to determine the extent of the benefits
which any participant may be entitled to receive under the plan
on the date of termination of employment, since the amount of
such benefits will be dependent, among other things, upon the
future earnings of the bank, the future compensation of the
participants and the future earnings under the plan.
TRANSACTIONS WITH DIRECTORS, NOMINEES, OFFICERS AND ASSOCIATES
In the ordinary course of its banking business, the bank has
and anticipates that it will continue to have transactions with
certain directors and officers of the corporation and the bank
and their associates. To the extent such transactions consisted
of extensions of credit of any material amount, they have been
made in the ordinary course of the bank's business on
substantially the same terms including interest charged and
collateral required as those prevailing at the time for
comparable transactions with other customers of the bank and do
not involve more than the normal risk of collectibility or
present other unfavorable features.
<PAGE>
AUDITORS
Jarrett Stokes & Kelly, now known as Stokes Kelly & Hinds, LLC,
effective January 1, 1998, was selected as the independent auditors
for the corporation for the fiscal year ending December 31, 1997,
and was last elected by the shareholders of the corporation at the
annual meeting held on April 15, 1997. Stokes Kelly & Hinds, LLC
and its predecessor has certified the corporation's financial
statements for the fiscal year ended December 31, 1990 and
all fiscal years subsequent thereto.
The board of directors of the corporation at a meeting held
November 18, 1997 selected Jarrett Stokes & Kelly (now known as
Stokes Kelly & Hinds, LLC) as the independent auditors for the
corporation for 1998. A resolution will be presented at the
annual meeting for the ratification by the shareholders of the
appointment of Stokes Kelly & Hinds, LLC as the independent
auditors for the corporation. The board of directors recommends
the shareholders vote in favor of the resolution.
The accounting fees are paid by the corporation to indpendent
auditors and represent payment for auditing services only.
The auditors render no other type of service to the corporation
or the bank, and no service to any director or principal officer
of the corporation or the bank. There is no agreement to place
any limit on current or future auditors' fees.
A representative of Stokes Kelly & Hinds, LLC will be
present at the annual meeting of shareholders with the
opportunity to make statements and to respond to appropriate
questions from shareholders.
SHAREHOLDER PROPOSALS - ANNUAL MEETING
Any shareholder who, in accordance with and subject to the
provisions of the proxy rules of the Securities and Exchange
Commission, wishes to submit a proposal for inclusion in the
corporation's proxy material for its 1999 annual meeting of
shareholders, must deliver such proposal in writing to the
chairman of the board of Commercial National Financial
Corporation at the office of the corporation, 900 Ligonier
Street, Latrobe, Pennsylvania 15650, not later than November 30,
1998.
OTHER MATTERS
The board of directors and the principal officers of the
corporation do not intend to present to the meeting any business
other than as set forth in the notice of annual meeting and this
proxy statement. The corporation knows of no other business to
be presented for action at the meeting. If, however, any other
business should properly come before the meeting, or any
adjournment thereof, the proxy holders intend to vote shares in
accordance with recommendations of the board of directors of the
corporation.
By Order of the Board of Directors
/s/ Wendy S. Schmucker
Wendy S. Schmucker, Secretary
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000866054
<NAME> COMMERCIAL NATIONAL FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,711,026
<INT-BEARING-DEPOSITS> 130,937
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,267,314
<INVESTMENTS-CARRYING> 64,114,775
<INVESTMENTS-MARKET> 65,691,241
<LOANS> 183,481,157
<ALLOWANCE> 1,882,251
<TOTAL-ASSETS> 319,741,956
<DEPOSITS> 260,689,757
<SHORT-TERM> 17,850,000
<LIABILITIES-OTHER> 2,757,188
<LONG-TERM> 0
0
0
<COMMON> 3,600,000
<OTHER-SE> 34,845,011
<TOTAL-LIABILITIES-AND-EQUITY> 319,741,956
<INTEREST-LOAN> 15,312,410
<INTEREST-INVEST> 6,521,952
<INTEREST-OTHER> 47,530
<INTEREST-TOTAL> 21,881,892
<INTEREST-DEPOSIT> 9,388,643
<INTEREST-EXPENSE> 9,677,138
<INTEREST-INCOME-NET> 12,204,754
<LOAN-LOSSES> 270,000
<SECURITIES-GAINS> 11,561
<EXPENSE-OTHER> 8,063,437
<INCOME-PRETAX> 5,360,386
<INCOME-PRE-EXTRAORDINARY> 4,086,609
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,086,609
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.27
<YIELD-ACTUAL> 8.14
<LOANS-NON> 23,172
<LOANS-PAST> 659,078
<LOANS-TROUBLED> 948,128
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,035,818
<CHARGE-OFFS> 448,308
<RECOVERIES> 24,741
<ALLOWANCE-CLOSE> 1,882,251
<ALLOWANCE-DOMESTIC> 1,882,251
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
