<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, 1999
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 17, 2000. $33,003,082
Number of shares of common stock outstanding at March 17, 2000. 3,527,568
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to shareholders for
the fiscal year ended December 31, 1999 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 18, 2000 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
Pennsylvania. 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, an in-store machine in each the Norvelt
Open Pantry and New Alexandria Qwik Mart and the lobby of the
Kirk S. Nevin Arena located in Greensburg. 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 Commercial National Investment
Corporation, which is a 50% owner of Commercial National Insurance
Services together with the Gooder Agency, Inc., of Ligonier.
Commercial National Insurance Services offers a full array of
insurance products and services to consumer and commercial markets
surrounding the Ligonier area.
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 online banking system.
By using a personal computer with internet access, customers can
access their Commercial National Bank accounts, perform common
banking tasks and pay bills 24 hours a day, seven days a week, 365
days a year. 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>
Competition
- -----------
Throughout the subsidiary bank's service area, substantial
competition exists for both 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 subsidiaries 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 subsidiaries 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, 1999 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U. S. Treasury securities and other
U. S. Government agencies and
corporations $72,567,628 $77,481,622 $81,067,566
Obligations of states and political
subdivisions 51,542,799 36,454,587 35,619,236
Other securities 3,371,638 2,396,600 1,330,300
---------- ---------- ----------
Total $127,482,065 $116,332,809 $118,017,102
============ ============ ============
</TABLE>
Loans
- -----
Final loan maturities excluding consumer installment and
mortgage loans and before unearned discount at December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
Within One-Five After
One Year Years Five Years Total
-------- ------ ---------- -----
<S> <C> <C> <C> <C>
Commercial and Industrial $ 9,639 $ 9,606 $ 3,627 $22,872
Real estate-construction 3,999 135 - 4,276
Other 3,705* 1,790 8,568 $14,063
------- ------ ------- --------
Totals $17,343 $11,531 $12,337 $41,211
======= ====== ======= =======
Loans at fixed interest rates $ 6,331 $ 5,285 $11,616
Loans at variable interest rates 5,200 337 5,537
------ ------- -------
$11,531 $ 5,622 $17,153
====== ======= =======
</TABLE>
* Includes $1.9 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, 1999
Loans on non-accrual basis $ 517,644
Loans past due 90 days or more 187,259
Renegotiated loans 493,215
----------
Total $1,198,118
==========
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
==========
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, 1999 the
corporation had no other real estate owned and no in-substance
foreclosures.
Effect of non-accrual loans on interest income during 1999 is as
follows:
Non-accrual
Loans
-------
Gross amount of interest that would have
been recorded at original rates $ 8,321
Less: Interest that was reflected in income -
--------
Net reduction to interest income $ 8,321
========
<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, 1999:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Loans outstanding at beginning of year,
net of unearned income $192,115,160 $183,481,157 $159,935,523 $144,288,002 $139,066,657
============ ============ ============ ============ ============
Average loans outstanding $194,664,755 $186,418,665 $169,849,234 $151,056,637 $142,697,066
Allowance for loan losses: ============ ============ ============ ============ ============
Balance, beginning of year $ 1,914,174 $ 1,882,251 $ 2,035,818 $ 2,081,700 $ 2,077,553
------------ ------------ ------------ ------------ ------------
Loans charged off:
Commercial, industrial & other 2,678,266 24,306 4,859 - -
Installment and charge card 616,786 377,353 437,003 170,719 97,089
Real estate 12,971 11,208 6,446 3,233 -
--------- ------- ------- ------- -------
Total loans charged off 3,308,023 412,867 448,308 173,952 97,089
--------- ------- ------- ------- -------
Recoveries:
Commercial, industrial & other - 300 - - -
Installment and charge card 23,596 9,490 22,669 23,070 10,884
Real estate - - 2,072 - 352
--------- ------- ------ ------- -------
Total recoveries 23,596 9,790 24,741 23,070 11,236
--------- ------- ------- ------- -------
Net loans charged off 3,284,427 403,077 423,567 150,882 85,853
Provision charged to expense 3,289,706 435,000 270,000 105,000 90,000
--------- ------- --------- ------- -------
Balance, end of year $ 1,919,453 $ 1,914,174 $ 1,882,251 $ 2,035,818 $ 2,081,700
============ =========== =========== =========== ===========
Ratios:
Net charge-offs as a percentage
of average loans outstanding 1.69% .22% .25% .10% .06%
Allowance for loan losses
as a percentage of average loans
outstanding .99 1.03 1.11 1.35 1.46
</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, 1999 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 1999, 1998 and 1997:
<TABLE>
December 31,
1999 1998 1997
<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 $ 41,744,536 - % $ 37,565,870 - % $ 34,124,049 - %
Interest bearing demand 21,376,716 .72 20,709,992 1.69 20,204,634 1.91
Money market 43,545,503 3.51 41,921,741 3.89 42,542,349 4.07
Savings 46,836,966 2.52 45,672,055 2.93 44,871,628 3.09
Time 115,189,889 5.11 112,647,588 5.40 108,744,105 5.41
------------ ----------- -----------
Total $268,693,610 3.26% $258,517,246 3.64% $250,486,765 3.75%
============ ============ ===========
</TABLE>
Remaining maturities of certificates of deposit $100,000 or more:
<TABLE>
December 31,
1999 1998 1997
<CAPTION>
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Remaining maturity:
3 months or less $26,559,928 72% $16,943,373 57% $12,602,770 40%
Over 3 through 6 months 4,159,920 11 2,965,786 10 4,452,058 14
Over 6 months through 12 months 3,166,384 8 6,109,446 20 2,628,559 8
Over 12 months 3,429,108 9 3,997,620 13 11,796,885 38
---------- -- ---------- -- ---------- --
Total $37,315,340 100% $30,016,225 100% $31,480,272 100%
========== ========== ==========
</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 69 Chairman of the board
(1977 to present),
chief executive officer
(1977 to 1997)
Louis T. Steiner 38 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)
Gregg E. Hunter 41 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)
Wendy S. Schmucker 31 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)
Ryan M. Glista 32 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 25 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, 1999
on page 20 is incorporated herein by reference in response
to this item. As of March 17, 2000 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, 1999
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, 1999
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, 1999 is incorporated herein by reference in response
to this item.
Annual
Report
Page
------
Report of Independent Certified Public Accountants................... 19
Financial Statements:
Consolidated Statements of Financial
Condition as of December 31, 1999 and 1998.................... 6
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997................................. 7
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997.................. 8
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.................................. 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 18, 2000 on pages 3 and 4 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 18, 2000 on page 11 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 18, 2000 on page 6 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 18, 2000 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, 1999
21 Subsidiaries of the Registrant
22 Commercial National Financial Corporation 2000 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 21, 2000
<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 21, 2000
- --------------------
Louis A. Steiner, Chairman of the Board and Director
/s/ Louis T. Steiner MARCH 21, 2000
- --------------------
Louis T. Steiner, Vice Chairman of the Board and Director
/s/ Gregg E. Hunter MARCH 21, 2000
- -------------------
Gregg E. Hunter, Vice Chairman of the Board and Director
/s/ Wendy S. Schmucker MARCH 21, 2000
- -------------------------
Wendy S. Schmucker, Secretary/Treasurer
/s/ John T. Babilya MARCH 21, 2000
- --------------------
John T. Babilya, Director
/s/ George A. Conti, Jr. March 21, 2000
- ------------------------
George A. Conti, Jr., Director
/s/ Richmond H. Ferguson MARCH 21, 2000
- ------------------------
Richmond H. Ferguson, Director
/s/ Dorothy S. Hunter MARCH 21, 2000
- ---------------------
Dorothy S. Hunter, Director
/s/ Frank E. Jobe MARCH 21, 2000
- ------------------
Frank E. Jobe, Director
- ------------------
Roy M. Landers, Director
/s/ John C. McClatchey MARCH 21, 2000
- ----------------------
John C. McClatchey, Director
/s/ Joseph A. Mosso MARCH 21, 2000
- -------------------
Joseph A. Mosso, Director
/s/ Joedda M. Sampson March 21, 2000
- ---------------------------
Joedda M. Sampson, Director
/s/ Debra L. Spatola MARCH 21, 2000
- -----------------------
Debra L. Spatola, Director
/s/ George V. Welty MARCH 21, 2000
- -------------------
George V. Welty, Director
/s/ C. Edward Wible MARCH 21, 2000
- -------------------
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 1999 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 1999 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 1999 three times in large print and centered.)
<PAGE>
The inside of the front cover is blank.
<PAGE>
Our Commitment To Those We Serve
(At this point in the 1999 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 1999 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 right-hand corner of this page and every odd-number page throughout
the rest of the annual report.)
To Our Sharholders
Financial-modernization legislation signed into law in November allows
organizations such as Commercial National Financial Corporation to more
fully evolve into entities that can be of better service to their clients.
That legislation, as well as objectives undertaken and completed earlier
in the year, allows your company to continue its transformation into a
comprehensive financial-services organization.
During a busy and productive year, we focused on three areas for
development:
- - completing unfinished 1998 initiatives;
- - launching new intiatives for 1999; and
- - implementing a number of personnel
adjustments.
COMPLETING UNFINISHED 1999 INTIIATIVES
The corporation's banking subsidiary, Commercial National Bank of
Pennsylvania, continued to evolve as a sales-and-service organization
during 1999 as all personnel (including your president and chief executive
officer) underwent extensive training that emphasized serving our customers,
be they internal (banking associates) or external (retail and commercial
clients). This continuing process gives our employees the skills necessary
to provide the unparalleled service to which our customers have become
accustomed.
The Commercial National Online Banking product became functional for
retail customers in August and for commercial customers in October. This
system enables users to check balances, transfer funds and pay bills from
any Internet-enabled computer anywhere.
The bank's commercial customers can conduct those same transactions and
can initiate Automated Clearing House transactions and wire transfers
from their business computers. Online Banking, as another delivery method
for bank services, provides expanded access for customers.
Our insurance affiliate, Commercial National Insurance Services, began
operation April 1. Our partners instituted an insurance program that
complements bank services by offering an array of products that further
fulfills the expectations customers have of us.
The corporation's capital-management program continued during 1999,
as the company increased its dividend two times in four quarters.
Additionally, the firm's stock buy-back program, begun in January,
accounted for the repurchase of more than 60,000 shares for a total
investment exceeding $1.1 million. Both initiatives improved shareholder
position and bolstered the future of the corporation.
