<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, 1998
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, 1999. $49,383,743
Number of shares of common stock outstanding at March 13, 1999. 3,592,508
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to shareholders for
the fiscal year ended December 31, 1998 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 20, 1999 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 has eliminated
over-crowded work offices, organized work groups and provides 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 involve holding the stock
of it subsidiary bank and an insurance partnership to market
insurance products and services.
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 provides our customers with the option of paying
bills through personal computer, screenphone, touchtone phone and
even rotary phone. During 1997, the Commercial National 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.
<PAGE>
In December of 1998, the corporation announced that a new
partnership would be formed with a local independent insurance
agency. The new insurance agency, located in Ligonier, will be
called Commercial National Insurance Services and will provide
a full line of products including commercial and personal property
and casualty insurance, life insurance, long term care, health
insurance and workers compensation. The partnership will be jointly
owned by Gooder & Mary, Inc. and Commercial National Investment
Corporation, a wholly owned subsidiary of the corporation.
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.
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, 1998 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U. S. Treasury securities and other
U. S. Government agencies and
corporations $77,481,622 $81,067,566 $73,477,520
Obligations of states and political
subdivisions 36,454,587 35,619,236 27,928,975
Other securities 2,396,600 1,330,300 933,200
---------- ---------- ----------
Total $116,332,809 $118,017,102 $102,339,695
============ ============ ============
</TABLE>
Loans
- -----
Final loan maturities excluding consumer installment and
mortgage loans and before unearned discount at December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
Within One-Five After
One Year Years Five Years Total
-------- ------ ---------- -----
<S> <C> <C> <C> <C>
Commercial and Industrial $ 9,726 $ 9,677 $ 1,491 $20,894
Real estate-construction 2,441 314 - 2,755
Other 4,287* 599 9,918 $14,805
------- ------ ------ -------
Totals $16,454 $10,590 $11,409 $38,454
======= ====== ======= =======
Loans at fixed interest rates $ 4,355 $ 3,394 $ 7,749
Loans at variable interest rates 6,235 350 6,585
------ ------- -------
$10,590 $ 3,744 $14,354
====== ======= =======
</TABLE>
* Includes $2.2 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, 1998
Loans on non-accrual basis $ 95,032
Loans past due 90 days or more 320,438
Renegotiated loans 572,352
----------
Total $ 987,822
==========
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
==========
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, 1998 the
corporation had no other real estate owned and no in-substance
foreclosures.
Effect of non-accrual loans on interest income during 1998 is as
follows:
Non-accrual
Loans
-------
Gross amount of interest that would have
been recorded at original rates $ 3,280
Less: Interest that was reflected in income -
--------
Net reduction to interest income $ 3,280
========
<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, 1998:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans outstanding at beginning of year,
net of unearned income $183,481,157 $159,935,523 $144,288,002 $139,066,657 $125,575,221
============ ============ ============ ============ ============
Average loans outstanding $186,418,665 $169,849,234 $151,056,637 $142,697,066 $130,041,170
Allowance for loan losses: ============ ============ ============ ============ ============
Balance, beginning of year $ 1,882,251 $ 2,035,818 $ 2,081,700 $ 2,077,553 $ 1,968,014
------------ ------------ ------------ ------------ ------------
Loans charged off:
Commercial, industrial & other 24,306 4,859 - - -
Installment and charge card 377,353 437,003 170,719 97,089 46,873
Real estate 11,208 6,446 3,233 - 40,009
------- ------- ------- ------- -------
Total loans charged off 412,867 448,308 173,952 97,089 86,882
------- ------- ------- ------- -------
Recoveries:
Commercial, industrial & other 300 - - - -
Installment and charge card 9,490 22,669 23,070 10,884 7,637
Real estate - 2,072 - 352 8,784
------- ------- ------ ------- -------
Total recoveries 9,790 24,741 23,070 11,236 16,421
------- ------- ------- ------- -------
Net loans charged off 403,077 423,567 150,882 85,853 70,461
Provision charged to expense 435,000 270,000 105,000 90,000 180,000
------- ------- --------- ------- -------
Balance, end of year $ 1,914,174 $ 1,882,251 $ 2,035,818 $ 2,081,700 $ 2,077,553
============ =========== =========== =========== ===========
Ratios:
Net charge-offs as a percentage
of average loans outstanding .22% .25% .10% .06% .05%
Allowance for loan losses
as a percentage of average loans
outstanding 1.03 1.11 1.35 1.46 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, 1998 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 1998, 1997 and 1996:
<TABLE>
December 31,
1998 1997 1996
<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 $ 37,565,870 - % $ 34,124,049 - % $ 32,920,490 - %
Interest bearing demand 20,709,992 1.69 20,204,634 1.91 18,110,581 1.95
Money market 41,921,741 3.89 42,542,349 4.07 39,754,528 3.79
Savings 45,672,055 2.93 44,871,628 3.09 44,744,695 3.03
Time 112,647,588 5.40 108,744,105 5.41 97,004,511 5.34
------------ ----------- -----------
Total $258,517,246 3.64% $250,486,765 3.75% $232,534,805 3.61%
============ ============ ===========
</TABLE>
Remaining maturities of certificates of deposit $100,000 or more:
<TABLE>
December 31,
1998 1997 1996
<CAPTION>
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Remaining maturity:
3 months or less $16,943,373 57% $12,602,770 40% $ 7,136,310 28%
Over 3 through 6 months 2,965,786 10 4,452,058 14 2,830,951 11
Over 6 months through 12 months 6,109,446 20 2,628,559 8 2,047,722 8
Over 12 months 3,997,620 13 11,796,885 38 13,319,276 53
---------- -- ---------- -- ---------- --
Total $30,016,225 100% $31,480,272 100% $25,334,259 100%
========== ========== ==========
</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. In 1998 the second floor was renovated
to house our credit services department. The first floor 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 subsidiaries is a party which will have any
material effect on the financial position of the corporation
and its subsidiaries.
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 68 Chairman of the board
(1977 to present),
chief executive officer
(1977 to 1997)
Louis T. Steiner 37 President (April 1998 to present),
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 40 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)
Wendy S. Schmucker 30 Secretary/treasurer and vice president,
manager corporate administration
November 1997 to present), assistant
vice president and managing corporate
officer (December 1996 to October 1996),
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 31 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)
Susan F. Robb 24 Assistant secretary (April 1998
to present), corporate administrator
(September 1997 to present), customer
service representative (September 1996
to September 1997)
</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, 1998
on page 20 is incorporated herein by reference in response
to this item. As of March 13, 1999 there were 535
shareholders of record of the registrant's common stock.
The number of beneficial shareholders is approximately 775.
Item 6. Selected Financial Data
-----------------------
Information appearing in the annual report to
shareholders for the fiscal year ended December 31, 1998
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, 1998
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, 1998 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, 1998 and 1997...... 6
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996................................. 7
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996.................. 8
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................. 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 20, 1999 on pages 4 thru 6 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 20, 1999 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 20, 1999 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 20, 1999 on page 14 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, 1998
21 Subsidiaries of the Registrant
22 Commercial National Financial Corporation 1999 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 T. Steiner
------------------------------------------
Louis T. Steiner, Vice Chairman, President
and Chief Executive Officer
March 19, 1999
<PAGE>
EXHIBIT INDEX TABLE OF CONTENTS
Exhibit
Number Description
- ------- ------------
21 Subsidiaries of the Registrant
<PAGE>
Exhibit 21 - Subsidiaries 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
Commercial National Investment Corporation 100%
900 Ligonier Street
Latrobe, PA 15650
<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 16, 1999
- --------------------
Louis A. Steiner, Chairman of the Board and Director
/s/ Louis T. Steiner MARCH 16, 1999
- --------------------
Louis T. Steiner, Vice Chairman of the Board and Director
/s/ Gregg E. Hunter MARCH 16, 1999
- -------------------
Gregg E. Hunter, Vice Chairman of the Board and Director
/s/ Wendy S. Schmucker MARCH 16, 1999
- -------------------------
Wendy S. Schmucker, Secretary/Treasurer
/s/ John T. Babilya MARCH 16, 1999
- --------------------
John T. Babilya, Director
- ------------------------
George A. Conti, Jr., Director
/s/ Richmond H. Ferguson MARCH 16, 1999
- ------------------------
Richmond H. Ferguson, Director
/s/ Dorothy S. Hunter MARCH 16, 1999
- ---------------------
Dorothy S. Hunter, Director
/s/ Frank E. Jobe MARCH 16, 1999
- ------------------
Frank E. Jobe, Director
- ------------------
Roy M. Landers, Director
/s/ John C. McClatchey MARCH 16, 1999
- ----------------------
John C. McClatchey, Director
/s/ Joseph A. Mosso MARCH 16, 1999
- -------------------
Joseph A. Mosso, Director
- ---------------------------
Joedda M. Sampson, Director
/s/ Debra L. Spatola MARCH 16, 1999
- -----------------------
Debra L. Spatola, Director
/s/ George V. Welty MARCH 16, 1999
- -------------------
George V. Welty, Director
/s/ C. Edward Wible MARCH 16, 1999
- -------------------
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 1998 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 1998 ANNUAL REPORT
<PAGE>
(Front cover of the annual report. The corporate logo bearing the graphic of a
bank facade appears centered at the top of the page. Directly under the logo,
Commercial National Financial Corporation appears horizontally. The rest of
the page bears the number 1998 three times in large print and centered.)
<PAGE>
The inside front cover of the annual report is as follows.
Thanks
- -----------------------------------------------------------------
With this issue of the Commercial National Financial Corporation
Annual Report, we salute the Charley family of Greensburg for its
tireless efforts on behalf of our subsidiary, Commercial National
Bank of Westmoreland County.
With the 1998 retirement of William M. Charley from our board of
directors, the Charley family concludes service that has extended
over the past 60 years.
For their legacies to their communities - and for all they've done
for us - we simply say "thank you."
<PAGE>
Our Commitment To Those We Serve
(At this point in the 1998 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. The form has been modified for electronic
filing purposes.)
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 1998 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. Also, a bank facade appears in the
upper left-hand corner of this page and every odd-number page throughout
the rest of the annual report.)
To Our Sharholders
The word "change" is becoming overused in business today, in some
cases blamed for a series of bad actions and in other cases credited
for it part in achieving a celebrated victory. While the uncertainty
of change indeed may cause anxiety in some business organizations, it
also allows a corporation to grow, and growth is precisely what your
company experience last year.
Early in 1998, the corporation's subsidiary, Commercial National Bank
of Westmoreland County, underwent extensive management realignment
detailed elsewhere in this report. The resulting reassignments placed
a renewed importance on providing unparalled service to our customers.
As the bank continued its quest to develop a full sales-and-service
culture (which actually began several years ago with an initial
emphasis on quality customer service), we extended employee training
through the year and allocated significant resources to maintain this
process through 1999 and beyond.
Especially committed to leading the bank in this effort are four
senior managers with responsibility for key divisions in our
service-delivery system. They include...
Martin E. May
Senior Vice President and
Senior Banking Officer
Philip S. Pettina
Senior Vice President and
Senior Manager, Retail Banking
Michael L. Matthews
Vice President and
Senior Manager,
Asset Management and Trust
Keith M.Visconti
Vice President and
Senior Lending Officer
Commercial National became a citizen of the World Wide Web during the
first quarter when the bank's Internet site went live at
www.cnbthebank.com, enabling users anywhere to become familiar with
our locations, services and financial solutions. Site visitors also
can operate a loan calculator that determines monthly payments,
amounts to be borrowed or potential terms of loans when certain
elements are entered.
Since Internet banking is fast becoming an accepted mode of transacting
business via personal computer, Commercial National is reviewing
options to improve its Web site to change its currently proprietary
home-banking PC package into an Internet-compatible format to become
available in 1999.
The corporation generated growth in a new area as the year drew to a close.
Since its inception in 1990, Commercial National Financial Corporation
has existed with only one owned company - Commercial National Bank of
Westmoreland County.
In December, though, a second subsidiary was formed with the creation
of Commercial National Investment Corporation. This wholly owned
company, in turn, is a 50-percent owner of the newly formed Commercial
National Insurance Services, which will offer a full array of insurance
products and services to the consumer and commercial markets alike.
The new agency resulted from a year of discussion among several potential
partners with the Gooder Agency, Inc., of Ligonier emerging as the
selected provider. Now with the insurance-service arm in place,
Commercial National is ready to offer another important piece of the
financial mix that provides one-stop shopping for busy customers
looking for convenience in every transaction.
Also recognizing its responsibility to shareholders, the corporation
engaged in two capital-management programs in 1998. The first element
increased the dividend twice during the year, once in the first
quarter and again in the third, enabling us to reward shareholders
with additional earnings on their investments as a result of the
company's strong growth.
Then in November, the corporation announced a two-for-one stock split
and the commencement of a stock buy-back program. The repurchase plan
allows the corporation to secure shares on the open market to afford
ongoing liquidity for shareholders, provide price support during
volatile market conditions and accumulate shares for later corporate
purposes.
During 1998 the board of directors also experienced a transition. Two
directors, William M. Charley and Edwin P. Cover, announced their
retirements. In December, the board elected John T. Babilya of West
Newton and Joedda M. Sampson of Pittsburgh to fill the vacancies.
Even with such growth, achieved through these various initiatives and
the corporate reorganization, we were not distracted from our daily
operations. In the pages that follow, you'll see how Commercial
National produced record earnings for the third consecutive year with
net income improving by more than 13.5% to more than $4.6 million.
As a final challenge facing us in 1999, we like every company in the
world, are preparing to deal successfully with the "Year 2000 Problem."
For the past two years, a group of Commercial National employees have
expended significant time and energy (in addition to managing their
day-to-day responsibilities) to inventory, review and test the
multitude of systems to ensure that your investment and our customers'
money will remain safe.
Michael J. Palko, our vice president and director of technology, is
leading this monumental effort. He joined the bank in February 1998
after more than 20 years with Allegheny Energy. Even before his
employment here Mike worked 14 months on Year 2000 solutions as a
consultant, so his experience in dealing with the issue is of great
value to us.
We are pleased to report that all of our testing to date has confirmed
that we are well prepared for the arrival of the Year 2000. We do not
expect any "system surprises" and are confident that we can continue
to conduct "business as usual" come January 1.
Be assured that even beyond our own diligent efforts to avoid any
disruption of service, our primary federal regulator, the Office
of the Comptroller of the Currency, is reveiwing our progress as
well as the work being done at all financial institutions in its
jurisdiction.
At Commercial National, the challenges of 1998 have provided opportunity
for growth. We appreciate your continued support and confidence as
we prepare to meet those of the future with similar dispatch.
/s/ Louis T. Steiner
Louis T. Steiner
Vice Chairman,
President and
Chief Executive Officer
<PAGE>
Highlights of 1998
(At this point in the 1998 annual report, the following sentence appears in
large print at the top of the left column to start off the highlights of 1998.)
Maintaining focus
during a time
of rapid growth
is a difficult challenge
in any business...
... but it's a challenge that was met well as 1998 unfolded at Commercial
National Financial Corporation.
The corporation achieved record earnings for the year, even in the
face of major developments that easily could have distracted managers
in other businesses.
During 1998, the company...
- - re-crafted its senior management team
with a significant realignment,
- - advanced its program of technology with
an eye to the future, and
- - set the stage for further expanding its
serive offerings,
WE CALLED UPON PEOPLE TO ASSUME
NEW AND GREATER RESPONSIBILITIES.
Providing quality financial service to customers requires that
the best people provide the best service. At Commercial National,
we believe we have those people and we believe they are able to
meet nearly any challenge as it arises. Throughout 1998, we had
opportunities to see that belief many times over.
In April, Louis T. Steiner, who already held the posts of vice
chairman and chief executive officer, assumed the additional
position and duties of president of both entities when Edwim P.
Cover announced his retirement after serving more than 11 years.
In conjunction with that occurrence, several other changes were
made to subsequently assign new responsibilities to key managers
so that business continued as usual.
- Martin E. May, who had served for a time as vice president
and senior lender, was promoted to senior vice president,
and later in the year assumed additional responsibility
as senior banking officer.
- Philip S. Pettina, senior vice president, moved into the
position of senior manager of retail banking during the
third quarter after most recently serving as director of
support services. He brought to the post more than 20
years of retail banking and administrative experience.
Several other staff adjustments were made during the year to
keep ahead of the constantly growing demand for service.
- Michael J. Palko
joined the company as vice president and director of
technology in February.
- William J. Johnston
joined the company as assistant vice president and business
development officer for the Murrysville market in June.
- Donna J. Daugherty
business development officer, was appointed assistant vice
president in July.
- Thomas E. Sylvester
Ligonier community office manager, was appointed assistant
vice president in July.
- Rebecca J. Weiner
manager of Management Information Systems, was promoted to
assistant vice president in October.
During 1998, a number of other employees were recognized with
awards for their specific efforts to improve our performance. At
our Employees' Annual Meeting in May, the company presented its
1998 Chairman's Award to ...
- Michael L. Matthews
Vice President
Asset Management and Trust Division
... for generating substanitial new revenue in the division and
for evaluating service providers for a new product offering.
At the same meeting, the bank's President's Award was conferred
upon ...
- Thomas D. Watters
Vice President, Chief Auditor
... for research into an accounting entry that resulted in
substantial income to the company,
- Rebecca J. Weiner
Assistant Vice President
Management Information Systems
... for continued support to front-line staff which resulted in an
improved customer service,
... and to
- the entire Management Information Systems staff
... for its efforts at maintaining information services during a
major staff changeover in the department.
Finally, our board of directors also experienced growth with the
addition of two new members after the retirements of Edwin P. Cover
and William M. Charley. Mr. Cover's retiement from the board was
announced concurrently with his retirement as president from both
the corporation and the bank. Mr. Charley retired from the board
after nearly 30 years of service, having continued a family
tradition that originated with his father and then was maintained
by both him and his brother.
Named to fill the board vacancies beginning in 1999 were John T.
Babilya, president of Arc Weld Inc., a West Newton business, and
Joedda M. Sampson, president Allegheny City Restorations, a
Pittsburgh-area development firm.
GROWTH OF THE BUSINESS MEANT
GOOD NEWS FOR SHAREHOLDERS.
By carefully managing growth of the corporation over the year,
record levels of income were generated as a result of a number
of strategically implemented initiatives.
Higher net interest income, control of net operating expense
(At this point in the 1998 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>
1994 $ 8.92
1995 $10.07
1996 $18.00
1997 $18.25
1998 $19.88
</TABLE>
(At this point in the 1998 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.)
and effective tax management all combined to yield record earnings
for the year, in spite of an increase required for the loan-loss
provision of the corporation. The year-end price of Commercial
National stock apprecitated nearly 9 percent
(At this point, the text reverts back to using the full column width.)
in value from the $18.25 in 1997 to $19.88 at the end of 1998. The
per-share prices are based on 3.6 million shares outstanding after
a two-for-one stock split on 1.8 million shares that became effective
(At this point in the 1998 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>
1994 $0.27
1995 $0.28
1996 $0.31
1997 $0.35
1998 $0.42
</TABLE>
<TABLE>
<CAPTION>
Deposit Base Growth
<S> <C>
1994 $219,561
1995 $230,736
1996 $238,808
1997 $260,690
1998 $266,461
</TABLE>
(At this point in the 1998 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.)
December 31.
The dividend payout on shares owned by investors showed even greater
improvement, increasing by nearly 20 percent from $0.35 per share to
$0.42 per share in 1998, also adjusted for calculation on 3.6 million
shares.
Deposits grew only slightly during the year from $260.7 million in
1997 to $266.4 million by the end of 1998.
Principally responsible for the lack of growth in interest-bearing
deposit categories were a general decline in market interest rates
and obvious customer preferences for other, sometimes more risky,
investments with non-traditional finanicial-services providers.
<PAGE>
(At this point, the text reverts back to full column width.)
Growth in both non-interest-bearing checking volumes and savings
accounts was better than anticipated, which helped offset the
shortfall experienced in most interest-bearing accounts.
At year-end, plans were set for an aggressive service-training
program to be implemented as 1999 begins. The campaign will provide
all of our customer-service employees with additional skills that
will enable them to uncover and satisfy the diverse customer needs
that are emerging in today's financial marketplace.
The Commercial National loan portfolio grew in 1998 by nearly
(At this point in the 1998 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>
1994 $139,367
1995 $144,523
1996 $160,048
1997 $183,639
1998 $192,239
</TABLE>
(At this point in the 1998 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.)
5 percent to $192.2 million from $183.6 million a year ago. Accounting
for most of that improvement was the commercial-mortgage segment,
which realized a 17 percent improvement from a year ago, increasing
by $7.8 million in spite of
(At this point in the 1998 annual report, the text appears back to full
three-column format.)
very tight pricing that resulted from intense competition in the
marketplace.
Commercial loans grew by nearly 10 percent or $1.8 million, and
municipal loans grew by more than 12 percent or $0.4 million.
Volumes in all other loan types - personal, residential mortgage
and credit cards - stayed relatively even or became slightly smaller.
Loan-loss provision costs stabilized in the second half of the
year as the company de-emphasized activity in products prone to
high loss (such as credit cards and and dealer used-auto financing)
and re-emphasized more credit-worthy products such as commercial,
home-equity, tax-free municipal and residential mortgage loans.
To overcome the general sluggishness in loan activity, the
company conducted special mortgage-sales training and implemented
a more structured retail and commercial officer-calling program
to comprehensively canvas the market area for additional business
prospects.
Total interest income for the year rose to $23.6 million from
$21.8 million a year ago, an improvement of more than 8 percent.
At the same time, however, interest expense also increased by a
corresponding 7 percent, growing by $0.6 million from the year
before.
Additional income was generated during the year through non-
interest sources such as ...
- service-charge income and fees, which
(At this point in the 1998 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>
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
1998 $23,667 $10,318 $13,349
</TABLE>
(At this point, the text reverts back to full-column width.)
grew by $160,000, and
- trust and asset-management revenues,
which improved by more than $75,000.
In 1999, we believe that even more income can be generated through
an affiliation developed between the Gooder Agency, Inc., of Ligonier
and a new subsidiary, Commercial National Investment Corporation,
together which formed Commercial National Insurance Services. The
extension of insurance service to our customer base is a logical
move that will provide our clients with even more comprehensive
"one-stop" financial service.