The foremost challenge facing the entire banking industry in 1999 was
the "Y2K bug," moving from the year 1999 to the year 2000. By spending
billions of dollars to uncover and correct potential Y2K glitches, the
worldwide financial industry now benefits from the most technologically
advanced systems available.
We are pleased to report that Commercial National weathered the Year
2000 changeover without incident. Congratulations and thanks are owed
to Michael Palko, our senior vice president and director of technology,
and to all members of our "Year 2000 Committee" for their hard work
and dedication, typical of that demonstrated daily by Commercial
National employees throughout the years.
LAUNCHING NEW INITIATIVES FOR 1999
The year just finished would have shown record earnings had we not
sustained a significant loss due to a single customer's default on it's
commercial loans. Complete details of our performance, of course, are
found in the following pages.
In spite of the loss taken on that one commercial relationship, earnings
in other categories were strong and represented continued close attention
to managing expenses and taxes , as well as the ongoing development of
the bank's Asset Management and Trust Division.
Our trust group has grown from managing no assets at its formation five
years ago to managing more than $80 million last year. That growth and
the corresponding increase in revenue came about even as the department
experienced significant staff turnover. Michael Matthews, vice president
and senior manager of the division, lead it through its growing pains
and made a strong team even stronger.
Effective October 1, we changed our bank name from Commercial National
Bank of Westmoreland County to Commercial National Bank of Pennsylvania
to reflect the expansion of its customer base beyond the confines of our
headquarters county. We believe the change will help the bank evolve
into a more regional community bank, creating a more favorable reception
when our officers call on clients beyond the borders of Westmoreland
County.
Also in 1999, Commercial National committed itself, along with more
than 1,000 banking peers, to General Colin Powell's "America's Promise"
campaign, focusing volunteer efforts to develop and guide our nation's
youth.
Although we made the "America's Promise" committment as a public
statement in 1999, the employees of Commercial National Bank always have
devoted themselves to their communities through their time, talents and
money contributed to their favorite causes. We greatly apprectiate those
who help their neighbors, and so many others who partner with us to
improve the quality of life for all we serve.
IMPLEMENTING PERSONNELL ADJUSTMENTS
Several changes were made during the year to take better advantange of
the unique skills of our talented and hard-working employees.
Since our last annual report, we announced the appointments of...
Kelly R. Moreman
Assistant Vice President and
Manager of Credit Services
Patricial A. Nemchik
Vice President and
Business Development Officer
Michael J. Palko
Senior Vice President and
Director of Technology
Marsha J. Salley
Assistant Vice President and
Manager of Credit Card Sales
Michael A. Schmidt
Assistant Vice President and
Sales Manager of Retail Banking
James T. Vaughan
Assistant Vice President and
Trust and Investment Administrator
Keith M. Visconti
Senior Vice President and
Senior Lending Officer
During 1999, two long-time Commercial National employees passed away after
serving both the corporation and its subsidiary bank in senior-management
positions for many years.
The contributions, loyalty and dedication of both Lois J. Lazarchik, retired
executive vice president, and Sandra L. Neiderhiser, a vice president and
manager of corporate and financial services at the time of her disability
from an extended illness, were an inspiration to those who knew them
personally and to those who worked with them professionally. We were enriched
by having worked with them and have been made poorer by their loss.
As you can see, 1999 was another busy but productive year for Commercial
National. Certainly, the year 2000 promises to be just as exciting but no
less challenging.
Without question, these accomplishments could not have happened without
the assistance provided to this organization by its shareholders, employees
and clients. We appreciate your continued confidence and support.
/s/ Louis T. Steiner
Louis T. Steiner
Vice Chairman,
President and
Chief Executive Officer
<PAGE>
Highlights of 1999
(At this point in the 1999 annual report, the following sentence appears in
large print at the top of the left column to start off the highlights of 1999.)
While 1999 looked
to be finishing
as the strongest year yet
for Commercial National
National Financial...
...a loss recognized in the fourth quarter -and taken as the
result of a major commercial loan default- led to a year-end that
was not as profitable as we had hoped.
Final, audited earinings for the year amounted to $3,203,605 (or
$0.90 per share), down from the $4,932,611 (or $1.38 per share)
that would have been realized without the loan charge-off.
The decision to make the adjustment was made because of a
substantial decline in in the value of collateral that the borrower
pledged to support the loans, a discovery that greatly reduced
the prospect of our receiving full repayment.
Of course, the company is continuing to pursue vigorous collection
efforts against the borrower to minimize the loss, but -in
accordance with conservative accounting practices- the company
preferred to assume the entire potential loss against what it
expected to be record earnings, rather than to affect financial
performance in the year ahead.
Fortunately, as the following pages reveal, the overall financial
standing of Commercial National Financial Corporation remains
virtually unaffected by this incident, as the company remains
heavily capitalized, maintains adequate reserves and anticipates
strong earnings in the year 2000 and beyond.
MOST BUSINESS SEGMENTS SHOWED
STEADY GROWTH.
Although the year ended with a downturn because of the single
customer's commercial loan relationship default noted earlier, other
segments of the business showed steady, if not robust, growth . Those
improvements -together with tax advantages and continued close attention
to managing the day-to-day expenses of the business -still generated
a reasonable return for the corporation and its investors.
The year-end price of Commercial National Financial Corporation stock
(traded as CNAF on the Nasdaq Stock Market, Inc.) was affected
strongly by the general market trends that developed during the year
in the financial-services industry. The stock price slid in value by
7.5 percent from a per-share price of $19.88 at the end of 1998 to
$18.50 per share at year-end 1999. Throughout the period, the stock
traded at a per share price ranging from a low of $15.38 to a high
of $21.50.
Total deposits managed by the corporation grew only slightly during
the year -about 2.4 percent- from $266.4 million in 1998 to $272.9
million by the end of 1999.
The slow growth in interest-bearing deposit categories was attributed
to the continuing preference customers displayed for investments placed
with other less-traditional service providers, despite the potential
risks attendant with such instruments.
The 1999 Commercial National loan portfolio grew by nearly 7 percent
to $204.9 million from $192.2 million a year ago. Most of that
improvement was found in the commercial-
(At this point in the 1999 annual report, there appears three bar graphs
occupying the bottom third of the page starting at the second column and
extending to the third column.)
<TABLE>
<CAPTION>
Annual Share Price Appreciation
<S> <C>
1995 $10.07
1996 $18.00
1997 $18.25
1998 $19.88
1999 $18.50
</TABLE>
<TABLE>
<CAPTION>
Dividends Paid Per Share
<S> <C>
1995 $0.28
1996 $0.31
1997 $0.35
1998 $0.42
1999 $0.60
</TABLE>
<TABLE>
<CAPTION>
Deposit Base Growth
<S> <C>
1995 $230,736
1996 $238,808
1997 $260,690
1998 $266,461
1999 $272,947
</TABLE>
(At this point in the 1999 annual report, the following text begins at
the top of the third column and continues.)
mortgage segment, which showed a 13 percent improvement over a year
ago, increasing by $7.2 million in spite of continuing pricing
pressure from competition and relatively sharp interest-rate
increases that began at mid-year.
Other categories posting growth at the end of the year were...
- commerical loans by more than 10 percent,
- construction loans by more than 55 percent, and
- tax-free loans by more than 14 percent.
The company continued to de-emphasized its promotion of products that
were more likely to generate high losses (such as credit card loans),
and concentrated instead on building high-quality business in other
categories such as commercial, home-equity and residential mortgage
loans.
Total interest income for the year was up by about $636,000 or slightly
more than 2 percent from $23.6 million a year ago to $24.3 million at
year-end. Interest expense, however, decreased slightly at the same
time by nearly 3 percent, declining by about $305,000 from the prior year.
The resulting net interest income of $14.3 million was up by almost
$941,000 or 7 percent from the $13.3 million realized in the prior
year.
Other operating income was up from $1.73 million to $1.99 million.
The 14.5 percent gain resulted from mid-year increases implemented in
service charges for selected deposit products and fees for use of
automatic teller machines not owned by the company. Limited promotion
of home-equity installment and residential mortgage loans and asset
management and trust
<PAGE>
<PAGE>
sevices also contributed to the improvement.
From the developing venture of Commercial National Insurance
Services (a partnership between Gooder & Mary, Inc. and Commercial
National Investment Corporation), we expect to continue providing
customers with unparalleled financial service from a single location
while generating additional non-interest revenue for the corporation.
The post-tax return on average assets declined to 0.95 percent from
the 1.46 percent return posted for each of the preceeding two years,
the drop attributed principally to the fourth-quarter commercial loan
charge-off. Total assets of the corporation grew to $355 million at the
end of 1999 from $326 million in the year prior, marking an improvement
of more than 8 percent.
TECHNOLOGY CAPTURED OUR ATTENTION AND
DEMANDED ALLOCATION OF RESOURCES.
By July, customers of Commercial National gained the ability to access
their banking information from any Internet-connected computer anywhere
in the world. Having previously established a presence on the World Wide
Web at www.cnbthebank.com, the company advanced from a proprietary,
PC-based banking program to an improved Web version that provides
comprehensive banking and calculation services, generating about 80,000
hits per month.
For all of last year and for the several months preceding, Commercial
National fixed, adjusted and tested its innumerable data and
(At this point in the 1999 annual report, there appears a bar graph
occupying first column as set out in the following table.)
<TABLE>
<CAPTION>
Loan Portfolio Growth
<S> <C>
1995 $144,523
1996 $160,048
1997 $183,639
1998 $192,239
1999 $204,960
</TABLE>
(At this point in the 1999 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>
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
1999 $24,303 $10,013 $14,289
</TABLE>
(At this point, the text reverts back to full-column width starting
with the second column.)
electronic systems to be sure that service would be delivered
efficiently without interruption with the arrival of January 1, 2000.
Our "Year 2000 Committee," comprising key employees with the
knowledge and ability to avoid a major system shutdown, committed the
necessary time and financial resources to get the job done ahead of
schedule. The year arrived without disruption, reinforcing what customers
had been told since mid-year -that Commercial National indeed was
"Y2K-OK."
OUR STAFF MET THE CHALLENGES OF A FIERCELY
COMPETITIVE BUSINESS.
During the year, an amitious service-training program was implemented
to provide the entire Commercial National customer-service staff with
additional skills to uncover and meet the changing customer needs that
continue to emerge from a diverse customer base across our marketplace.
(At this point in the 1999 annual report, there appears a bar graph occupying
one-third of the middle column as set out in the following table.)
<TABLE>
<CAPTION>
Post Tax Return On Average Assets
<S> <C>
1995 1.43%
1996 1.39%
1997 1.39%
1998 1.46%
1999 0.95%
</TABLE>
(At this point in 1999 annual report, the following text runs along the left
of the bar graph occupying the remaining two-thirds of the column that the
graph did not use.)
Several of those employees were recognized by the company with the
presentation of awards for their personal efforts to improve financial
or service performance. At our Employees' Annual Meeting in May, the
company presented its 1999 Chairman's Award to...
- Keith M. Visconti
Senior Vice President
and Senior Lending Officer
...for his performance as senior lender and as a leader of the company's
business-development effort, which acquired new customers and generated
new revenue.
At the same meeting, the bank's President's Award was conferred upon...
- Mary E. Resetar
Customer Service Representative
West Newton Office
...for above-average sales results and her consistent attention to the
needs of customers, both inside and outside the company,
- Jennifer L. Battaglia
Customer Service Officer
Latrobe Office
...for supporting the Credit Services Department as a fill-in credit
analyst while the company sought a full-time replacement,
...and to
- Cheryl L. Yvanek
Banking Associate
Ligonier Office
...for her consistent accuracy in maintaining perfect balances at her
teller station, month after month.
THE COMMUNITIES AROUND US
GREW WITH US.
Continuing its participation in the communities where it does business,
Commercial National again recognized more than 90 civic and charitable
groups during the year with presentation of contributions and pledges
for in-kind service amounting to nearly $100,000. At annual "Community
Appreciation Day" events held in September, representatives from
nonprofit agencies serving Greensburg, Hempfield Township, Latrobe,
Ligonier Township, Unity Township, Murrysville and West Newton
received their contributions as the company reinforced its commitment
to maintaining the quality of life in its marketplace.
Despite the difficult events dealt with as the year came to a close,
we're confident that our Commercial National managers and staff are
committed to safeguarding and improving the investments of our
shareholders, maintaining the vitality of our communities and
continuing to build an independent community bank of which we all
can remain proud.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------
Cash and due from banks on demand $ 8,654,617 $ 7,655,963
Interest bearing deposits with banks 558,781 67,935
Federal funds sold 5,750,000 -
Securities available for sale 124,743,186 119,103,480
Loans 204,959,798 192,239,249
Unearned income (120,463) (124,089)
Allowance for loan losses (1,919,453) (1,914,174)
----------------------------
Net loans 202,919,882 190,200,986
----------------------------
Premises and equipment 6,304,454 6,027,496
Accrued interest receivable 2,057,925 2,210,909
Other assets 4,309,145 1,112,584
- -------------------------------------------------------------------------------
Total Assets $ 355,297,990 $ 326,379,353
============ ============
LIABILITIES
- -------------------------------------------------------------------------------
Deposits
Non-interest-bearing $ 41,534,998 $ 44,518,765
Interest-bearing 231,412,405 221,941,756
----------------------------
Total deposits 272,947,403 266,460,521
Short-term borrowings 15,000,000 3,775,000
Other liabilities 2,946,694 2,982,183
Long-term borrowings 25,000,000 10,000,000
- -------------------------------------------------------------------------------
Total liabilities 315,894,097 283,217,704
----------------------------
Shareholders' Equity
- -------------------------------------------------------------------------------
Common stock, par value $2; 10,000,000 shares authorized;
3,600,000 issued; 3,539,643 and 3,600,000 shares
outstanding in 1999 and 1998 7,200,000 7,200,000
Retained earnings 35,190,986 34,133,006
Accumulated other comprehensive income -
net of deferred taxes $(931,218) and
$942,028 in 1999 and 1998 (1,807,660) 1,828,643
Treasury stock at cost; 60,357 shares in 1999 (1,179,433) -
-----------------------------
Total shareholders' equity 39,403,893 43,161,649
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 355,297,990 $ 326,379,353
============ ============
</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,
-----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Interest Income
- -----------------------------------------------------------------------------
Interest and fees on loans $16,693,455 $16,755,493 $15,312,410
Interest and dividends on securities:
Taxable 5,432,186 4,967,679 4,827,530
Exempt from federal income taxes 2,043,482 1,894,515 1,694,422
Interest on deposits with banks 10,824 7,858 7,167
Interest on federal funds sold 122,785 41,547 40,363
- -----------------------------------------------------------------------------
Total interest income 24,302,732 23,667,092 21,881,892
Interest Expense 10,013,456 10,318,581 9,677,138
- -----------------------------------------------------------------------------
Net Interest Income 14,289,276 13,348,511 12,204,754
Provision for Loan Losses 3,289,706 435,000 270,000
- -----------------------------------------------------------------------------
Net interest income after provision
for loan losses 10,999,570 12,913,511 11,934,754
Other Operating Income
- -----------------------------------------------------------------------------
Service charges on deposit accounts 691,899 584,783 572,124
Other service charges and fees 616,811 530,530 382,332
Net security gains (349,940) 10,113 11,561
Trust department income 304,998 240,418 164,430
Other income 721,452 367,246 358,622
- -----------------------------------------------------------------------------
Total other operating income 1,985,220 1,733,090 1,489,069
-----------------------------------
Other Operating Expenses
- -----------------------------------------------------------------------------
Salaries and employee benefits 5,111,197 4,883,607 4,664,107
Net occupancy expense 580,883 604,730 543,407
Furniture and equipment expense 712,922 601,934 617,402
Pennsylvania shares tax 344,333 306,602 278,192
Other expenses 2,544,746 2,143,771 1,960,329
- -----------------------------------------------------------------------------
Total other operating expenses 9,294,081 8,540,644 8,063,437
-----------------------------------
Income Before Income Taxes 3,690,709 6,105,957 5,360,386
-----------------------------------
Income Tax Expense 487,104 1,465,071 1,273,777
- -----------------------------------------------------------------------------
Net Income $ 3,203,605 $ 4,640,886 $ 4,086,609
=========== =========== ===========
Net Income Per Common Share $ .90 $ 1.29 $ 1.14
=========== =========== ===========
</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 Treasury Shareholders'
Stock Earnings (Loss)Income Stock Equity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 $ 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 net 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
COMPREHENSIVE INCOME
Net income - 3,203,605 - - 3,203,605
Other comprehensive income, net
of tax:
Unrealized net losses on securities
of $(3,867,263), net of reclassification
adjustment for losses included in net
income of $230,960 - - (3,636,303) - (3,636,303)
-----------
TOTAL COMPREHENSIVE LOSS ( 432,698)
Cash dividends declared
$.60 per share - (2,145,625) - - (2,145,625)
Purchases of treasury stock - - - $(1,179,433) (1,179,433)
- -------------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 $7,200,000 $35,190,986 $(1,807,660) $(1,179,433) $39,403,893
=========== ============ =========== ============ ============
</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,
------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 3,203,605 $ 4,640,886 $ 4,086,609
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 717,001 604,772 593,862
Loss on sale of other real estate - - 6,446
Provision for loan losses 3,289,706 435,000 270,000
Net amortization of securities
and loan fees 77,801 202,283 153,615
Net security gains 349,940 (10,113) (11,561)
Decrease (increase) in interest receivable 152,984 234,255 (300,441)
Increase in interest payable 316,569 52,939 198,258
(Decrease) increase in taxes payable (3,307) 23,409 3,591
(Decrease) increase in taxes receivable (963,219) - 98,177
Deferred tax (benefit) expense (118,693) 17,176 115,735
(Decrease) increase in other liabilities ( 69,128) (130,976) 41,140
Increase in other assets (403,630) (185,021) (174,276)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,549,629 5,884,610 5,081,155
- -----------------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in deposits with other banks (490,846) 63,002 22,730
Decrease in federal funds sold (5,750,000) - -
Purchases of securities available for sale (69,437,582) (25,334,138) (34,966,171)
Purchases of securities held to maturity - (1,966,778) (11,702,873)
Maturities and calls of securities
available for sale 28,192,935 7,654,065 12,311,659
Proceeds from sales of securities
available for sale 29,625,903 8,996,484 6,488,260
Maturities and calls of securities
held to maturity - 12,175,000 12,095,000
Net increase in loans (16,084,250) (9,069,590) (24,014,417)
Proceeds from the sale of other real estate - - 266,473
Purchases of premises and equipment (993,959) (641,482) (1,782,183)
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (34,937,799) (8,123,437) (41,281,522)
- -----------------------------------------------------------------------------------------------
Financing Activities
Net increase in deposits 6,486,882 5,770,764 21,881,686
Net increase (decrease) in short-term borrowings 11,225,000 (14,075,000) 16,450,000
Proceeds from long-term borrowings 15,000,000 10,000,000 -
Dividends paid (2,145,625) (1,512,000) (1,260,000)
Purchase of treasury stock (1,179,433) - -
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 29,386,824 183,764 37,071,686
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 998,654 (2,055,063) 871,319
Cash and cash equivalents at beginning of year 7,655,963 9,711,026 8,839,707
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,654,617 $ 7,655,963 $ 9,711,026
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,696,887 $ 10,265,642 $ 9,478,881
============ ============ ============
Taxes $ 1,598,200 $ 1,423,900 $ 1,172,800
============ ============ ============
</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, 1999, 1998, and 1997
- -----------------------------------------------------------
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 Pennsylvania (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, 1998 and 1997, have been reclassified to
conform with the December 31, 1999 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 loan's 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.
Earnings per Share:
Earnings per share have been calculated on the weighted average
number of shares outstanding of 3,578,894 shares in 1999, and
3,600,000 in 1998 and 1997. The weighted average number of shares
outstanding has been adjusted for the effect of a two-for-one
stock split in the form of a stock dividend more full 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
<PAGE>
(At this point in the 1999 annual report, the page is still in
three column format with the first column containing full text
with the second and third columns having text occupy about a
fourth of the page. The remaining space in the second and
third columns consist of two tables that will be identified
when approached.)
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.
Treasury Stock
The acquisition of treasury stock is recorded under the cost
method. At the date of subsequent reissue, the treasury stock
is reduced by the cost of such stock on the average cost basis,
with any excess proceeds being credited to additional paid-in
capital.