Efforts to contain non-interest expenses included the elimination
of a number of large, unproductive operating expenditures, a move
that limited the increase in that category to just under 6 percent.
(At this point in the 1998 annual report, there appears a bar graph occupying
two-thirds space of the middle column as set out in the following table.)
<TABLE>
<CAPTION>
Post Tax Return On Average Assets
<S> <C>
1994 1.42%
1995 1.43%
1996 1.39%
1997 1.39%
1998 1.46%
</TABLE>
(At this point in 1998 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.)
With earnings for the year reaching a record level, the post-tax return
on average assets grew to 1.46 percent from the 1.39 percent return
posted for both of the preceeding two years. Total assets of the
corporation grew to $326 million at the end of 1998 from $319 million
in the year
(At this point in the 1998 annual report, the text goes back to full-column
width.)
prior, marking a 2 percent improvement.
WE TOOK STEPS TO BE SURE OUR SERVICE
KEPT UP WITH THE PACE OF TECHNOLOGY
After establishing a presence on the World Wide Web at
www.cnbthebank.com in February, Commercial National took a major
step toward the future to prepare for true Internet banking.
As 1999 develops, we expect to complete that process so that our
current proprietary PC-based banking program will become available
in an improved version on the Web, enabling customers to access
their banking information from any Internet-connected computer
anywhere.
Sometimes just keeping up with technology is a challenge, too,
as experienced by so many businesses working toward "Year 2000"
compliance. For more than a year, Commercial National has been
at work adjusting and testing systems to be sure that its service
will be delivered as efficiently on January 1, 2000, as it is on
December 31, 1999, Our "Year 2000 Committee" includes key
employees who have the knowledge and ability and have committed
the time to make it happen.
In addition to its own preparedness for the "Year 2000" event,
the corporation took steps to be sure its customers and community
members were prepared as well. Special videotape educational
packages were distributed to commercial-loan customers, and the
company coordinated a workshop hosted by the Latrobe Area
Chamber of Commerce to address the issue with local businesses.
AS THE CORPORATION GREW, SO
GREW THE COMMUNITIES WE SERVE
Commercial National long has recognized the value of its corporate
participation in communities where it does business. During 1998, we
worked hard to be sure those communities were better places to live,
too.
Recognizing the reliance many of us have on non-profit agencies
in the area, Commercial National in September distributed to more
than 90 civic and charitable groups nearly $100,000 in contributions
and pledges for in-kind service. Representatives from agencies in
Greensburg, Hempfield Township, Latrobe, Ligonier, Ligonier Township,
Unity Township, Murrysville and West Newton received the contributions
as the company's investment in the future vitality of those places
where we live and work.
In the face of so many bank mergers and acquisitions - many of them
"community banks" with which we competed for years - we continue
to believe that our independence as a locally owned and locally
operated company provides a distinct advantage not found at many
other financial institutions. When larger, far-away companies acquire
them, the ties those institutions have in the communities they
serve are diminished.
As the future unfolds at Commercial National, we expect to renew our
efforts to use the best people to provide the best service on the
best products available in the marketplace.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------
Cash and due from banks on demand $ 7,655,963 $ 9,711,026
Interest bearing deposits with banks 67,935 130,937
Securities available for sale 119,103,480 54,267,314
Securities held to maturity, market value of
$65,691,241 - 64,114,775
Loans 192,239,249 183,639,085
Unearned income (124,089) (157,928)
Allowance for loan losses (1,914,174) (1,882,251)
----------------------------
Net loans 190,200,986 181,598,906
----------------------------
Premises and equipment 6,027,496 5,990,786
Accrued interest receivable 2,210,909 2,445,164
Other assets 1,112,584 1,483,048
- -------------------------------------------------------------------------------
Total Assets $ 326,379,353 $ 319,741,956
============ ============
LIABILITIES
- -------------------------------------------------------------------------------
Deposits
Non-interest-bearing $ 44,518,765 $ 35,968,693
Interest-bearing 221,941,756 224,721,064
----------------------------
Total deposits 266,460,521 260,689,757
Short-term borrowings 3,775,000 17,850,000
Other liabilities 2,982,183 2,757,188
Long-term borrowings 10,000,000 -
- -------------------------------------------------------------------------------
Total liabilities 283,217,704 281,296,945
----------------------------
Shareholders' Equity
- -------------------------------------------------------------------------------
Common stock, par value $2; 10,000,000 shares authorized;
3,600,000 issued and outstanding in 1998;
1,800,000 issued and outstanding in 1997 7,200,000 3,600,000
Retained earnings 34,133,006 34,604,120
Accumulated other comprehensive income -
net of deferred taxes $942,028 and
$124,096 in 1998 and 1997 1,828,643 240,891
-----------------------------
Total shareholders' equity 43,161,649 38,445,011
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 326,379,353 $ 319,741,956
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Consolidated Statements of Income
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
<S> <C> <C> <C>
Interest Income
- -----------------------------------------------------------------------------
Interest and fees on loans $16,755,493 $15,312,410 $13,549,080
Interest and dividends on securities:
Taxable 4,967,679 4,827,530 4,914,451
Exempt from federal income taxes 1,894,515 1,694,422 1,391,106
Interest on deposits with banks 7,858 7,167 6,252
Interest on federal funds sold 41,547 40,363 86,678
- -----------------------------------------------------------------------------
Total interest income 23,667,092 21,881,892 19,947,567
Interest Expense 10,318,581 9,677,138 8,445,126
- -----------------------------------------------------------------------------
Net Interest Income 13,348,511 12,204,754 11,502,441
Provision for Loan Losses 435,000 270,000 105,000
- -----------------------------------------------------------------------------
Net interest income after provision
for loan losses 12,913,511 11,934,754 11,397,441
Other Operating Income
- -----------------------------------------------------------------------------
Service charges on deposit accounts 584,783 572,124 511,418
Other service charges and fees 530,530 382,332 287,694
Net security gains 10,113 11,561 577
Trust department income 240,418 164,430 89,274
Other income 367,246 358,622 367,227
- -----------------------------------------------------------------------------
Total other operating income 1,733,090 1,489,069 1,256,190
-----------------------------------
Other Operating Expenses
- -----------------------------------------------------------------------------
Salaries and employee benefits 4,883,607 4,664,107 4,231,494
Net occupancy expense 604,730 543,407 492,414
Furniture and equipment expense 601,934 617,402 616,663
Pennsylvania shares tax 306,602 278,192 255,161
Other expenses 2,143,771 1,960,329 2,048,844
- -----------------------------------------------------------------------------
Total other operating expenses 8,540,644 8,063,437 7,644,576
-----------------------------------
Income Before Income Taxes 6,105,957 5,360,386 5,009,055
-----------------------------------
Income Tax Expense 1,465,071 1,273,777 1,252,589
- -----------------------------------------------------------------------------
Net Income $ 4,640,886 $ 4,086,609 $ 3,756,466
=========== =========== ===========
Net Income Per Common Share $ 1.29 $ 1.14 $ 1.04
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - January 1, 1996 $ 3,600,000 $ 29,143,045 $ 293,425 $33,036,470
COMPREHENSIVE INCOME
Net income - 3,756,466 - 3,756,466
Other comprehensive income, net
of tax:
Unrealized losses on securities
of ($282,301), net of reclassification
adjustment for gains included in net
income of ($381) - - (282,682) (282,682)
----------
TOTAL COMPREHENSIVE INCOME 3,473,784
Cash dividends declared
$.31 per share - (1,122,000) - (1,122,000)
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 3,600,000 31,777,511 10,743 35,388,254
COMPREHENSIVE INCOME
Net income - 4,086,609 - 4,086,609
Other comprehensive income, net
of tax:
Unrealized gains on securities
of $237,778, net of reclassification
adjustment for gains included in net
income of ($7,630) - - 230,148 230,148
-----------
TOTAL COMPREHENSIVE INCOME 4,316,757
Cash dividends declared
$.35 per share - (1,260,000) - (1,260,000)
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 3,600,000 34,604,120 240,891 38,445,011
COMPREHENSIVE INCOME
Net income - 4,640,886 - 4,640,886
Other comprehensive income, net
of tax:
Unrealized gains on securities
of $1,594,427, net of reclassification
adjustment for gains included in net
income of ($6,675) - - 1,587,752 1,587,752
----------
TOTAL COMPREHENSIVE INCOME 6,228,638
Stock split in the form of a dividend 3,600,000 (3,600,000) - -
Cash dividends declared
$.42 per share - (1,512,000) - (1,512,000)
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $7,200,000 $34,133,006 $1,828,643 $43,161,649
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 4,640,886 $ 4,086,609 $ 3,756,466
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 604,772 593,862 591,288
Loss on sale of other real estate - 6,446 -
Provision for loan losses 435,000 270,000 105,000
Net amortization of securities
and loan fees 202,283 153,615 158,210
Net security gains (10,113) (11,561) (577)
(Increase) decrease in interest receivable 234,255 (300,441) 5,482
Increase in interest payable 52,939 198,258 63,088
Increase in taxes payable 23,409 3,591 -
Increase (decrease) in taxes receivable - 98,177 (90,286)
Deferred tax expense 17,176 115,735 52,019
Increase (decrease) in other liabilities (130,976) 41,140 47,875
Increase in other assets (185,021) (174,276) (167,122)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,884,610 5,081,155 4,521,443
- -----------------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in deposits with other banks 63,002 22,730 (71,016)
Decrease in federal funds sold - - 5,425,000
Purchases of securities available for sale (25,334,138) (34,966,171) (10,768,047)
Purchases of securities held to maturity (1,966,778) (11,702,873) (25,142,595)
Maturities and calls of securities
available for sale 7,654,065 12,311,659 14,094,084
Proceeds from sales of securities
available for sale 8,996,484 6,488,260 16,651,647
Maturities and calls of securities
held to maturity 12,175,000 12,095,000 5,809,060
Net increase in loans (9,069,590) (24,014,417) (16,177,469)
Proceeds from the sale of other real estate - 266,473 -
Purchases of premises and equipment (641,482) (1,782,183) (1,403,102)
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (8,123,437) (41,281,522) (11,582,438)
- -----------------------------------------------------------------------------------------------
Financing Activities
Net increase in deposits 5,770,764 21,881,686 8,071,760
Net increase (decrease) in short-term borrowings (14,075,000) 16,450,000 1,400,000
Proceeds from long-term borrowings 10,000,000 - -
Dividends paid (1,512,000) (1,260,000) (1,122,000)
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 183,764 37,071,686 8,349,760
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,055,063) 871,319 1,288,765
Cash and cash equivalents at beginning of year 9,711,026 8,839,707 7,550,942
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,655,963 $ 9,711,026 $ 8,839,707
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 10,371,521 $ 9,478,881 $ 8,382,038
============ ============ ============
Taxes $ 1,423,900 $ 1,172,800 $ 1,294,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997, and 1996
- -----------------------------------------------------------
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 subsidiaries, Commercial
National Bank of Westmoreland County (the bank) and Commercial
National Investment Corporation. 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 its subsidiaries 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, 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, 1997 and 1996, have been reclassified to
conform with the December 31, 1998 presentation. None of these
reclassifications affected net income.
Securities
Debt securities that the corporation has the positive intent
and ability to hold to maturity are classified as securities held
to maturity and are reported at amortized cost. Debt and equity
securities not classified as held to maturity securities are
classified as securities available for sale and 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 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.
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.
<PAGE>
(At this point in the 1998 annual report the page is still in three
column format with the first column being in full text and the second
and third columns having text occupy about a fourth of the page. The
remaining space in the second and third columns consists of a table
that will be identified later on this page.)
Earnings per Share:
Earnings per share have been calculated on the weighted average
number of shares outstanding of 3,600,000 shares in 1998, 1997
and 1996. The weighted average number of shares outstanding has
been adjusted for the effect of a two-for-one stock split
effected in the form of a stock dividend more fully described in
Note 13.
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.
Comprehensive Income
As of January 1, 1998, the bank adopted Statement 130, Reporting
Comprehensive Income. Statement 130 established new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the
corporation's net income or shareholder's equity. Statement 130
requires unrealized gains or losses on the corporation's available
for sale securities, which prior to adoption were reported
separately in shareholder's equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement of 130.
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, 1998 and 1997 was $2,675,000 and $2,121,000,
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, 1998
U.S. Treasury securities $15,577,778 $ 156,617 $ - $ 15,734,395
Obligations of U.S. Government
corporations and agencies 61,903,845 700,251 (2,855) 62,601,241
Obligations of states and
political subdivisions 36,454,587 1,916,896 (239) 38,371,244
Other securities 2,396,600 - - 2,396,600
- -----------------------------------------------------------------------------------
$116,332,810 $2,773,764 $ (3,094) $119,103,480
=========== ========== ========== ============
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
=========== ========== ========== ===========
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiaries
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
=========== ========== ========== ===========
</TABLE>
(At this point in the 1998 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, 1998, 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
for Sale
- --------------------------------------------------------------------------
<CAPTION>
Amortized Estimated
Cost Market Value
- --------------------------------------------------------------------------
<S> <C> <C>
Due within 1 year $ 15,468,716 $ 15,587,310
Due after 1 but within 5 years 35,918,147 37,018,769
Due after 5 but within 10 years 29,275,508 30,569,448
Due after 10 years 33,273,839 33,531,353
Equity securities 2,396,600 2,396,600
- --------------------------------------------------------------------------
$116,332,810 $119,103,480
============ ============
</TABLE>
(The following test reverts back to the one-column format measuring
two columns wide.)
Securities with amortized cost and market values, respectively,
of $11,798,395 and $12,210,441 at December 31, 1998 and $13,883,365
and $14,183,281 at December 31, 1997, were pledged to secure
public deposits and for other purposes required or permitted by
law.
Proceeds from sales and calls of securities were $17,361,371,
$13,608,361 and $20,730,381 during 1998, 1997 and 1996,
respectively. Gross gains of $17,915, $20,187 and $52,137 and
gross losses of $7,802, $8,626 and $51,560 were realized on those
sales and calls during 1998, 1997 and 1996, respectively.
(At this point in the 1998 annual report. the text is in one-column
format starting with the third column.)
Other securities consist of Federal Reserve Bank stock, an
equity security, with book and market values of $108,000 at
December 31, 1998 and 1997 and Federal Home Loan Bank stock, an
equity security, with book and market values of $2,276,100 and
$1,222,300 at December 31, 1998 and 1997, respectively. Also included
in other securities is an investment in Commercial National Insurance
Services, with book and market values of $12,500 at December 31, 1998.
The corporation did not hold any derivative financial
instruments such as futures, forwards, swap or option contracts
at December 31, 1998 or December 31, 1997. Also included in the
investment portfolio are mortgage-backed securities amounting to
$41,303,841 in 1998 and $20,579,009 in 1997 which are subject to
prepayment risk as a result of interest rate fluctuations.
In September 1998, the corporation transferred securities from the
held to maturity classification to the available for sale
classification. The transfer was done to enable the corporation to
better manage the interest rate risk associated with the investment
portfolio. The amortized cost and market values of these securities
as of the date of transfer was $53,889,490 and $55,506,850,
respectivley.
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 1998 annual report, a table appears measuring
two columns wide starting with the second column.)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross change in unrealized gain (loss)
on securities available for sale $2,405,684 $ 348,711 $ (428,308)
Deferred taxes 817,932 118,563 (145,626)
- -------------------------------------------------------------------------------
Net change in unrealized gain (loss)
on securities available for sale $1,587,752 $ 230,148 $ (282,682)
========== ========== ===========
</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,
--------------------------
1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Commercial loans $ 20,893,911 $ 19,052,486
Real estate loans - commercial 52,165,384 44,289,723
Real estate loans - construction 2,754,964 3,510,809
Real estate loans - other 96,210,304 95,570,632
Installment loans 5,388,246 6,219,577
Municipal loans 3,757,563 3,340,405
Other loans 11,068,877 11,655,453
- ------------------------------------------------------------------
$192,239,249 $183,639,085
============ ============
</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>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, $1,882,251 $ 2,035,818 $ 2,081,700
- ----------------------------------------------------------------------------------
Losses charged against allowance (412,867) (448,308) (173,952)
Recoveries on previously charged-off loans 9,790 24,741 23,070
Provision charged to operating expense 435,000 270,000 105,000
- ----------------------------------------------------------------------------------
Balance at December 31, $1,914,174 $ 1,882,251 $ 2,035,818
========== =========== ===========
</TABLE>
(At this point the following text is in three-column format occupying the
first column.)
Impairment of loans having recorded investments of $3,838,099
and $2,488,585 at December 31, 1998 and 1997, respectively,
has been recognized in conformity with FAS 114 as amended by
FAS 118. The average recorded investment in impaired loans during
1998, 1997 and 1996 was $4,595,916, $3,231,563 and $3,738,895,
respectively. The total allowance for loan losses related to these
loans was $331,642 and $256,826 at December 31, 1998 and 1997,
respectively. Interest income on impaired loans of $429,512,
$258,241 and $249,676 was recognized for cash payments received in
1998, 1997 and 1996, 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,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit $44,315,527 $42,603,755
Standby letters of credit $ 2,768,940 $ 2,923,379
Financial standby letters of credit $ 4,541,531 $ 4,442,424
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiaries
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 $604,772 in 1998, and $593,862 in 1997.
The composition of premises and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Premises $6,101,386 $5,827,969
Leasehold improvements 214,866 214,866
Furniture and equipment 5,443,402 5,127,110
- ----------------------------------------------------------------
11,759,654 11,169,945
Less accumulated depreciation
and amortization 6,558,389 5,953,617
- ----------------------------------------------------------------
5,201,265 5,216,328
Land 826,231 774,458
- ----------------------------------------------------------------
$6,027,496 $5,990,786
========= =========
</TABLE>
8. Interest-Bearing Deposits
Interest bearing deposits include certificates of deposit issued in
denominations of $100,000 or more which amounted to $30,016,225 and
$31,480,272 at December 31, 1998 and 1997. Interest expense related to
certificates of $100,000 or greater was $1,587,148, $1,577,237 and
$1,213,126, for the years ended December 31, 1998, 1997 and 1996,
respectively.
Interest bearing deposits at December 31, are detailed as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 45,622,724 $ 44,637,868
NOW accounts 12,598,378 12,644,010
Money Market NOW accounts 8,811,086 9,324,094
FIMM accounts 42,210,709 43,085,563
Time deposits 112,698,859 115,029,529
- ---------------------------------------------------------------------
$221,941,756 $224,721,064
=========== ===========
</TABLE>
Included in time deposits at December 31, 1998 were certificates of deposit
with the following scheduled maturities:
1998 $ 81,327,417
1999 20,719,584
2000 5,091,559
2001 2,449,972
2002 and thereafter 3,110,327
------------
$112,698,859
============
(At this point in the 1998 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>
1998 1997
- ----------------------------------------------------------------------------------------------
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased $ 1,775,000 $ 2,397,534 5.60% $ 6,850,000 $1,371,233 5.68%
Borrowings from
Federal Home Loan Bank 2,000,000 8,578,753 5.76% 11,000,000 3,447,945 6.11%
- ----------------------------------------------------------------------------------------------
$ 3,775,000 $10,976,287 5.72% $17,850,000 $4,819,178 5.99%
==============================================================================================
Maximum total at any
month-end $20,450,000 $17,850,000
=========== ===========
</TABLE>
At December 31, 1998 the corporation had approved but unused borrowing
with the Federal Home Loan Bank of $10,000,000.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
(At this point in the 1998 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:
1998 1997 1996
- ---------------------------------------------------------------------------
Federal funds purchased $134,332 $ 77,888 $51,016
Borrowings from Federal Home Loan Bank 493,784 210,607 -
- ---------------------------------------------------------------------------
Total interest on short-term borrowings $628,116 $288,495 $51,016
===========================================================================
10. Long-Term Borrowings
Long-term borrowings at December 31, 1998, follows:
Amount Rate
------ ----
Borrowings from FHLB
due January 30, 2001 $ 5,000,000.00 5.70%
Borrowings from FHLB
due November 25, 2005 $ 5,000,000.00 4.82%
-------------- ------
$10,000,000.00
==============
The corporation pays interest monthly on these advances, with
principal due at maturity. FHLB advances due January 30, 2001
are at a fixed rate. Advances due November 25, 2005 can be
repriced quarterly after November 24, 2001, at that time, if
the interest rate increases, the corporation will have the
option to repay the advance without incurring a prepayment
penalty.
11. 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 $506,572, $520,978 and $474,692 for the
years ended December 31, 1998, 1997 and 1996.
12. Income Taxes
The balance sheets include approximately ($279,623) and $555,486 of net
deferred tax asset (liability) at December 31, 1998 and 1997, respectively.
The components of the net deferred tax asset (liability) at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Allowancee for loan losses $ 492,014 $ 481,160
Accrued benefits 180,263 194,035
Deferred loan fees 42,190 53,695
Premises and equipment 1,161 2,195
- ------------------------------------------------------------------
Total deferred tax assets 715,628 731,089
Securities accretion 53,223 51,507
Unrealized gain on securities
available for sale 942,028 124,096
- ------------------------------------------------------------------
Total deferred tax liabilities 995,251 175,603
- ------------------------------------------------------------------
Net deferred tax asset ($279,623) $555,486
========= ========
</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>
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rates $2,076,611 $1,822,531 $1,703,079
Increase (decrease) resulting from:
Non-taxable interest and dividend income (700,181) (626,324) (516,972)
Non-deductible interest expense 89,263 79,904 61,313
Other (622) (2,334) 5,169
- -----------------------------------------------------------------------------------
Total tax provision $1,465,071 $1,273,777 $1,252,589
========= ========= =========
</TABLE>
(At this point, the text reverts back to the three-column format beginning in
third column.)
13. Stock Split
On November 17, 1998, the Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend to shareholders of
record on December 15, 1998. 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.
14. Fair Value of Financial Instruments
Below are various estimated fair values at December 31, 1998 and 1997, 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 on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
<PAGE>
Commercial National Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------------
(At this point in the 1998 annual report, the following text and table
is in three-column format occupying the about two-thirds of the first
and second columns.)
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.
LONG-TERM BORROWINGS: Fair values of fixed rate borrowings are estimated by
discounting the future cash flows using the corporation's estimated incremental
borrowing rate for similar types of borrowing arrangements.