Comprehensive Income
As of January 1, 1998, the corporation adopted Statement of
Financial Accounting Standards 130, Reporting Comprehensive Income
(FAS 130). FAS 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 shareholders' equity. FAS 130 requires unrealized
gains or losses on the corporation's available-for-sale securities,
which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the
requirements of FAS 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, 1999 and 1998 was $2,549,000 and $2,675,000,
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, 1999
U.S. Treasury securities $ 3,002,818 $ 5,312 $ - $ 3,008,130
Obligations of U.S. Government
agencies 14,497,290 6,120 60,218 14,443,192
Obligations of states and
political subdivisions 51,542,799 371,814 903,809 51,010,804
Mortgage-backed securities 55,067,520 - 2,158,098 52,909,422
Other securities 3,371,638 - - 3,371,638
- ------------------------------------------------------------------------------------
$127,482,065 $ 383,246 $3,122,125 $124,743,186
=========== ========== ========== =============
December 31, 1998
U.S. Treasury securities $ 15,577,778 $ 156,617 $ - $ 15,734,395
Obligations of U.S. Government
agencies 20,986,555 313,700 2,855 21,297,400
Obligations of states and
political subdivisions 36,454,587 1,916,896 239 38,371,244
Mortgage-backed securities 40,917,290 386,551 - 41,303,841
Other securities 2,396,600 - - 2,396,600
- ----------------------------------------------------------------------------------
$116,332,810 $2,773,764 $ (3,094) $119,103,480
=========== ========== ========== ===========
</TABLE>
The amortized cost and estimated market values of securities at
December 31, 1999, 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 $ 14,295,648 $ 14,306,369
Due after 1 but within 5 years 28,575,549 28,277,100
Due after 5 but within 10 years 50,537,412 49,241,329
Due after 10 years 30,701,818 29,546,750
Equity securities 3,371,638 3,371,638
- --------------------------------------------------------------------------
$127,482,065 $124,743,186
============ ============
</TABLE>
(The following test reverts back to the one-column format measuring
two columns wide.)
Securities with amortized cost and market values, respectively,
of $62,760,127 and $60,739,684 at December 31, 1999 and $11,798,395
and $12,210,441 at December 31, 1998, were pledged to secure
public deposits and for other purposes required or permitted by
law.
Proceeds from sales and calls of securities were $29,625,903,
$17,361,371 and $13,608,361 during 1999, 1998 and 1997,
respectively. Gross gains of $243,708, $17,915 and $20,187 and
gross losses of $593,648, $7,802 and $8,626 were realized on those
sales and calls during 1999, 1998 and 1997, respectively.
Other securities consist of Federal Reserve Bank stock, an
equity security, with book and market values of
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------
(The following text measures two columns wide in a three column
format.)
$108,000 at December 31, 1999 and 1998 and Federal Home Loan Bank
stock, an equity security, with book and market values of
$3,254,700 and $2,276,100 at December 31, 1999 and 1998, respectively.
Also included in other securities is an investment in Commercial
National Insurance Services, with book and market values of $8,938 and
$12,500 at December 31, 1999 and 1998, respectively.
The corporation did not hold any derivative financial
instruments such as futures, forwards, swap or option contracts
at December 31, 1999 or December 31, 1998. Also included in the
investment portfolio are mortgage-backed securities 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 1999 annual report, a table appears
in one column format measuring two columns wide.)
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross change in unrealized (loss) gain
on securities available for sale $(5,509,549) $2,405,684 $ 348,711
Deferred tax (benefit) gain (1,873,246) 817,932 118,563
- -------------------------------------------------------------------------------
Net change in unrealized (loss) gain
on securities available for sale $(3,636,303) $1,587,752 $ 230,148
========== ========== ===========
</TABLE>
4. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Commercial loans $ 23,069,385 $ 20,893,911
Real estate loans - commercial 59,386,543 52,165,384
Real estate loans - construction 4,275,988 2,754,964
Real estate loans - other 99,769,594 96,210,304
Installment loans 4,396,065 5,388,246
Municipal loans 4,290,289 3,757,563
Other loans 9,771,934 11,068,877
- ------------------------------------------------------------------
$204,959,798 $192,239,249
============ ============
</TABLE>
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>
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, $1,914,174 $ 1,882,251 $ 2,035,818
- ----------------------------------------------------------------------------------
Losses charged against allowance (3,308,023) (412,867) (448,308)
Recoveries on previously charged-off loans 23,596 9,790 24,741
Provision charged to operating expense 3,289,706 435,000 270,000
- ----------------------------------------------------------------------------------
Balance at December 31, $1,919,453 $ 1,914,174 $ 1,882,251
========== =========== ===========
</TABLE>
(At this point the following text is in three-column format occupying the
third column.)
Impairment of loans having recorded investments of $3,900,080
and $3,838,099 at December 31, 1999 and 1998, respectively,
has been recognized in conformity with FAS 114 as amended by
FAS 118. The average recorded investment in impaired loans during
1999, 1998 and 1997 was $6,697,653, $4,545,916 and $3,231,563,
respectively. The total allowance for loan losses related to these
loans was $95,181 and $429,512 at December 31, 1999 and 1998,
respectively. Interest income on impaired loans of $624,414,
$331,642 and $258,241 was recognized for cash payments received in
1999, 1998 and 1997, 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.
<PAGE>
(At this point in the 1999 annual report, the table and following
text appear in the first column.)
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit $65,792,354 $44,315,527
Standby letters of credit $ 1,787,191 $ 2,768,940
Financial standby letters of credit $ 4,154,814 $ 4,541,531
</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 $717,001 in 1999, and $604,772 in 1998.
The composition of premises and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Premises $6,119,503 $6,101,386
Leasehold improvements 214,866 214,866
Furniture and equipment 6,419,244 5,443,402
- ----------------------------------------------------------------
12,753,613 11,759,654
Less accumulated depreciation
and amortization 7,275,390 6,558,389
- ----------------------------------------------------------------
5,478,223 5,201,265
Land 826,231 826,231
- ----------------------------------------------------------------
$6,304,454 $6,027,496
========= =========
</TABLE>
8. Interest-Bearing Deposits
Interest bearing deposits include certificates of deposit issued in
denominations of $100,000 or more which amounted to $37,315,340 and
$30,016,225 at December 31, 1999 and 1998. Interest expense related to
certificates of $100,000 or greater was $1,870,326, $1,587,148 and
$1,577,237, for the years ended December 31, 1999, 1998 and 1997,
respectively.
Interest bearing deposits at December 31, are detailed as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 45,991,977 $ 45,622,724
NOW accounts 13,056,700 12,598,378
Money Market NOW accounts 9,235,891 8,811,086
FIMM accounts 46,098,370 42,210,709
Time deposits 117,029,467 112,698,859
- ---------------------------------------------------------------------
$231,412,405 $221,941,756
=========== ===========
</TABLE>
Included in time deposits at December 31, 1999 were certificates of deposit
with the following scheduled maturities:
2000 $ 92,066,218
2001 14,611,248
2002 4,844,704
2003 3,236,549
2004 and thereafter 2,270,748
------------
$117,029,467
============
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------
(At this point in the 1999 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>
1999 1998
- -------------------------------------------------------------------------------------------------
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased $ - $ 2,168,767 5.37% $ 1,775,000 $ 2,397,534 5.60%
Borrowings from
Federal Home Loan Bank 15,000,000 6,412,260 5.53% 2,000,000 8,578,753 5.76%
- -------------------------------------------------------------------------------------------------
$15,000,000 $ 8,581,027 5.49% $ 3,775,000 $10,976,287 5.72%
=================================================================================================
Maximum total at any
month-end $25,000,000 $20,450,000
=========== ===========
</TABLE>
At December 31, 1999 the corporation had approved but unused borrowing
with the Federal Home Loan Bank of $10,000,000.
(At this point in the 1999 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:
1999 1998 1997
- ----------------------------------------------------------------------------
Federal funds purchased $116,389 $134,332 $ 77,888
Federal Reserve Discount Window 477 - -
Borrowings from Federal Home Loan Bank 354,846 493,784 210,607
- ----------------------------------------------------------------------------
Total interest on short-term borrowings $471,712 $628,116 $288,495
============================================================================
10. Long-Term Borrowings
Long-term borrowings consist of Federal Home Loan Bank (FHLB) Advances which
are collateralized by certain mortgages and investment securities. The bank
is required to maintain an investment in the capital stock of the FHLB of
Pittsburgh in an amount of either 1% of its mortgage related assets or .3%
of its total assets (whichever is greater), as calculated at December 31
of each year.
Advances from the FHLB consist of the following:
December 31, 1999 December 31, 1998
---------------------- ---------------------
Weighted Weighted
Stated Maturity Amount Average Rate Amount Average Rate
- -------------- --------------------------------------------------
January 2001 $ 5,000,000 5.70% $ 5,000,000 5.70%
December 2002 5,000,000 6.93% - -
December 2004 5,000,000 7.00% - -
November 2005 5,000,000 4.82% 5,000,000 4.82%
March 2009 5,000,000 5.52% - -
----------- ----- ----------- -----
$25,000,000 5.43% $10,000,000 5.26%
=========== ===== =========== =====
Of the outstanding advances, $10,000,000 are convertible rate notes which
carry an option, at the interest rate change date, to repay the advance
without incurring a prepayment penalty.
(At this point in the 1999 annual report, the following text is in
one column format starting with the third column about a third of
the way down.)
Advances from the FHLB of Pittsburgh are secured by the bank's stock in the
FHLB of Pittsburgh, qualifying residential mortgage loans, U.S. Government
securities, U.S. agency securities and mortgage-backed securities issued or
guaranteed by GNMA, FHLMC and FNMA to the extent that the defined statutory
value must be at least equal to the advances outstanding. The maximum
borrowing capacity at December 31, 1999, is $83,159,000. The advances are
subject to restrictions or penalties in the event of prepayment.
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 $580,000, $506,572 and $520,978 for the
years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE>
(At this point in the 1999 annual report, the following text and tables
appear in one column format measuring two columns wide.)
12. Income Taxes
The balance sheets include approximately $1,712,316 and $(279,623) of net
deferred tax asset (liability) at December 31, 1999 and 1998, respectively.