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short term investments $ 7,723,899 $ 7,723,899 $ 9,841,963 $ 9,841,963
Securities available for sale 119,103,480 119,103,480 54,267,314 54,267,314
Securities held to maturity - - 64,114,775 65,691,241
Loans, net of reserve 190,200,986 196,094,171 181,598,906 188,390,805
Accrued interest receivable 2,210,909 2,210,909 2,445,164 2,445,164
Financial liabilities
Deposits $266,460,521 $268,140,263 $260,689,757 $261,978,797
Short-term borrowings 3,775,000 3,775,000 17,850,000 17,850,000
Accrued interest payable 1,287,472 1,287,472 1,340,412 1,340,412
Long-term borrowings 10,000,000 10,068,773 - -
- ----------------------------------------------------------------------------------------------------
</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.)
15. 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 1998. 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
$941,275 and $631,928 at December 31, 1998 and 1997.
The following is an analysis of loans to those parties whose loan
balances exceeded $60,000 for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------
<S> <C>
Balances at January 31, $ 527,254 $1,055,482
Advances 730,758 144,516
Repayments (516,355) (672,744)
- --------------------------------------------------------------------------
Balances at December 31, $ 741,657 $ 527,524
=========== ===========
</TABLE>
(At this point the following text is back to three-column format
beginning at the third column.)
16. 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), and of Tier I Capital
(as defined). Management believes, as of December 31, 1998, that the
corporation and the bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1998, the most recent notification from the
regulatory agencies categorized the bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized the 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, 1998:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Commercial National Financial Corp. $43,247,180 23.1% $15,007,898 >8.0%
Commercial National Bank 43,258,545 23.1% 15,006,498 >8.0% 18,758,122 >10.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (To Risk Weighted Assets)
Commercial National Financial Corp. 41,333,006 22.0% 7,503,949 >4.0%
Commercial National Bank 41,344,371 22.0% 7,503,249 >4.0% 11,254,873 >6.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to Average Assets)
Commercial National Financial Corp. 41,333,006 12.8% 12,950,394 >4.0%
Commercial National Bank 41,344,371 12.8% 12,950,262 >4.0% 16,187,827 >5.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Commercial National Financial Corp. $40,086,371 21.7% $14,779,213 >8.0%
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. 38,204,120 20.7% 7,389,606 >4.0%
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. 38,204,120 12.4% 12,345,867 >4.0%
Commercial National Bank 38,188,502 12.4% 12,346,264 >4.0% 15,432,830 >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
$11,350,350 at December 31, 1998. 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>
17. Condensed Financial Information fo Commercial National Financial Corporation
(Parent Only)
<TABLE>
Balance Sheets
- -----------------------------------------------------------------------
<CAPTION>
December 31,
1998 1997
----------------------------
<S> <C> <C>
Assets:
Cash $ 6,441 $ 62,524
Investment in subsidiaries 43,193,014 38,429,394
- -----------------------------------------------------------------------
$ 43,199,455 $ 38,491,918
=========== ===========
Liabilities and shareholders' equity:
Accounts payable $ 37,806 $ 46,907
Shareholders' equity 43,161,649 38,445,011
- -----------------------------------------------------------------------
$ 43,199,455 $ 38,491,918
=========== ===========
</TABLE>
<TABLE>
Statements of Income and Changes in Retained Earnings
- ------------------------------------------------------------------------
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Dividends and fees from subsidiaries $ 1,582,000 $ 1,380,000 $ 1,194,000
Expenses 109,997 78,824 120,051
------------------------------------------
1,472,003 1,301,176 1,073,949
Applicable tax benefit 13,014 (14,000) 16,331
------------------------------------------
1,485,017 1,287,176 1,090,280
Equity in undistributed earnings of subsidiaries 3,155,869 2,799,433 2,666,186
------------------------------------------
Net income 4,640,886 4,086,609 3,756,466
Retained earnings January 1, 34,604,120 31,777,511 29,143,045
Dividends paid (1,512,000) (1,260,000) (1,122,000)
Stock split (3,600,000) - -
------------------------------------------
Retained earnings December 31, $34,133,006 $34,604,120 $31,777,511
========== ========== ==========
</TABLE>
<TABLE>
Statements of Cash Flows
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,640,886 $ 4,086,609 $ 3,756,466
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (3,155,869) (2,799,433) (2,666,186)
Increase (decrease) in accounts payable (9,100) 29,344 (10,438)
--------------------------------------
Net cash provided by operating activities 1,475,917 1,316,520 1,079,842
--------------------------------------
Investing activities:
Investment subsidiary (20,000) - -
Financing activities:
Dividends paid (1,512,000) (1,260,000) (1,122,000)
--------------------------------------
Net increase (decrease) in cash (56,083) 56,520 (42,158)
Cash at beginning of year 62,524 6,004 48,162
--------------------------------------
Cash at end of year $ 6,441 $ 62,524 $ 6,004
=========== ========== ==========
</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 Subsidiaries
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 subsidiaries as of December 31, 1998 and
1997, 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, 1998. 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 subsidiaries as of
December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Stokes Kelly & Hinds, LLC
January 27, 1999
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
subsidiaries, Commercial National Bank of Westmoreland County and
Commercial National Investment Corporation, are 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 subsidiaries 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 Subsidiaries
Quarterly Summary of Financial Data (Unaudited)
- ----------------------------------------------------------------
The unaudited quarterly results of operations for the years ended
December 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $5,926,333 $5,901,234 $5,831,114 $6,008,411
Interest expense 2,642,444 2,564,825 2,551,856 2,559,456
---------------------------------------------
Net interest income 3,283,889 3,336,409 3,279,258 3,448,955
Provision for loan losses 90,000 105,000 120,000 120,000
---------------------------------------------
Net interest income after
provision for loan losses 3,193,889 3,231,409 3,159,258 3,328,955
Other income (including security
transactions) 458,511 408,110 433,118 433,351
Other expenses 2,090,072 2,136,342 2,159,940 2,154,290
---------------------------------------------
Income before taxes 1,562,328 1,503,177 1,432,436 1,608,016
Applicable income taxes 382,000 355,000 336,000 392,071
- ------------------------------------------------------------------------------------
Net income $1,180,328 $1,148,177 $1,096,436 $1,215,945
========= ========= ========= =========
Earnings per share $ .33 $ .32 $ .30 $ .34
========= ========= ========= =========
</TABLE>
<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 $ .25 $ .29 $ .30 $ .30
========= ========= ========= =========
</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
"CmclNat."
<TABLE>
<CAPTION>
Cash Dividend
1998 High Low Per Share
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $19.25 $17.75 $ .10
Second Quarter 19.375 18.50 .10
Third Quarter 20.125 18.50 .11
Fourth Quarter 21.00 18.375 .11
</TABLE>
<TABLE>
<CAPTION>
1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $18.50 $17.00 $ .08
Second Quarter 18.50 17.25 .09
Third Quarter 18.50 17.25 .09
Fourth Quarter 18.50 17.625 .09
</TABLE>
<PAGE>
Commercial National Financial Corporation and Subsidiaries
- ----------------------------------------------------------
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
-------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 16,755,493 $ 15,312,410 $ 13,549,080 $ 12,843,170 $ 11,250,168
Interest and dividends on securities 6,862,194 6,521,952 6,305,557 6,138,993 5,807,222
Interest on money market investments 49,405 47,530 92,930 240,311 326,188
- -------------------------------------------------------------------------------------------------------------
Total interest income 23,667,092 21,881,892 19,947,567 19,222,474 17,383,578
Interest Expense
Deposits 9,537,002 9,388,643 8,394,110 8,251,854 6,444,799
Short-term borrowings 493,784 288,495 51,016 365 -
Long-term borrowings 287,795 - - - -
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 10,318,581 9,677,138 8,445,126 8,252,219 6,444,799
- -------------------------------------------------------------------------------------------------------------
Net interest income 13,348,511 12,204,754 11,502,441 10,970,255 10,938,779
Provision for loan losses 435,000 270,000 105,000 90,000 180,000
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 12,913,511 11,934,754 11,397,441 10,880,255 10,758,779
Other operating income 1,733,090 1,489,069 1,256,190 1,112,942 1,015,791
Other operating expenses 8,540,644 8,063,437 7,644,576 7,046,171 7,138,659
- -------------------------------------------------------------------------------------------------------------
Income before taxes 6,105,957 5,360,386 5,009,055 4,947,026 4,635,911
Applicable income taxes 1,465,071 1,273,777 1,252,589 1,253,833 1,150,991
- -------------------------------------------------------------------------------------------------------------
Net income $ 4,640,886 $ 4,086,609 $ 3,756,466 $ 3,693,193 $ 3,484,920
============ ============ ============ ============ ============
Per Share Data
Net income $ 1.29 $ 1.14 $ 1.04 $ 1.03 $ .97
Dividends declared $ .42 $ .35 $ .31 $ .28 $ .27
Average shares outstanding (a) 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000
At End of Period
Total assets $326,379,353 $319,741,956 $278,110,524 $266,176,018 $251,141,709
Securities 119,103,480 118,382,089 102,355,972 103,480,616 96,675,122
Loans and leases, net of
unearned income 192,115,160 183,481,157 159,935,523 144,288,002 139,066,657
Allowance for loan losses 1,914,174 1,882,251 2,035,818 2,081,700 2,077,553
Deposits 266,460,521 260,689,757 238,808,071 230,736,311 219,560,923
Shareholders' equity 43,161,649 38,445,011 35,388,254 33,036,470 29,556,943
Key Ratios
Return on average assets 1.46% 1.39% 1.39% 1.43% 1.42%
Return on average equity 11.47 11.14 11.02 11.80 12.15
Net loan-to-deposit ratio 71.38 69.66 66.12 61.63 62.39
Dividend payout ratio (dividends
declared divided by net income) 32.58 30.83 29.87 27.29 27.55
Equity-to-assets ratio (average equity
divided by average total assets) 12.72 12.47 12.64 12.13 11.72%
</TABLE>
[FN]
(a) Retroactively adjusted for a two-for-one stock split in the form of a
dividend declared in November 1998.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
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, 1998, 1997 and 1996.
This information should be read in conjunction with the consolidated
financial statements and related footnotes for the years under review.
In November 1998, the Board of Directors authorized a two-for-one stock
split effected in the form of a stock dividend to shareholders of record
as of December 15, 1998. 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 1998 was $4,640,886, compared to $4,086,609 in 1997 and
$3,756,466 in 1996. Earnings per share were $1.29 in 1998 compared to
1997's earnings of $1.14 per share. In 1996, earnings per share were
$1.04.
Return on average assets was 1.46% in 1998, 1.39% in 1997 and 1.39% in
1996. For the same years return on average equity was 11.47%, 11.14% and
11.02%, 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
1998, net interest income was $13,348,511 compared to $12,204,754 in 1997
and $11,502,441 in 1996.
Average earning assets grew $20,956,507 in 1998, $23,235,041 in 1997 and
$10,364,280 in 1996. Average interest-bearing liabilities increased
$15,869,057 in 1998, $20,639,642 in 1997 and $7,908,162 in 1996. The return
on earning assets, calculated on a tax-equivalent basis, equaled 8.20% in
1998 compared to 8.14% in 1997 and 8.06% in 1996. The cost-of-funds rate
was 4.35% in 1998, 4.36% in 1997 and 4.21% in 1996. The tax-equivalent
net interest margin was 4.78% in 1998, 4.69% in 1997 and 4.77% in 1996.