The components of the net deferred tax asset (liability) at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Unrealized net losses on securities $ 931,218 $ -
Allowancee for loan losses 663,680 492,014
Accrued benefits 138,433 180,263
Deferred loan fees 40,957 42,190
Premises and equipment 405 1,161
- ------------------------------------------------------------------
Total deferred tax assets 1,774,693 715,628
Securities accretion 62,377 53,223
Unrealized gain on securities
available for sale - 942,028
- ------------------------------------------------------------------
Total deferred tax liabilities 62,377 995,251
- ------------------------------------------------------------------
Net deferred tax asset $1,712,316 ($279,623)
=========== ==========
</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>
1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rates $1,254,841 $2,076,611 $1,822,531
Increase (decrease) resulting from:
Non-taxable interest and dividend income (759,541) (700,181) (626,324)
Non-deductible interest expense 90,021 89,263 79,904
Life insurance (105,819) ( 7,458) ( 8,589)
Other 7,602 6,836 6,255
- -----------------------------------------------------------------------------------
Total tax provision $ 487,104 $1,465,071 $1,273,777
========= ========= ==========
</TABLE>
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 the prior period
presented has been restated.
14. Fair Value of Financial Instruments
Below are various estimated fair values at December 31, 1999 and 1998, 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.
(At this point in the 1999 annual report, the text appears in one column
format starting with the third column.)
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.
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.
<PAGE>
Commercial National Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------------------------
(At this point in the 1999 annual report, the following text and table
appear in one column format measuring two columns wide.)
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,
- ---------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short term investments $ 14,963,398 $ 14,963,398 $ 7,723,899 $ 7,723,899
Securities available for sale 124,743,186 124,743,186 119,103,480 119,103,480
Loans, net of reserve 202,919,882 203,460,163 190,200,986 196,094,171
Accrued interest receivable 2,057,925 2,057,925 2,210,909 2,210,909
Financial liabilities
Deposits $272,947,403 $273,642,038 $266,460,521 $268,140,263
Short-term borrowings 15,000,000 15,000,000 3,775,000 3,775,000
Accrued interest payable 1,604,041 1,604,041 1,287,472 1,287,472
Long-term borrowings 25,000,000 24,581,867 10,000,000 10,068,773
- ----------------------------------------------------------------------------------------------------
</TABLE>
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 1999. 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
$7,218,856 and $5,206,868 at December 31, 1999 and 1998.
The following is an analysis of loans to those parties whose loan
balances exceeded $60,000 for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------
<S> <C>
Balances at January 31, $5,007,250 $2,141,813
Advances 2,122,457 4,255,836
Repayments (3,589,316) (1,390,399)
- --------------------------------------------------------------------------
Balances at December 31, $3,540,391 $5,007,250
=========== ===========
During 1999, the corporation elected two new directors, thus the aggregate
amount of credit extended and the balances and activity for 1998 has been
restated to reflect the addition of the new directors.
</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, 1999, that the
corporation and the bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1999, 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. $43,131,006 20.8% $16,592,553 >8.0%
Commercial National Bank 43,150,074 20.8% 16,591,455 >8.0% 20,739,319 >10.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (To Risk Weighted Assets)
Commercial National Financial Corp. 41,211,553 19.9% 8,296,276 >4.0%
Commercial National Bank 41,230,621 19.9% 8,295,727 >4.0% 12,443,591 >6.0%
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to Average Assets)
Commercial National Financial Corp. 41,211,553 11.8% 10,505,245 >3.0%
Commercial National Bank 41,230,621 11.8% 10,504,838 >3.0% 19,407,136 >5.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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% 9,712,796 >3.0%
Commercial National Bank 41,344,371 12.8% 9,712,696 >3.0% 16,187,827 >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
$5,841,000 at December 31, 1999. 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>
Commercial National Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------
17. Condensed Financial Information fo Commercial National Financial Corporation
(Parent Only)
<TABLE>
Balance Sheets
- -----------------------------------------------------------------------
<CAPTION>
December 31,
1999 1998
----------------------------
<S> <C> <C>
Assets:
Cash $ 4,620 $ 6,441
Investment in subsidiaries 39,438,719 43,193,014
- -----------------------------------------------------------------------
$ 39,443,339 $ 43,199,455
=========== ===========
Liabilities and shareholders' equity:
Accounts payable $ 39,446 $ 37,806
Shareholders' equity 39,403,893 43,161,649
- -----------------------------------------------------------------------
$ 39,443,339 $ 43,199,455
=========== ===========
</TABLE>
<TABLE>
Statements of Income and Changes in Retained Earnings
- ------------------------------------------------------------------------
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Dividends and fees from subsidiaries $ 3,472,058 $ 1,582,000 $ 1,380,000
Expenses 152,245 109,997 78,824
------------------------------------------
3,319,813 1,472,003 1,301,176
Applicable tax benefit (expense) 1,784 13,014 (14,000)
------------------------------------------
3,321,597 1,485,017 1,287,176
Equity in undistributed earnings of subsidiaries (117,992) 3,155,869 2,799,433
------------------------------------------
Net income 3,203,605 4,640,886 4,086,609
Retained earnings January 1, 34,133,006 34,604,120 31,777,511
Dividends paid (2,145,625) (1,512,000) (1,260,000)
Stock split - (3,600,000) -
------------------------------------------
Retained earnings December 31, $35,190,986 $34,133,006 $34,604,120
========== ========== ===========
</TABLE>
<TABLE>
Statements of Cash Flows
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,203,605 $ 4,640,886 $ 4,086,609
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries 117,992 (3,155,869) (2,799,433)
Increase (decrease) in accounts payable 1,640 (9,100) 29,344
--------------------------------------
Net cash provided by operating activities 3,323,237 1,475,917 1,316,520
--------------------------------------
Investing activities:
Investment subsidiary - (20,000) -
Financing activities:
Dividends paid (2,145,625) (1,512,000) (1,260,000)
Purchase of treasury stock (1,179,433) - -
--------------------------------------
Net cash used by financing activities (3,325,058) (1,512,000) (1,260,000)
Net increase (decrease) in cash (1,821) (56,083) 56,520
Cash at beginning of year 6,441 62,524 6,004
--------------------------------------
Cash at end of year $ 4,620 $ 6,441 $ 62,524
=========== ========== ==========
</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, 1999 and
1998, 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, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Stokes Kelly & Hinds, LLC
January 28, 2000
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 Pennsylvania 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, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $5,956,183 $5,975,508 $6,123,967 $6,247,074
Interest expense 2,409,985 2,411,734 2,497,350 2,694,387
---------------------------------------------
Net interest income 3,546,198 3,563,774 3,626,617 3,552,687
Provision for loan losses 120,000 120,000 165,000 2,884,706
---------------------------------------------
Net interest income after
provision for loan losses 3,426,198 3,443,774 3,461,617 667,981
Other income (including security
transactions) 539,806 490,705 528,743 425,966
Other expenses 2,271,739 2,268,946 2,306,697 2,446,699
---------------------------------------------
Income before taxes 1,694,265 1,665,533 1,683,663 (1,352,752)
Applicable income taxes 407,800 406,100 420,500 (747,296)
- ------------------------------------------------------------------------------------
Net income $1,286,465 $1,259,433 $1,263,163 $ (605,456)
========= ========= ========= =========
Earnings per share $ .36 $ .35 $ .35 $ (.16)
========= ========= ========= =========
</TABLE>
<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>
(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
1999 High Low Per Share
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $21.50 $19.50 $ .13
Second Quarter 20.00 17.875 .15
Third Quarter 19.25 17.00 .15
Fourth Quarter 21.25 15.375 .17
</TABLE>
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------
<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>
<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
-------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 16,693,455 $ 16,755,493 $ 15,312,410 $ 13,549,080 $ 12,843,170
Interest and dividends on securities 7,475,668 6,862,194 6,521,952 6,305,557 6,138,993
Interest on money market investments 133,609 49,405 47,530 92,930 240,311
- -------------------------------------------------------------------------------------------------------------
Total interest income 24,302,732 23,667,092 21,881,892 19,947,567 19,222,474
Interest Expense
Deposits 8,749,173 9,537,002 9,388,643 8,394,110 8,251,854
Short-term borrowings 471,712 493,784 288,495 51,016 365
Long-term borrowings 792,571 287,795 - - -
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 10,013,456 10,318,581 9,677,138 8,445,126 8,252,219
- -------------------------------------------------------------------------------------------------------------
Net interest income 14,289,276 13,348,511 12,204,754 11,502,441 10,970,255
Provision for loan losses 3,289,706 435,000 270,000 105,000 90,000
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 10,999,570 12,913,511 11,934,754 11,397,441 10,880,255
Other operating income 1,985,220 1,733,090 1,489,069 1,256,190 1,112,942
Other operating expenses 9,294,081 8,540,644 8,063,437 7,644,576 7,046,171
- -------------------------------------------------------------------------------------------------------------
Income before taxes 3,690,709 6,105,957 5,360,386 5,009,055 4,947,026
Applicable income taxes 487,104 1,465,071 1,273,777 1,252,589 1,253,833
- -------------------------------------------------------------------------------------------------------------
Net income $ 3,203,605 $ 4,640,886 $ 4,086,609 $ 3,756,466 $ 3,693,193
============ ============ ============ ============ ============
Per Share Data
Net income $ .90 $ 1.29 $ 1.14 $ 1.04 $ 1.03
Dividends declared $ .60 $ .42 $ .35 $ .31 $ .28
Average shares outstanding (a) 3,578,894 3,600,000 3,600,000 3,600,000 3,600,000
At End of Period
Total assets $355,297,990 $326,379,353 $319,741,956 $278,110,524 $266,176,018
Securities 124,743,186 119,103,480 118,382,089 102,355,972 103,480,616
Loans and leases, net of
unearned income 204,839,335 182,115,160 183,481,157 159,935,523 144,288,002
Allowance for loan losses 1,919,453 1,914,174 1,882,251 2,035,818 2,081,700
Deposits 272,947,403 266,460,521 260,689,757 238,808,071 230,736,311
Shareholders' equity 39,403,893 43,161,649 38,445,011 35,388,254 33,036,470
Key Ratios
Return on average assets .95% 1.46% 1.39% 1.39% 1.43%
Return on average equity 7.50 11.47 11.14 11.02 11.80
Net loan-to-deposit ratio 74.34 71.38 69.66 66.12 61.63
Dividend payout ratio (dividends
declared divided by net income) 66.98 32.58 30.83 29.87 27.29
Equity-to-assets ratio (average equity
divided by average total assets) 12.68 12.72 12.47 12.64 12.13
</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, 1999, 1998 and 1997.
This information should be read in conjunction with the consolidated
financial statements and related footnotes for the years under review.
As previously noted in the 1999 Annual Report, the earnings performance
of the corporation was affected materially by way of default on the loans
of a single commercial relationship.
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 1999 was $3,203,605, compared to $4,640,886 in 1998 and
$4,086,609 in 1997. Earnings per share were $.90 in 1999 compared to
1998's earnings of $1.29 per share. In 1997, earnings per share were
$1.14.