<PAGE>
<TABLE>
Financial Comparisons
Consolidated Average Balance Sheet, Interest Income/Expense and Rates
<CAPTION>
1998 1997 1996
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 $186,418,665 $16,755,493 9.03% $169,849,234 $15,312,410 9.06% $151,056,637 $13,549,080 9.01%
Taxable securities 77,380,692 4,967,679 6.42 77,615,939 4,827,530 6.22 78,491,319 4,914,451 6.26
Non-taxable securities 36,888,885 1,894,515 7.78 32,285,316 1,694,422 7.95 26,118,891 1,391,106 8.07
Interest-bearing deposits
with banks 108,280 7,858 7.26 110,211 7,167 6.50 127,222 6,252 4.91
Federal funds sold 758,904 41,547 5.47 738,219 40,363 5.47 1,569,809 86,678 5.52
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 301,555,426 23,667,092 8.20 280,598,919 21,881,892 8.14 257,363,878 19,947,567 8.06
Non-interest-earning Assets
Cash 7,027,443 6,572,767 6,182,888
Allowance for loan losses (1,876,326) (1,950,574) (2,080,108)
Other assets 11,117,942 9,039,928 8,241,254
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-
earning assets 16,269,059 13,662,121 12,344,034
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $317,824,485 $294,261,040 $269,707,912
============ ============ ============
Liabilities and Shareholders' Equity
Interest-bearing Deposits
NOW accounts $ 20,709,992 350,081 1.69% $ 20,204,634 386,186 1.91% $ 18,110,581 353,404 1.95
Money Market accounts 41,921,741 1,630,147 3.89 42,542,349 1,732,133 4.07 39,754,528 1,506,643 3.79
Savings deposits 45,672,055 1,337,385 2.93 44,871,628 1,387,360 3.09 44,744,695 1,357,140 3.03
Time deposits 112,647,588 6,085,057 5.40 108,744,105 5,882,964 5.41 97,004,511 5,176,923 5.34
Short-term borrowings 10,976,287 628,116 5.72 4,819,178 288,495 5.99 927,937 51,016 5.50
Long-term borrowings 5,123,288 287,795 5.62 - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 237,050,951 10,318,581 4.35 221,181,894 9,677,138 4.36 200,542,252 8,445,126 4.21
Non-Interest-bearing Liabilities and Capital
Non-interest-bearing deposits 37,565,870 34,124,049 32,920,490
Other liabilities 2,756,896 2,255,578 2,156,953
Shareholders' equity 40,450,768 36,699,519 34,088,217
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-bearing
funding sources 80,773,534 73,079,146 69,165,650
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $317,824,485 $294,261,040 $269,707,912
=========== =========== ===========
Net Interest Income and
Net Yield on Interest-
earning Assets $13,348,511 4.78% $12,204,754 4.69% $11,502,441 4.77%
=========== =========== ===========
</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 Subsidiaries
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
-----------------------------------------------------------------------------
1998 Change from 1997 1997 Change from 1996
-----------------------------------------------------------------------------
<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 $1,443,083 $1,493,783 $ (50,700) $1,763,330 $1,685,609 $ 77,721
Securities
Taxable 140,149 (14,632) 154,781 (86,921) (54,809) (32,112)
Non-taxable 200,093 241,608 (41,515) 303,316 328,427 (25,111)
Interest-bearing deposits with banks 691 (126) 817 915 (836) 1,751
Federal funds sold 1,184 1,131 53 (46,315) (45,917) (398)
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 1,785,200 1,721,764 63,436 1,934,325 1,912,474 21,851
Interest-bearing Liabilities
Deposits 14,027 199,116 (185,089) 994,533 704,298 290,235
Short-term borrowings 339,621 368,589 (28,968) 237,479 213,932 23,547
Long-term debt 287,795 - 287,795 - - -
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 641,443 567,705 73,738 1,232,012 918,230 313,782
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $1,143,757 $1,154,059 $ (10,302) $ 702,313 $ 994,244 $ (291,931)
========== ========== ========= ========== ========== ===========
</TABLE>
[FN]
Included in interest income are loan fees of $305,826 in 1998,
$212,453 in 1997 and $227,189 in 1996.
(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 $435,000 in 1998, $270,000 in 1997 and $105,000 in 1996.
For each of the same years the net charge-off against the
allowance for loan losses was $403,077, $423,567 and $150,882,
respectively. On December 31, 1998 the allowance for
loan losses equaled 1.00% of total loans compared to 1.03% at
the end of 1997 and 1.27% at the end of 1996. Loans which were
past due 90 days or more, or were on non-accrual equaled 0.22%
of total loans on December 31, 1998, 0.89% on December 31,
1997 and 0.08% on December 31, 1996. 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 1998, total non-interest income increased $244,021 to
$1,733,090 from $1,489,069 in 1997. Asset management and trust
income grew $75,988 to $240,418. Service charges on deposit
accounts increased $12,659 to $584,783. Other service charges
and fees increased by $148,198 to $530,530. This increase is
mainly attributable to ATM and debit card revenues. Net gains
on sold and called investments amounted to $10,113. Other income
increased by $8,624 to $367,246. In 1996, total non-interest
income was $1,256,190.
Non-interest expense in 1998 was $8,540,644. This represented
an increase of $477,207 over 1997's non-interest expense which
totaled $8,063,437. The major area contributing to this
increase was personnel expense which rose $219,500. Coupled with
personnel expense was an increase in other operating expense of
$183,442. The large increases in the aforementioned items were
moderated somewhat by smaller increases in the following item.
Net occupancy expense increased $61,323 and furniture and
equipment expense declined slightly by $15,468. Pennsylvania
shares tax increased $28,410 over 1997. Non-interest expense
in 1996 was $7,644,576.
Income tax expense was $1,465,071 in 1998, $1,273,777 in 1997
and $1,252,589 in 1996. The effective tax rate was 23.99%,
23.76% and 25.01%, 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 and are available to
meet both short- and long-term funding needs.
<PAGE>
(At this point in the 1998 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 two tables
that will be described later in this page.)
On December 31, 1998, total deposits were $5,770,764 greater
than on December 31, 1997. Interest-bearing deposits decreased
$2,779,308 in 1998 while demand deposits increased
$8,550,072. The decrease in interest bearing deposits was
attributed to the unattractiveness of deposit rates in this
year's declining rate environment and competition from nonbank
financial service companies.
During the same period, total loans, net of unearned income, grew
by $8,634,003. Competition for high-quality loans remained intense
throughout 1998. Real-estate secured commercial loan products had
strong growth in 1998 while commercial loans also posted significant
increases from year-end 1997.
The amortized cost of the corporation's securities portfolio decreased
$1,684,292 and was $116,332,810 on December 31, 1998. On that same
date, the estimated market value of the entire securities portfolio was
$119,103,480 which was higher than amortized cost by $2,770,670 and
represented the net of $2,773,764 gross unrealized gains less $3,094
gross unrealized losses. On December 31, 1998 the amount of securities
which would reach maturity within one year was $15,468,716 as compared
to $12,159,462 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, 1998.
<TABLE>
<CAPTION>
Loans by Classification on December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------
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 $ 20,893,911 11% $ 19,052,486 10% $ 17,115,404 11% $ 14,494,356 10% $ 9,794,172 7%
Real estate - commercial 52,165,384 27 44,289,723 24 33,437,360 21 32,460,803 23 32,108,097 23
Real estate - construction 2,754,964 1 3,510,809 2 1,924,619 1 1,523,490 1 1,637,794 1
Real estate - other 96,210,304 50 95,570,632 52 86,045,874 54 79,910,652 55 80,702,169 58
Consumer - installment 5,388,246 3 6,219,577 4 6,542,365 4 4,803,258 3 5,535,248 4
Municipal 3,757,563 2 3,340,405 2 3,183,483 2 1,332,403 1 1,350,655 1
Other 11,068,877 6 11,655,453 6 11,799,130 7 9,998,413 7 8,238,730 6
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $192,239,249 100% $183,639,085 100% $160,048,235 100% $144,523,755 100% $139,366,865 100%
Unearned Income (124,089) (157,928) (112,712) (235,373) (300,208)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans,
net of unearned income $192,115,160 $183,481,157 $159,935,523 $144,288,002 $139,066,657
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
Maturity Distribution of Securities on December 31, 1998
<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 $15,063,657 $ 405,059 $ - $ 15,468,716 5.96%
After 1 but within 5 years 23,305,834 12,612,313 - 35,918,147 7.17
After 5 but within 10 years 8,131,215 21,144,293 - 29,275,508 7.40
After 10 years 30,980,917 2,292,922 - 33,273,839 6.92
No fixed maturity - - 2,396,600 2,396,600 6.19
- -------------------------------------------------------------------------------------------------------
$77,481,623 $36,454,587 $2,396,600 $116,332,810 6.98%
=========== =========== ========== ============ =====
</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%)
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------
(At this point in the 1998 annual report, the following text is in
three-column format occupying top quarter of the page followed by a
table that occupies the full three columns.)
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 $ 2,185 $ 3,486 $ 6,909 $ 9,999 $ 36,367 $ 54,989
Federal funds sold and
deposits with banks 68 - - - - -
Loans 43,241 3,041 6,363 12,557 73,531 53,375
- ------------------------------------------------------------------------------------------------------
Total interest-sensitive
assets 45,494 6,527 13,272 22,556 109,898 108,364
Interest-bearing liabilities:
Certificates of deposit 9,411 25,511 18,557 27,850 31,264 106
Other interest-bearing
liabilities - 6,527 6,527 10,907 68,029 17,253
Other borrowings 1,775 2,000 - - 10,000 -
- ------------------------------------------------------------------------------------------------------
Total interest-sensitive
liabilities 11,186 34,038 25,084 38,757 109,293 17,359
- ------------------------------------------------------------------------------------------------------
Interest sensitivity gap $34,308 $(27,511) $(11,812) $(16,201) $ 605 $91,005
======= ========= ========= ========= ========== =======
Cumulative gap $34,308 $ 6,797 $ (5,015) $(21,216) $ (20,611) $70,394
======= ========= ========= ========= ========== =======
Ratio of cumulative gap to
earning assets 11.02% 2.18% (1.61%) (6.82%) (6.62%) 22.62%
======== ========= ========= ========= ========== =======
</TABLE>
(At this point the text is back to three column format with a table
included in the second column of the text.)
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
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,
1998 and December 31, 1997 according to the categories indicated:
<TABLE>
Allocation of the Allowance for Loan Losses
(dollar amounts in thousands)
<CAPTION>
1998 1997
----------------------------------------------------
<S> <C> <C>
Commercial, Industrial, Financial,
Agricultural and Tax Free $ 455 $ 555
Residential mortgages 29 231
Loans to individuals 913 622
Off-balance sheet items 114 138
Year 2000 190 141
Unallocated 213 195
----------------
Total $1,914 $1,882
====== ======
Reserve as a percentage
of average total loans 1.03% 1.11%
======= =======
</TABLE>
CAPITAL RESOURCES
Shareholders' equity grew $4,716,638 during 1998 and was
$43,161,649 on December 31, 1998 compared to $38,445,011 on
December 31, 1997. Unrealized gains on securities available for
sale on December 31, 1998 temporarily increased shareholders'
equity by $1,828,643. The retained earnings retention rate was
67.42% in 1998 as compared to 69.17% in 1997.
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
<PAGE>
At this point the whole page is in three column format.)
information systems in place and the general competence and
abilities of the corporation's management.
On December 31, 1998, the corporation's capital (not including
the allowance for loan losses) amounted to $43,161,649
or 13.22% of total assets. The inclusion of the allowance
increases the capital ratio to 13.81%. On the same basis of
calculation, these ratios were 12.02% and 12.61% respectively
on December 31, 1997.
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, 1998, the corporation had Tier I and total
equity capital to risk adjusted asset ratios of 22.03% and
23.05%, respectively. The leverage ratio was 12.77%. At
December 31, 1997, the corporation had Tier I and total equity
capital to risk adjusted assets ratios of 20.68% and 21.70%,
respectively.
<TABLE>
The table below presents the corporation's capital position on December 31, 1997
(dollar amounts in thousands)
<CAPTION>
Percent
of Adjusted
Amount Assets
-------------------------------------------------------------
<S> <C> <C>
Tier I capital 41,333 22.03
Tier I capital requirement 7,504 4.00
Total equity capital 43,247 23.05
Risk-based requirement 15,008 8.00
-------------------------------------------------------------
Leverage capital 41,333 12.77
Leverage requirement 12,950 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 which will be discussed in further
detail in the next section.
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.
YEAR 2000
In 1997, the corporation's year 2000 committee was formed and
began and analysis of year 2000 issues that may affect the day
to day business operations of the corporation or the bank. The
year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Any systems that have time sensitive software may recognize a
date using "00" as the year 1900 rather than 2000 and, in turn,
may result in miscalculations and/or system failures.
The corporation has completed the assessment phase and is
currently completing the testing of all software regarding the
year 2000 issue. The corporation is primarily dependent upon
systems that have been developed by third parties and, therefore,
is dependent upon vendor compliance. The corporation has contingency
plans for all systems in place. These plans involve automated as
well as manual actions and may require additional staffing
requirements.
Based on our assessment of the vendors and testing currently being
done, the corporation estimates the costs associated with addressing
the issue will be approximately $500,000 with items being expensed as
incurred or capitalized, whenever appropriate. These costs or any
additional costs associated with the year 2000 issue are not
expected to have a material impact on the corporation's financial
position. The corporation has and will continue to devote the
necessary time and resources to resolve the year 2000 issue in a
timely manner.
The corporation continues to evaluate the effect of the year 2000
issue on its commercial customers. Failure of a commercial customer
to prepare for year 2000 could adversely affect the customer's
operations and, in turn, affect the corporation's ability to collect
outstanding loans and retain deposit balances. The corporation
mailed out questionnaires to its commercial customers regarding the
potential effect that year 2000 could have on their businesses.
Those customers deemed mission critical by senior management will
be placed on a year 2000 watch list and will be contacted on an
ongoing basis regarding their year 2000 readiness.
(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, President and Chief Executive Officer
Gregg E. Hunter Vice Chairman and Chief Financial Officer
Wendy S. Schmucker Vice President and Secretary/Treasurer
Ryan M. Glista Vice President and Comptroller
Susan F. Robb Assistant Secretary/Treasurer
CORPORATE DIRECTORS
- -------------------------------------------------------------------------
John T. Babilya Frank E. Jobe Debra L. Spatola
President, C.E.O. Retired, Vice President,
& Co-owner former Executive Vice Laurel Valley Foods, Inc.
Arc Weld, Inc. President, Commercial
National Bank of
Westmoreland County
George A. Conti, Jr. Roy M. Landers Louis A. Steiner
Attorney at Law Retired, Chairman of the Board
former Executive Vice Commercial National Bank
President, R & L of Westmoreland County
Development Co.
Richmond H. Ferguson John C. McClatchey Louis T. Steiner
Attorney at Law Chief Executive Officer Vice Chairman, President
Ferguson Law JCM Industries and Chief Executive Officer
Associates Commercial National Bank
of Westmoreland County
Dorothy S. Hunter Joseph A. Mosso George V. Welty
Vice President, Retired, former Attorney, Partner,
Latrobe Foundry President Mosso's Flickinger & Welty
Machine & Supply Co. Pharmacy Inc.
Gregg E. Hunter Joedda M. Sampson C. Edward Wible
Vice Chairman and President, Allegheny Certified Public Accountant
Chief Financial Officer City Resorations, Inc. Horner Wible & Associates,
of Commercial National Certified Public Accountants
Bank of Westmoreland
County
All corporate directors also serve as directors of
Commercial National Bank of Westmoreland County
DIRECTORS EMERITUS
- ----------------------------------------------------------------------------
James A. Charley William M. Charley William W. Washnock
<PAGE>
Commercial National Bank of Westmoreland County
BANK OFFICERS
- -----------------------------------------------------------------------------
Chairman of the Board Louis A. Steiner
- -----------------------------------------------
Vice Chairman/President/Chief Executive Officer Louis T. Steiner
- -----------------------------------------------
Vice Chairman/Chief Financial Officer Gregg E. Hunter
- -----------------------------------------------
Senior Vice Presidents
- ----------------------------------------------------------------------
Donna L. Belluchie Martin E. May Philip S. Pettina
Vice Presidents
- ----------------------------------------------------------------------
Ryan M. Glista Michael L. Matthews Keith M. Visconti
William N. Hamilton, Jr. Michael J. Palko Thomas D. Watters
Cheryl M. Letterio Wendy S. Schmucker
Assistant Vice Presidents
- -----------------------------------------------------------------------
Karen E. Burick Kelly R. Moreman James T. Vaughan
Donna J. Daugherty Marsha J. Salley Rebecca J. Weiner
William J. Johnston Thomas E. Sylvester* Phyllis S. Yesh*
Community Office Managers
- -------------------------------------------------------------------------
Douglas P. Arndt Michael A. Schmidt Jerome M. Supko
Linda A. Burns Laura A. Steiner Patricia L. Torrance
Debra Gras
Service Officers
- --------------------------------------------------------------------------
Lisa A. Ball Judy A. Hoffer Susan L. Roebuck
Mona A. Birt Gina M. Kovatch Elizabeth M. Rosa
Terrie L. Bowman Jonna M. Kundla Kristin Rossi
Eleanor A. Bridge Dina M. Lauricia Roxanne Shadron
Regina L. Calabrace Sharon M. Lewis Jennifer L. Sopcisak
Jennifer M. Chemski Susan M. Matenkosky John H. Sperandio
Judith J. Ciocco Charles H. McDowell Sean E. Swansboro
Karen J. Ciocco Tiffany D. McMahon Charles L. Taylor
Kathy S. Claycomb Florence E. Pevarnik Marilyn A. Tlumach
James V. Conforti William W. Rice II Cynthia M. Varner
Virginia E. Halucka Susan F. Robb Jodi L. Zyvith
H. Alan Hamill Randi L. Robinson
[FN]
* also serve as community office manager
<PAGE>
COMMUNITY ADVISORY BOARDS
- -------------------------------------------------------------------------------
Greensburg Ligonier Murrysville West Newton
Patrick A. Love Jean M. Case Walter F. Baczkowski Robert D. Austin
Barry W. Morris W. Scott Clites August I. Bondi Linda L. Lunt
Edward J. Smith John C. Horrell Fred C. Honsberger Dee M. Taylor
Barry R. Shebeck Leonard L. Poliziani
BUSINESS 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) 724/537-9966 (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.
Insurance
- -----------------------------------------------------------------------
Commercial National Insurance Services Commercial National
232 North Market Street Insurance Services is
Ligonier, PA 15658 a partnership of Gooder
724/238-4617 & Mary, Inc., and
877/205-4617 (toll free) Commercial National
724/238-0160 (fax) Investment Corporation,
[email protected] a wholly owned subsidiary
of Commercial National
Financial Corporation.
<PAGE>
Commercial National Financial Corporation
- -----------------------------------------------------------------------
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. M.H. Meyerson & Co.
100 Light Street Two World Trade Center 525 Washington Boulevard
Baltimore, MD 21202 New York, NY 10048 34th Floor
800-638-7411 800-966-1559 Jersey City, NJ 07303
800-333-3113
FJ Morrissey & Co Inc. Knight Securities Ryan, Beck & Co.
Suite 1420 525 Washington Boulevard 80 Main Street
1700 Market Street Jersey City, NJ 07310 West Orange, NJ 07052
Philadelphia, PA 19103 800-222-4910 973-597-6020
800-842-8928
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 1998 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 20, 1999
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 20, 1999
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 19, 1999, 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 19, 1999
<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 20, 1999
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 20, 1999 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 1998, are being mailed on March 22, 1999, 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 3,592,508
and only those shareholders of record at the close of business on
March 22, 1999 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.
<PAGE>
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 auditors 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 five (5) 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.
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 2002. 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.
<PAGE>
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>
Richmond H. Ferguson 61, attorney-at-law 2002 1990
Dorothy S. Hunter(1) 74, vice president 2002 1990
Latrobe Foundry Machine
& Supply Company
John C. McClatchey 61, chief executive officer 2002 1990
JCM Industries
manufacturer of hardwood lumber
pallets
Joseph A. Mosso 67, retired, former president 2002 1990
Mosso's Pharmacy, Inc.
Louis T. Steiner(2) 37, vice chairman, president and 2002 1995
chief executive officer of the
corporation and bank (1998-present);
vice chairman and chief executive
officer of the corporation and bank
(1997-1998); vice chairman of the
corporation and bank (1995-1997);
vice president of the bank (1994-1995)
</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 20, 1999.
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
------ --------------- ------- -----
<S> <C> <C> <C>
Gregg E. Hunter(3) 40, vice chairman and chief 2000 1995
financial officer of the
corporation and bank (1995-
present), vice president/
chief financial officer of
bank (1994 - 1995);
assistant secretary/treasurer
of the corporation (1993-1995)
Joedda M. Sampson 46, president and principal 2000 1999
owner Allegheny City
Restorations, Inc., a development
corporation engaged in restoring
and developing historic properties
and operating business entities
which occupy portions of the
historic sites developed
Debra L. Spatola 42, vice president, 2000 1997
Laurel Valley Foods, Inc.
Louis A. Steiner(4) 68, 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 52, attorney, partner 2000 1997
Flickinger and Welty
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
---- ------------------------- ------- --------
<S> <C> <C> <C>
John T. Babilya 39, president, chief 2001 1999
executive officer and
co-owner, Arc Weld, Inc.
a precision custom-manufacturing
firm servicing the steel,
drilling, coal, glass, electrical
and geo-environmental industries
George A. Conti, Jr. 59, attorney at law 2001 1996
Frank E. Jobe 77, retired former executive 2001 1990
vice president of the bank
Roy M. Landers 70, retired former executive 2001 1990
vice president, R & L
Development Company, land
development
C. Edward Wible 53, certified public 2001 1995
accountant, Horner Wible
& Associates, Certified Public
Accountants
<FN>
(1) Dorothy S. Hunter, director and nominee, is the sister of
Louis A. Steiner, director; mother of Gregg E. Hunter,
director; and aunt of Louis T. Steiner, director and nominee.