Return on average assets was .95% in 1999, 1.46% in 1998 and 1.39% in
1997. For the same years return on average equity was 7.50%, 11.47% and
11.14%, 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
1999, net interest income was $14,289,276 compared to $13,348,511 in 1998
and $12,204,754 in 1997.
Average earning assets grew $18,875,552 in 1999, $20,956,507 in 1998 and
$23,235,041 in 1997. Average interest-bearing liabilities increased
$13,088,953 in 1999, $15,869,057 in 1998 and $20,639,642 in 1997. The return
on earning assets, calculated on a tax-equivalent basis, equaled 7.94% in
1999 compared to 8.20% in 1998 and 8.14% in 1997. The cost-of-funds rate
was 4.00% in 1999, 4.35% in 1998 and 4.36% in 1997. The tax-equivalent
net interest margin was 4.82% in 1999, 4.78% in 1998 and 4.69% in 1997.
<PAGE>
<TABLE>
Financial Comparisons
Consolidated Average Balance Sheet, Interest Income/Expense and Rates
<CAPTION>
1999 1998 1997
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 $194,664,755 $16,693,454 8.63% $186,418,665 $16,755,493 9.03% $169,849,234 $15,312,410 9.06%
Taxable securities 82,519,029 5,432,186 6.58 77,380,692 4,967,679 6.42 77,615,939 4,827,530 6.22
Non-taxable securities 40,568,028 2,043,482 7.63 36,888,885 1,894,515 7.78 32,285,316 1,694,422 7.95
Interest-bearing deposits
with banks 136,426 10,824 7.93 108,280 7,858 7.26 110,211 7,167 6.50
Federal funds sold 2,542,740 122,785 4.83 758,904 41,547 5.47 738,219 40,363 5.47
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 320,430,978 24,302,732 7.94 301,555,426 23,667,092 8.20 280,598,919 21,881,892 8.14
Non-interest-earning Assets
Cash 7,826,298 7,027,443 6,572,767
Allowance for loan losses (1,909,438) (1,876,326) (1,950,574)
Other assets 10,460,125 11,117,942 9,039,928
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-
earning assets 16,376,985 16,269,059 13,662,121
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $336,807,963 $317,824,485 $294,261,040
============ ============ ============
Liabilities and Shareholders' Equity
Interest-bearing Deposits
NOW accounts $ 21,376,716 154,154 .72% $ 20,709,992 350,081 1.69% $ 20,204,634 386,186 1.91
Money Market accounts 43,545,503 1,528,089 3.51 41,921,741 1,630,147 3.89 42,542,349 1,732,133 4.07
Savings deposits 46,836,966 1,180,938 2.52 45,672,055 1,337,385 2.93 44,871,628 1,387,360 3.09
Time deposits 115,189,889 5,885,992 5.11 112,647,588 6,085,057 5.40 108,744,105 5,882,964 5.41
Short-term borrowings 8,588,090 471,712 5.49 10,976,287 628,116 5.72 4,819,178 288,495 5.99
Long-term borrowings 14,602,740 792,571 5.43 5,123,288 287,795 5.62 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 250,139,904 10,013,456 4.00 237,050,951 10,318,581 4.35 221,181,894 9,677,138 4.36
Non-Interest-bearing Liabilities and Capital
Non-interest-bearing deposits 41,744,536 37,565,870 34,124,049
Other liabilities 2,227,436 2,756,896 2,255,578
Shareholders' equity 42,696,087 40,450,768 36,699,519
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-bearing
funding sources 86,668,059 80,773,534 73,079,146
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $336,807,963 $317,824,485 $294,261,040
=========== =========== ===========
Net Interest Income and
Net Yield on Interest-
earning Assets $14,289,276 4.82% $13,348,511 4.78% $12,204,754 4.69%
=========== =========== ===========
</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
-----------------------------------------------------------------------------
1999 Change from 1998 1998 Change from 1997
-----------------------------------------------------------------------------
<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 $( 62,038) $ 741,166 $ (803,204) $1,443,083 $1,493,783 $ (50,700)
Securities
Taxable 464,507 347,035 117,472 140,149 (14,632) 154,781
Non-taxable 148,967 171,786 ( 22,819) 200,093 241,608 (41,515)
Interest-bearing deposits with banks 2,966 2,043 923 691 (126) 817
Federal funds sold 81,238 97,658 ( 16,420) 1,184 1,131 53
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 635,640 1,359,688 (724,048) 1,785,200 1,721,764 63,436
Interest-bearing Liabilities
Deposits (653,497) 255,234 (908,731) 14,027 199,116 (185,089)
Short-term borrowings (156,404) (136,663) ( 19,741) 339,621 368,589 (28,968)
Long-term debt 504,776 532,498 ( 27,722) 287,795 - 287,795
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense (305,125) 651,069 (956,194) 641,443 567,705 73,738
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 940,765 $ 708,619 $ 232,146 $1,143,757 $1,154,059 $ (10,302)
========== ========== ========= ========== ========== ===========
</TABLE>
[FN]
Included in interest income are loan fees of $211,752 in 1999,
$305,826 in 1998 and $212,453 in 1997.
(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 $3,289,706 in 1999, $435,000 in 1998 and $270,000 in 1997.
The 1999 provision was increased due to a default by one customer
on it's commercial loans aggregating $2,619,706. For each of the
same years the net charge-off against the allowance for loan losses
was $3,284,427, $403,077 and $423,567, respectively, with the 1999
increase due to the charge-off of the defaulted loans described
above. On December 31, 1999 the allowance for
loan losses equaled .94% of total loans compared to 1.00% at
the end of 1998 and 1.03% at the end of 1997. Loans which were
past due 90 days or more, or were on non-accrual equaled 0.58%
of total loans on December 31, 1999, 0.22% on December 31,
1998 and 0.89% on December 31, 1997. 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 1999, total non-interest income increased $252,130 to
$1,985,220 from $1,733,090 in 1998. Asset management and trust
income grew $64,580 to $304,998. Service charges on deposit
accounts increased $107,116 to $691,899. Other service charges
and fees increased by $86,281 to $616,811. Net losses on sold
investments amounted to $349,940. Other income
increased by $354,206 to $721,452. This was due to a life insurance
benefit of $294,817 that the bank received. In 1997, total non-interest
income was $1,489,069.
Non-interest expense in 1999 was $8,540,644. This represented
an increase of $477,207 over 1998's non-interest expense which
totaled $8,540,644. 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 items.
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 1997 was $8,063,437.
Income tax expense was $487,104 in 1999, $1,465,071 in 1998
and $1,273,777 in 1997. The effective tax rate was 13.20%,
23.99% and 23.76%, respectively. The disparity between 1999
and 1998 is related to the losses associated with the commercial
loan relationship and the corporation's sizeable tax-free
holdings.
LIQUIDITY
Liquidity measurements attempt to evaluate the corporation's
ability to meet the cash-flow needs of its depositors and
borrowers. One 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. Due to the rise in interest
rates
<PAGE>
(At this point in the 1999 annual report, the following text
is in three-column format and occupies the top quarter of the
page. The rest of the page comprises of two tables measuring
three columns wide.)
during 1999, liquidity from securities would result in
a loss given the shift in market values of the investments. The
bank is a member of the Federal Home Loan Bank (FHLB) system. The
FHLB is the primary liquidity source for long-term funding and also
provides short-term funding. Other supplemental external sources
have been established for short-term funding.
On December 31, 1999, total deposits were $6,486,882 greater
than on December 31, 1998. Interest-bearing deposits increased
$9,470,649 in 1999 while demand deposits decreased
$2,983,767. The increase in interest-bearing deposits was
attributed to competitive pricing in a rising rate environment.
During the same period, total loans, net of unearned income, grew
by $12,724,175. Competition for high-quality loans remained intense
throughout 1999. All real-estate secured and commercial loan products
posted increases from year-end 1998.
The amortized cost of the corporation's securities portfolio increased
$11,149,255 and was $127,482,065 on December 31, 1999. On that same
date, the estimated market value of the entire securities portfolio was
$124,743,186 which was lower than amortized cost by $2,738,879 and
represented the net of $3,122,125 gross unrealized losses less
$383,246 gross unrealized gains. On December 31, 1999 the amount of
securities which would reach maturity within one year was $14,295,648
as compared to $15,468,716 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, 1999.
<TABLE>
<CAPTION>
Loans by Classification on December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
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 $ 23,069,385 12% $ 20,893,911 11% $ 19,052,486 10% $ 17,115,404 11% $ 14,494,356 10%
Real estate - commercial 59,386,543 29 52,165,384 27 44,289,723 24 33,437,360 21 32,460,803 23
Real estate - construction 4,275,988 2 2,754,964 1 3,510,809 2 1,924,619 1 1,523,490 1
Real estate - other 99,769,594 48 96,210,304 50 95,570,632 52 86,045,874 54 79,910,652 55
Consumer - installment 4,396,066 2 5,388,246 3 6,219,577 4 6,542,365 4 4,803,258 3
Municipal 4,290,289 2 3,757,563 2 3,340,405 2 3,183,483 2 1,332,403 1
Other 9,771,934 5 11,068,877 6 11,655,453 6 11,799,130 7 9,998,413 7
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $204,959,798 100% $192,239,249 100% $183,639,085 100% $160,048,235 100% $144,523,755 100%
Unearned Income (120,463) (124,089) (157,928) (112,712) (235,373)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans,
net of unearned income $204,839,335 $192,115,160 $183,481,157 $159,935,523 $144,288,002
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
Maturity Distribution of Securities on December 31, 1999
<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 $12,006,536 $ 2,289,112 $ - $ 14,295,648 6.42%
After 1 but within 5 years 5,493,574 23,081,975 - 28,575,549 7.25
After 5 but within 10 years 24,365,700 26,171,712 - 50,537,412 7.32
After 10 years 30,701,818 - - 30,701,818 6.95
No fixed maturity - - 3,371,638 3,371,638 6.00
- -------------------------------------------------------------------------------------------------------
$72,567,628 $51,542,799 $3,371,638 $127,482,065 7.07%
=========== =========== ========== ============ =====
</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 1999 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.)