(2) Louis T. Steiner, director and nominee, is the son of
Louis A. Steiner, director; nephew of Dorothy S. Hunter,
director and nominee; and cousin of Gregg E. Hunter, director.
(3) Gregg E. Hunter, director, is the son of Dorothy S. Hunter,
director and nominee; nephew of Louis A. Steiner, director;
and cousin of Louis T. Steiner, director and nominee.
(4) Louis A. Steiner, director, is the brother of Dorothy S.
Hunter, director and nominee; father of Louis T. Steiner,
director and nominee; and uncle of Gregg E. Hunter, director.
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of February 20, 1999, 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>
<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 596,490 (1) 16.57%
R. D. 2, Box 197
Ligonier, PA 15658
Dorothy S. Hunter 183,000 (2) 5.08%
P. O. Box 28
Latrobe, PA 15650
Gregg E. Hunter 210,180 (3) 5.84%
P. O. Box 3
Latrobe, PA 15650
George A. Conti, Jr. 228,264 (4) 6.34%
101 North Main Street
Greensburg, PA 15601
</TABLE>
[FN]
(1) Includes 223,830 shares held directly by Mr. Steiner; 900
shares held by his spouse, Barbara J. Steiner; 240,000 shares
held by Latrobe Foundry Machine & Supply Company and 131,760
shares held by Ridge Properties, Inc. Louis A. Steiner is the
president of each company.
(2) Includes 3,000 shares held directly by Mrs. Hunter and
180,000 shares held as co-trustee, The Hunter Stock Trust, with
shared voting and investment power.
(3) Includes 30,180 shares held directly by Mr. Hunter and
180,000 shares held as co-trustee, The Hunter Stock Trust, with
shared voting and investment power.
(4) Includes 3,000 shares held in street name by Mr. Conti; 264
shares held as co-trustee of the Conti Trust, with shared voting
and investment power; 79,260 shares held as trustee of the
Corazzi Trust and 145,740 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 20, 1999, 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>
John T. Babilya 2,000 .06%
George A. Conti, Jr. 228,264(3) 6.34%
Richmond H. Ferguson 5,820 .16%
Dorothy S. Hunter 183,000(4) 5.08%
Gregg E. Hunter 210,180(5) 5.84%
Frank E. Jobe 30,300 .84%
Roy M. Landers 37,200 1.03%
John C. McClatchey 3,000 .08%
Joseph A. Mosso 24,240 .67%
Joedda M. Sampson 1,000 .03
Debra L. Spatola 1,200 .03%
Louis A. Steiner 596,490(6) 16.57%
Louis T. Steiner 21,432 .60%
George V. Welty 2,580 .07%
C. Edward Wible 2,000 .06%
All executive officers and
directors as a group
(15 directors, 4 officers,
16 persons in total) 1,168,766 32.47%
</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 20, 1999. Beneficial ownership may be disclaimed
as to certain of the securities.
(2) Information furnished by the directors and the corporation.
(3) Includes 3,000 shares held in street name by Mr. Conti; 264
shares held as co-trustee of the Conti Trust, with shared
voting and investment power; 79,260 shares held as trustee
of the Corazzi Trust and 145,740 shares held as trustee of
the Iorio Trust, each with sole voting and investment power.
(4) Includes 3,000 shares held directly by Mrs. Hunter and
180,000 shares held as co-trustee, The Hunter Stock Trust,
with shared voting and investment power.
(5) Includes 30,180 shares held directly by Mr. Hunter and
180,000 shares held as co-trustee, The Hunter Stock Trust,
with shared voting and investment power.
(6) Includes 223,830 shares held directly by Mr. Steiner; 900
shares held by his spouse, Barbara J. Steiner; 240,000
shares held by Latrobe Foundry Machine & Supply Company and
131,760 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
1998 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 1998
at the same times and performed the same functions as the audit
committee of the bank described in the following text. 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 1998 the committee met three (3) times.
COMMITTEES OF THE BOARD OF THE BANK
The by-laws of the bank provide for an audit committee,
executive committee, asset quality committee and trust and
trust and investment 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 George A. Conti, Jr.,
Debra L. Spatola 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 bank compliance
with regulations and internal policies and procedures and provides
direct liason with the audit department and board of directors. 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 1998 the committee held four (4)
meetings.
<PAGE>
The executive committee consists of the chairman, Louis A.
Steiner; the vice chairman, president and chief executive officer,
Louis T. Steiner; and the vice chairman and chief financial
officer, Gregg E. Hunter; together with directors Dorothy S. Hunter,
Roy M. Landers, John C. McClatchey 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 1998 the committee held
twelve (12) meetings.
The asset quality committee consists of the chairman,
Louis A. Steiner; the vice chairman, president and chief executive
officer, Louis T. Steiner; the vice chairman and chief financial
offier, Gregg E. Hunter; together with directors John T. Babilya
Richmond H. Ferguson, Frank E. Jobe and Joedda M. Sampson. The
committee meets quarterly to monitor loan and securities
investments to assure conformance with internal policy and all
applicable governmental regulations. During 1998 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, president and chief
executive officer Louis T. Steiner; 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 1998 the committees held twelve
(12) meetings.
ATTENDANCE AT MEETINGS
During 1998 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 and the bank are paid a fee of
$500 for attendance at meetings of the board of directors of the
corporation and 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 1998.
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 1998. 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 9, 1997, the committee set the 1998
compensation for Louis A. Steiner, chairman and for Louis T.
Steiner, vice chairman, president and chief executive officer,
as shown in this proxy statement.
The compensation reported consists of base salaries and other
compensation paid in 1998 and annual bonuses and profit sharing
earned in 1998 as determined by the bank's 1998 performance.
EXECUTIVE COMPENSATION COMMITTEE
Roy M. Landers
John C. McClatchey
Joseph A. Mosso
[FN]
At the time of the meeting, December 9, 1997, the committee consisted
of William M. Charley, Roy M. Landers and Joseph A. Mosso. Mr. Charley
retired August 1, 1998.
<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, a subsidiary of the corporation.
The following table sets forth certain information regarding
compensation received by the chief executive officer during 1998
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 Annual Profit
Principal Position Year Salary Bonus Sharing
- ------------------ ----- ------ ----- -------
<S> <C> <C> <C> <C>
LOUIS A. STEINER
chairman of the board 1998 109,412 6,403 17,306
of directors of the
corporation and the 1997 118,524 5,962 18,642
bank
1996 109,148 5,754 17,234
LOUIS T. STEINER
vice chairman, 1998 114,095 6,496 17,775
president and chief
executive officer of 1997 73,555 4,403 11,634
the corporation and
the bank 1996 56,690 4,008 9,060
GREGG E. HUNTER
vice chaiman and chief 1998 96,779 5,915 15,169
financial officer
of the corporation 1997 74,850 4,347 11,835
and the bank
1996 60,728 4,049 9,673
</TABLE>
<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 CNAF NASDAQ U.S. CO. NASDAQ BANKS
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 137.78 97.75 99.63
1995 159.87 138.25 148.38
1996 290.69 170.01 195.91
1997 300.37 208.57 328.01
1998 336.08 293.19 324.90
</TABLE>
[FN]
Assumes that the value of the investment in CNFC Common Stock and
each index was $100 on December 31, 1993 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.
AUDITORS
Stokes Kelly & Hinds, LLC was elected as the independent
auditors for the corporation for fiscal year ending December 31,
1998, and was last elected by the shareholders of the corporation
at the annual meeting held on April 21, 1998. Stokes Kelly &
Hinds, LLC and its predecessor have certified the corporation's
financial statements for the fiscal year ended December 31, 1990,
and all fiscal years subsequent thereto.
<PAGE>
The board of directors of the corporation at a meeting held
November 17, 1998 selected Stokes Kelly & Hinds, LLC as the
independent auditors for the corporation for 1999. 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 independent
auditors and represent payment for auditing services only.
Additionally, the bank intends to engage Stokes Kelly &
Hinds, LLC to perform internal bank audits for the year 1999.
These auditing fees will be paid by the bank.
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 on 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 annual meeting of
shareholders in the year 200, 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, 1999.
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>
(The following proxy has been modified for electronic filing
purposes.)
COMMERCIAL NATIONAL FINANCIAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints George A. Conti, Jr., Debra L.
Spatola and C. Edward Wible and each of them, as true and
lawful proxies, with full power of substitution, to vote and
act for the undersigned at the annual meeting of shareholders
of the COMMERCIAL NATIONAL FINANCIAL CORPORATION to be held at
900 Ligonier Street, Latrobe, Pennsylvania, on April 20, 1999 at
2:00 P.M., and at any adjournment thereof, as fully as the
undersigned could vote and act if personally present on the
matters set forth on this proxy, and, in their descretion on such
other matters as may properly come before the meeting.
PLEASE SIGN AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
------------, 1999
------------------
------------------
Shareholders date
and sign here
exactly as name is
printed.
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR ON ALL
---
MATTERS UNLESS THE UNDERSIGNED SPECIFIES OTHERWISE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL ITEMS.
---
FOR WITHELD
1. Elect Richmond H. Ferguson, Dorothy S. ( ) ( )
Hunter, John C. McClatchey, Joseph A.
Mosso and Louis T. Steiner, as directors,
in a class for a term expiring at the
annual meeting year 2002, EXCEPT VOTE WITHELD
FROM FOLLOWING NOMINEES:
- -----------------------------------------------------------------
2. Ratify the appointment of Stokes FOR AGAINST ABSTAIN
Kelly & Hinds, LLC as independent ( ) ( ) ( )
auditors for the corporation.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000866054
<NAME> COMMERCIAL NATIONAL FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,655,963
<INT-BEARING-DEPOSITS> 67,935
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,103,480
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 192,115,160
<ALLOWANCE> 1,914,174
<TOTAL-ASSETS> 326,379,353
<DEPOSITS> 266,460,521
<SHORT-TERM> 3,775,000
<LIABILITIES-OTHER> 2,982,183
<LONG-TERM> 10,000,000
0
0
<COMMON> 7,200,000
<OTHER-SE> 35,961,649
<TOTAL-LIABILITIES-AND-EQUITY> 326,379,353
<INTEREST-LOAN> 16,755,493
<INTEREST-INVEST> 6,862,194
<INTEREST-OTHER> 49,405
<INTEREST-TOTAL> 23,667,092
<INTEREST-DEPOSIT> 9,537,002
<INTEREST-EXPENSE> 10,318,581
<INTEREST-INCOME-NET> 13,348,511
<LOAN-LOSSES> 435,000
<SECURITIES-GAINS> 10,113
<EXPENSE-OTHER> 8,540,644
<INCOME-PRETAX> 6,105,957
<INCOME-PRE-EXTRAORDINARY> 4,640,886
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,640,886
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 8.20
<LOANS-NON> 95,032
<LOANS-PAST> 320,438
<LOANS-TROUBLED> 572,352
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,882,251
<CHARGE-OFFS> 412,867
<RECOVERIES> 9,790
<ALLOWANCE-CLOSE> 1,914,174
<ALLOWANCE-DOMESTIC> 1,914,174
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