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 $ 1,349 $ 2,729 $ 5,035 $ 9,865 $ 51,074 $ 54,060
Federal funds sold and
deposits with banks 6,309 - - - - -
Loans 39,394 2,923 5,219 9,187 83,660 63,807
- ------------------------------------------------------------------------------------------------------
Total interest-sensitive
assets 47,052 5,652 10,254 19,052 134,734 117,867
Interest-bearing liabilities:
Certificates of deposit 22,528 26,354 20,212 22,973 22,692 2,270
Other interest-bearing
liabilities - 4,629 4,629 6,934 43,586 54,605
Other borrowings 10,000 5,000 - - 25,000 -
- ------------------------------------------------------------------------------------------------------
Total interest-sensitive
liabilities 32,528 35,983 24,841 29,907 91,278 56,875
- ------------------------------------------------------------------------------------------------------
Interest sensitivity gap $14,524 $(30,331) $(14,587) $(10,855) $ 43,456 $60,992
======= ========= ========= ========= ========== =======
Cumulative gap $14,524 $(15,807) $(30,394) $(41,249) $ 2,207 $63,199
======= ========= ========= ========= ========== =======
Ratio of cumulative gap to
earning assets 4.30% (4.68%) (9.00%) (12.20%) .65% 18.70%
======== ========= ========= ========= ========== =======
</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,
1999 and December 31, 1998 according to the categories indicated:
<TABLE>
Allocation of the Allowance for Loan Losses
(dollar amounts in thousands)
<CAPTION>
1999 1998
----------------------------------------------------
<S> <C> <C>
Commercial, Industrial, Financial,
Agricultural and Tax Free $ 397 $ 455
Residential mortgages 65 29
Loans to individuals 1,069 913
Off-balance sheet items 235 114
Year 2000 153 190
Unallocated - 213
----------------
Total $1,919 $1,914
====== ======
Reserve as a percentage
of average total loans .99% 1.03%
======= =======
</TABLE>
CAPITAL RESOURCES
Shareholders' equity declined $3,757,756 during 1999 and was
$39,403,893 on December 31, 1999 compared to $43,161,649 on
December 31, 1998. Net unrealized gains on securities available for
sale on December 31, 1999 temporarily decreased shareholders'
equity by $1,807,660. The corporation's participation in a stock
buy-back program has reduced shareholder's equity by $1,179,433.
The retained earnings retention rate was 33.02% in 1999 as
compared to 67.42% in 1998.
The shareholders' equity or the capital base represents the
investment by the corporation's owners either initially or
through retention of earnings (net after income tax less
dividend payments). This investment acts as a safeguard against
future uncertainties. The amount of capital which is deemed
appropriate is dependent upon an assessment of the
corporation's total assets, the quality of its loans and
securities, its historical earnings record, its business prospects
for the near and long-term, the management and information systems
in place and the general competence and abilities of the corporation's
management.
<PAGE>
(At this point in the 1999 annual report, the following text
and table are in three column format.)
On December 31, 1999, the corporation's capital (not including
the allowance for loan losses) amounted to $39,403,893
or 11.09% of total assets. The inclusion of the allowance
increases the capital ratio to 11.63%. On the same basis of
calculation, these ratios were 13.22% and 13.81% respectively
on December 31, 1998.
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.
Under leverage guidelines, financial institutions are required
to maintain a leverage ratio of at least 3%. The 3% minimum
ratio is applicable only to financial institutions that meet
certain specified criteria, including excellent asset quality,
high liquidity, low interest rate exposure and the highest
regulatory rating. Financial institutions not meeting these
criteria are required to maintain a leverage ratio that exceeds
3% by a cushion of at least 100 to 200 basis points.
As of December 31, 1999, the corporation had Tier I and total
equity capital to risk adjusted asset ratios of 19.87% and
20.80%, respectively. The leverage ratio was 11.77%. At
December 31, 1998, the corporation had Tier I and total equity
capital to risk adjusted assets ratios of 22.03% and 23.05%,
respectively.
<TABLE>
The table below presents the corporation's capital position on December 31, 1999
(dollar amounts in thousands)
<CAPTION>
Percent
of Adjusted
Amount Assets
-------------------------------------------------------------
<S> <C> <C>
Tier I capital 41,212 19.87
Tier I capital requirement 8,296 4.00
Total equity capital 43,131 20.80
Risk-based requirement 16,593 8.00
-------------------------------------------------------------
Leverage capital 41,212 12.26
Leverage requirement 10,505 3.00
</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.
The Year 2000 issue came and went with no significant issues
to reported. Of course, we will continue to monitor all dates
in the year 2000 that are being touted by computer consultants
as potential problems.
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.
Collection efforts are underway to recapture any amount of the
defaulted loans that occured from a commercial account
relationship in 1999.
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 and 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, which
could have a material impact on companies through business
interruption or shutdown, financial loss, reputation damage
and legal liability.
The corporation is primarily dependent upon systems that have been
developed by third parties and, therefore, is dependent upon vendor
compliance. To date, the corporation's vendors reported no
significant year 2000 problems and the corporation's financial
position has not been negatively impacted with third party Year
2000 failures. Because the corporation's continued compliance
in 2000 is dependent upon third party Year 2000 compliance,
the corporation cannot guarantee that its efforts alone have
resolved the Year 2000 issue or that the third party vendors
will not experience any Year 2000 problems.
The corporation has developed contingency plans for all mission
critical systems. These plans involve automated as well as manual
actions and may require additional staffing requirements and will
detail procedures to be followed in the unlikely event of any
disruptions.
Based on our assessment of the vendors and testing currently being
done, the corporation estimates the costs associated with addressing
the issue are 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.
<PAGE>
(This page is left intentionally blank.)
<PAGE>
Commercial National Financial Corporation
CORPORATE OFFICERS
- -------------------------------------------------------------------------
Louis A. Steiner Chairman of the Board
Louis T. Steiner Vice Chairman, 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
Pennsylvania
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 Pennsylvania
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 Pennsylvania
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 Pennsylvania
All corporate directors also serve as directors of
Commercial National Bank of Pennsylvania
DIRECTORS EMERITI
- ----------------------------------------------------------------------------
James A. Charley William M. Charley William W. Washnock
<PAGE>
Commercial National Bank of Pennsylvania
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 Michael J. Palko Keith M. Visconti
Martin E. May Philip S. Pettina
Vice Presidents
- ----------------------------------------------------------------------
Ryan M. Glista Michael L. Matthews Wendy S. Schmucker
William N. Hamilton, Jr. Patricia A. Nemchik Thomas D. Watters
Cheryl M. Letterio
Assistant Vice Presidents
- -----------------------------------------------------------------------
Karen E. Burick Marsha J. Salley James T. Vaughan
Donna J. Daugherty Michael A. Schmidt Rebecca J. Weiner
William J. Johnston Thomas E. Sylvester* Phyllis S. Yesh*
Kelly R. Moreman
Community Office Managers
- -------------------------------------------------------------------------
Douglas P. Arndt Jennifer M. Chemski Jerome M. Supko
Linda A. Burns Laura A. Steiner Patricia L. Torrance
Regina L. Calabrace
Service Officers
- --------------------------------------------------------------------------
Thaddeus S. Anderson Judy A. Hoffer Elizabeth M. Rosa
Lisa A. Ball Donald G. Jones Kristin Rossi
Jennifer L. Battaglia Lori J. Krise Roxanne Shadron
Mona R. Birt Jonna M. Kundla John H. Sperandio
Terrie L. Bowman Susan M. Matenkosky Kimberly A. Stefkovich
Eleanor A. Bridge William T. McBeth Sean E. Swansboro
Judith J. Ciocco Charles H. McDowell Charles L. Taylor
Karen J. Ciocco Tiffany D. McMahon Marilyn A. Tlumach
Kathy S. Claycomb Florence E. Pevarnik Kimberly A. Turchek
James V. Conforti Patricia A. Queer Cynthia M. Varner
Beth Ann Ferlin Susan F. Robb Jodi L. Zyvith
Cynthia A. Fontaine Susan L. Roebuck
Virginia E. Halucka
[FN]
* also serve as community office manager
<PAGE>
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
724/539-2973 (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 Arnold
Palmer Regional Airport, Greensburg Kirk Nevin Arena, Latrobe Area Hospital,
New Alexandria Qwik Mart, Norvelt Open Pantry and Saint Vincent College. 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 Pennsylvania now is
Ligoner and New Alexandria. 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
www.cnbinsurance.com 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 Knight Securities Spear, Leads & Kellogg
100 Light Street 525 Washington Boulevard 10 Exhange Place
Baltimore, MD 21202 Jersey City, NJ 07310 Jersey City, NJ 07302
800-638-7411 800-342-2325 800-275-9682
FJ Morrissey & Co Inc. Ryan, Beck & Co.
Suite 1420 740 Broad Street
1700 Market Street Shrewsbury, NJ 07702
Philadelphia, PA 19103 800-342-2325
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 1999 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 18, 2000
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 18, 2000
at 2:00 P.M. for the following purposes.
- Election of five directors each for a term of three
years; and
- Ratification of the appointment of Stokes Kelly & Hinds, LLC
as independent auditors for the corporation; and
- 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 17, 2000, 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 promptly return the proxy in the
envelope prorided whether or not you plan to attend the meeting in person. If
you do attend the meeting, you may then withdraw your proxy and vote in person.
Your prompt response will be appreciated.
By Order of the Board of Directors
/s/ Wendy S. Schmucker
Wendy S. Schmucker
Secretary
March 20, 2000
<PAGE>
The following text in on 8.5 X 11 paper written in two-column format.
<PAGE>
COMMERCIAL NATIONAL FINANCIAL CORPORATION
900 Ligonier Street
Latrobe, Pennsylvania 15650
________________________________________
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON April 18, 2000
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 18, 2000 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 1999, are being mailed on March 20, 2000, 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 3,527,568
and only those shareholders of record at the close of business on
March 17, 2000 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. Arrangements will be made
with brokerage houses and other custodians, fiduciaries and nominees
to forward proxy solicitation materials to the beneficial owners of
stock held of record by these persons, and, upon request therefore,
the corporation will reimburse them for reasonable forwarding
expenses.
At the meeting, the shareholders will
- act upon the proposal to elect as directors the five persons set
forth in this proxy statement each in a class of directors as set
forth in the following pages;
- ratify the appointment of Stokes Kelly & Hinds, LLC as
independent auditors for the corporation; and
- 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 nominees listed in this
proxy statement. The five 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 bylaws 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. Abstentions will be counted as
present for purposes of determining the existence of a quorum.
Abstentions and broker non-votes will be treated as shares that
neither are capable of being voted nor have been voted and,
accordingly, will have no effect on the outcome of the vote on
the election of directors or on the outcome of the proposal to
ratify the appointment of Stokes Kelly & Hinds, LLC.
<PAGE>
ELECTION OF DIRECTORS
The bylaws of the corporation provide that the board of
directors shall consist of not less than three directors, and
shall be classified into three classes, each class to be
elected for a term of three years. The board of directors,
within the limits set in the bylaws, 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 with five directors
in each of three classes. At the annual meeting, there shall
be elected five directors as a class to serve until the
annual meeting of shareholders in the year 2003. 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 Pennsylvania (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 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:
- the name, address, and age of each proposed nominee;
- the principal occupation of each proposed nominee;
- the number of shares of the corporation owned by each
proposed nominee;
- the total number of shares of the corporation that
will be voted for each proposed nominee;
- the name and address of the notifying shareholder; and
- the number of shares of common stock of the corporation
owned by the notifying shareholder.
Nominations not made within the foregoing procedures may be disregarded
by the chairman at the annual shareholders' meeting.
Each nominee has consented to be named and to serve as a
director, if elected. If any nominee becomes unable to serve as
a director, the proxies named in the proxy will vote for a
substitute nominee selected and recommended by the board of
directors of the corporation.
The names and ages of the nominees, and the year each
nominee began continuous service as a director of the
corporation, together with the principal occupation of each at
present and for at least the previous five years, are as
follows:
<PAGE>
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
------ ----------------- ------- ------
<S> <C> <C> <C>
Gregg E. Hunter(1) 41, vice chairman and chief 2003 1995
financial officer of the
corporation and the bank (1995 -
present); vice president/chief
financial officer of the bank
(1994 - 1995)
Joedda M. Sampson 47, president and principal owner 2003 1999
Allegheny City Restorations, Inc.
a development corporation engaged
in restoring and developing historic
properties and operating business
entities which occupy them
Debra L. Spatola y 43, president 2003 1997
Laurel Valley Foods, Inc.
Louis A. Steiner(2) 69, chairman of the board 2003 1990
of the board and the bank
(1997 - present);
chairman of the board and
chief executive officer of
the corporation and the bank
(1990 - 1997)
George V. Welty 53, attorney, partner 2003 1997
Flickinger and Welty
</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.
[FN]
(1) Gregg E. Hunter, director and nominee, is the son of Dorothy
S. Hunter, director; nephew of Louis A. Steiner, director and
nominee; and cousin of Louis T. Steiner, director.
(2) Louis A. Steiner, director and nominee, is the brother of Dorothy
S. Hunter, director; father of Louis T. Steiner, director; and
uncle of Gregg E. Hunter, director and nominee.
<PAGE>
CONTINUING DIRECTORS
The remaining ten 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 18, 2000.
<TABLE>
<CAPTION>
AGE; PRINCIPAL OCCUPATION
FOR THE TERM DIRECTOR
NAME PAST FIVE YEARS EXPIRES SINCE
------ --------------- ------- -----
<S> <C> <C> <C>
John T. Babilya 40, president, chief executive 2001 1999
officer and co-owner
Arc Weld, Inc.
a precision custom-manufacturing
firm servicing steel, drilling, coal,
glass, electrical and geo-
environmental industries
George A. Conti, Jr. 61, attorney at law 2001 1996
Frank E. Jobe 78, retired, 2001 1990
former executive vice
president of the bank
Roy M. Landers 71, retired 2001 1990
former executive vice president
R & L Development Company
land development
C. Edward Wible 54, certified public 2002 1995
accountant, Horner Wible
& Associates, Certified Public
Accountants
Richmond H. Ferguson 68, attorney at law 2002 1990
Dorothy S. Hunter (3) 75, vice president 2002 1990
Latrobe Foundry Machine
& Supply Company
John C. McClatchey 62, chief executive officer 2002 1990
JCM Industries
manufacturer of hardwood
lumber and pallets
Joseph A. Mosso 68, retired 2002 1990
former president
Mosso's Pharmacy, Inc.
Louis T. Steiner (4) 38, vice chairman, president 2002 1995
and chief executive officer of the
corporation and the bank
(1998 - present); vice chairman
and chief executive of the
corporation and the bank
(1997 - 1998); vice chairman
of the corporation and the bank
(1995 - 1997)
<FN>
(3) Dorothy S. Hunter, director, is the sister of Louis A.
Steiner, director and nominee; mother of Gregg E. Hunter,
director and nominee; and aunt of Louis T. Steiner,
director.
(4) Louis T. Steiner, director, is the son of Louis A. Steiner,
director and nominee; nephew of Dorothy S. Hunter, director;
and cousin of Gregg E. Hunter, director and nominee.
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of February 18, 2000, 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 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 (1) (2) Owned
- ------------------- ----------------- ------------
<S> <C> <C>
Louis A. Steiner 596,490 (3) 16.57%
R. D. 2, Box 197
Ligonier, PA 15658
Dorothy S. Hunter 183,000 (4) 5.08%
P. O. Box 28
Latrobe, PA 15650
Gregg E. Hunter 210,180 (5) 5.84%
P. O. Box 3
Latrobe, PA 15650
George A. Conti, Jr. 228,600 (6) 6.35%
101 North Main Street
Greensburg, PA 15601
</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 60 days after February 18, 2000.
Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Information furnished by the directors and the corporation.
(3) 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.
(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 3,000 shares held in street name by Mr. Conti; 600
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 18, 2000, 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 2,503 .07%
George A. Conti, Jr. 228,600 (3) 6.35%
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 37,700 1.05%
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 2,680 .07%
C. Edward Wible 2,000 .06%
All executive officers and
directors as a group
(15 directors, 4 officers,
16 persons in total) 1,171,605 32.54%
</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 60 days after February 18, 2000.
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; 600
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
1999 the board of the corporation met six times and the board
of the bank met 13 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 four times
during 1999 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 1999 the committee met two times.
<PAGE>
COMMITTEES OF THE BOARD OF THE BANK
The bylaws 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 monitor and 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 1999 the committee held four meetings.
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 1999 the committee held
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
officer, 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 1999 the committee
held four meetings.
The trust committee and trust investment committee, each
consists of not less than five 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 committee members. Each committee meets monthly,
concurrently, to monitor and review all activities and functions
of the trust division. During 1999 the committees held 11 meetings.
<PAGE>
ATTENDANCE AT MEETINGS
During 1999 all directors at least 75 percent 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 1999.
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 1999. 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.
1999 was a transition year for the Bank's incentive program.
Two plans were in effect during 1999 - the first plan, combining
management incentive compensation and performance pay was in
effect from January 1, 1999 through June 30, 1999. Effective
July 1, 1999, that plan was replaced by job-specific variable
compensation plans. The Incentive Plan for Key Executives was
developed to provide a more direct link between Bank performance
and a variable compensation opportunity for eligible participants
if the Bank meets or exceeds key financial measures. After Tax
Return on Average Assets and After Tax Net Earnings increase
targets for the Plan year. Thresholds of performance must be met
or exceeded before payouts occur from the Plan. Payouts cycles
occur on both quarterly and annual cycles. Payouts, if earned,
will be as a percentage of overall base salary earned either
during a quarter or during the year - up to 20% quarterly and up
to 8% annually.
Executives also participate in the corporation's employee
profit sharing plan described elsewhere in the proxy statement.
On December 8, 1998, the committee set the 1999
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 1999 and annual bonuses and profit sharing
earned in 1999 as determined by the bank's 1999 performance.
EXECUTIVE COMPENSATION COMMITTEE
Roy M. Landers John C. McClatchey Joseph A. Mosso
<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 1999
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 1999 114,212 16,873 18,502
of directors of the
corporation and the 1998 109,412 6,403 17,306
bank
1997 118,524 5,962 18,642
LOUIS T. STEINER
vice chairman, 1999 121,526 17,882 19,981
president and chief
executive officer of 1998 114,095 6,496 17,775
the corporation and
the bank 1997 73,555 4,403 11,634
GREGG E. HUNTER
vice chairman and chief 1999 103,036 15,328 16,759
financial officer
of the corporation 1998 96,779 5,915 15,169
and the bank
1997 74,850 4,347 11,835
</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>
1994 100.00 100.00 100.00
1995 116.03 141.32 149.02
1996 210.98 173.87 196.75
1997 218.01 213.05 329.42
1998 243.93 300.22 327.15
1999 232.95 542.37 314.45
</TABLE>
[FN]
Assumes that the value of the investment in CNFC Common Stock and
each index was $100 on December 31, 1994 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 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 20 percent for
the first full three years of service increasing annually thereafter
to 100 percent vesting after seven 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.
<PAGE>
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,
1999, and was last elected by the shareholders of the corporation
at the annual meeting held on April 20, 1999. 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.
The board of directors of the corporation at a meeting held
November 16, 1999 selected Stokes Kelly & Hinds, LLC as the
independent auditors for the corporation for 2000. 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.
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 2001 annual meeting of
shareholders, must deliver such proposal in writing to the
chairman of the board of Commercial National Financial
Corporation at the office of the corporation, 900 Ligonier
Street, Latrobe, Pennsylvania 15650, not later
than November 30, 2000.
<PAGE>
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 18, 2000 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.
------------, 2000
------------------
------------------
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 Gregg E. Hunter, Joedda M. Sampson, ( ) ( )
Debra L. Spatola, Louis A. Steiner and
George V. Welty, as directors, in a
class for a term expiring at the
annual meeting year 2003, 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,654,617
<INT-BEARING-DEPOSITS> 558,781
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 124,743,186
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 204,839,335
<ALLOWANCE> 1,919,453
<TOTAL-ASSETS> 355,297,990
<DEPOSITS> 272,947,403
<SHORT-TERM> 15,000,000
<LIABILITIES-OTHER> 2,946,694
<LONG-TERM> 25,000,000
0
0
<COMMON> 7,200,000
<OTHER-SE> 32,203,893
<TOTAL-LIABILITIES-AND-EQUITY> 355,297,990
<INTEREST-LOAN> 16,693,455
<INTEREST-INVEST> 7,475,668
<INTEREST-OTHER> 133,609
<INTEREST-TOTAL> 24,302,732
<INTEREST-DEPOSIT> 8,749,173
<INTEREST-EXPENSE> 10,013,456
<INTEREST-INCOME-NET> 14,289,276
<LOAN-LOSSES> 3,289,706
<SECURITIES-GAINS> (349,940)
<EXPENSE-OTHER> 9,294,081
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</TABLE>
