form10qjune08.htm
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
WASHINGTON,
DC 20549
|
|
FORM
10-Q
|
(Mark
One)
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2008
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number 0-18676
COMMERCIAL NATIONAL FINANCIAL
CORPORATION
|
(Exact name of registrant as
specified in its charter)
|
|
PENNSYLVANIA
|
25-1623213
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
900 LIGONIER STREET LATROBE,
PA
|
15650
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area
code: (724)
539-3501
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes[ X
] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “ large accelerated
filer”, “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large
Accelerated filer [ ] Accelerated
filer [ ] Non-accelerated filer
[ ] Smaller Reporting
Company [ X ]
Indicate
by check mark whether the registrant is a shell company( as defined in Rule
12b-2 of the Exchange Act).
[ ]yes [x]
No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock.
CLASS
|
OUTSTANDING AT August 1,
2008
|
Common
Stock, $2 Par Value
|
2,897,053
Shares
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
|
Page
|
|
|
Consolidated
Statements of Financial Condition
|
|
3
|
Consolidated
Statements of Income
|
|
4
|
Consolidated
Statements of Changes in
|
|
|
Shareholders'
Equity
|
|
5
|
Consolidated
Statements of Cash Flows
|
|
6
|
Notes
to Consolidated Financial Statements
|
|
7
|
ITEM
2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
|
111
|
ITEM
3.Quantitative and Qualitative Disclosures about Market Risk
|
|
166
|
ITEM
4.Controls and Procedures
|
|
166
|
ITEM
4T.Controls and Procedures
|
|
166
|
PART
II - OTHER INFORMATION
ITEM
1.Legal Proceedings
|
|
177
|
ITEM
1A.Risk Factors
|
|
17
|
ITEM
2.Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
177
|
ITEM
3.Defaults Upon Senior Securities
|
|
177
|
ITEM
4.Submission of Matters to a Vote of Security Holders
|
|
188
|
ITEM
5.Other Information
|
|
188
|
ITEM
6.Exhibits
|
|
199
|
|
|
|
Signatures
|
|
200
|
|
|
|
|
|
|
COMMERCIAL
NATIONAL FINANCIAL CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
(dollars
in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
Cash and due from
banks
|
|
$ |
8,576 |
|
|
$ |
9,836 |
|
Interest bearing deposits with
banks
|
|
|
48 |
|
|
|
93 |
|
Total cash and cash
equivalents
|
|
|
8,624 |
|
|
|
9,929 |
|
|
|
|
|
Investment securities available
for sale
|
|
|
99,156 |
|
|
|
109,960 |
|
Restricted investments in bank
stock
|
|
|
3,119 |
|
|
|
2,375 |
|
|
|
|
|
Loans
receivable
|
|
|
216,531 |
|
|
|
227,005 |
|
Allowance for loan
losses
|
|
|
(1,832 |
) |
|
|
(1,869 |
) |
Net loans
|
|
|
214,699 |
|
|
|
225,136 |
|
|
|
Premises and equipment,
net
|
|
|
3,647 |
|
|
|
3,728 |
|
Investment in life
insurance
|
|
|
14,236 |
|
|
|
14,001 |
|
Other assets
|
|
|
2,538 |
|
|
|
2,513 |
|
|
|
Total assets
|
|
$ |
346,019 |
|
|
$ |
367,642 |
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
Deposits (all
domestic):
|
|
Non-interest
bearing
|
|
$ |
67,509 |
|
|
$ |
64,914 |
|
Interest
bearing
|
|
|
195,699 |
|
|
|
228,605 |
|
Total deposits
|
|
|
263,208 |
|
|
|
293,519 |
|
|
|
Short-term
borrowings
|
|
|
24,325 |
|
|
|
13,175 |
|
Long- term
borrowings
|
|
|
20,000 |
|
|
|
20,000 |
|
Other
liabilities
|
|
|
2,031 |
|
|
|
2,487 |
|
Total liabilities
|
|
|
309,564 |
|
|
|
329,181 |
|
|
|
Shareholders'
equity:
|
|
Common stock, par value $2 per
share; 10,000,000
|
|
shares authorized; 3,600,000
issued;
|
|
2,897,053 and 3,028,813 shares
outstanding, respectively
|
|
|
7,200 |
|
|
|
7,200 |
|
Retained
earnings
|
|
|
40,639 |
|
|
|
40,505 |
|
Accumulated other comprehensive
income
|
|
|
614 |
|
|
|
1,437 |
|
Treasury stock, at cost,
702,947 and 571,187 shares, respectively
|
|
|
(11,998 |
) |
|
|
(10,681 |
) |
Total shareholders'
equity
|
|
|
36,455 |
|
|
|
38,461 |
|
|
|
Total liabilities
and
|
|
shareholders'
equity
|
|
$ |
346,019 |
|
|
$ |
367,642 |
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
|
CONSOLIDATED
STATEMENTS OF INCOME
|
(Dollar
amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
|
|
Six
Months
|
|
Ended
June 30
|
|
Ended
June 30
|
|
(unaudited)
|
|
(unaudited)
|
|
|
2008
|
|
2007
|
|
|
2008
|
|
2007
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
Interest and fees on
loans
|
$
|
3,275
|
|
$
|
3,373
|
|
|
$
|
6,651
|
|
$
|
6,794
|
|
Interest and dividends on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,512
|
|
|
1,084
|
|
|
|
3,133
|
|
|
2,204
|
|
Exempt from federal income
taxes
|
|
34
|
|
|
34
|
|
|
|
67
|
|
|
68
|
|
Other
|
|
5
|
|
|
94
|
|
|
|
17
|
|
|
117
|
|
Total interest
income
|
|
4,826
|
|
|
4,585
|
|
|
|
9,868
|
|
|
9,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on
deposits
|
|
1,195
|
|
|
1,641
|
|
|
|
2,750
|
|
|
3,229
|
|
Interest on short-term
borrowings
|
|
114
|
|
|
3
|
|
|
|
245
|
|
|
67
|
|
Interest on long-term
borrowings
|
|
229
|
|
|
-
|
|
|
|
458
|
|
|
-
|
|
Total interest
expense
|
|
1,538
|
|
|
1,644
|
|
|
|
3,453
|
|
|
3,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
3,288
|
|
|
2,941
|
|
|
|
6,415
|
|
|
5,887
|
|
PROVISION
FOR LOAN LOSSES
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME AFTER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
3,288
|
|
|
2,941
|
|
|
|
6,415
|
|
|
5,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management and trust
income
|
|
258
|
|
|
253
|
|
|
|
515
|
|
|
527
|
|
Service charges on deposit
accounts
|
|
158
|
|
|
165
|
|
|
|
308
|
|
|
316
|
|
Other service charges and
fees
|
|
170
|
|
|
160
|
|
|
|
377
|
|
|
352
|
|
Income from investment in life
insurance
|
|
140
|
|
|
135
|
|
|
|
280
|
|
|
270
|
|
Other income
|
|
44
|
|
|
32
|
|
|
|
89
|
|
|
78
|
|
Total other operating
income
|
|
770
|
|
|
745
|
|
|
|
1,569
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
1,419
|
|
|
1,360
|
|
|
|
2,864
|
|
|
2,713
|
|
Net occupancy
|
|
182
|
|
|
173
|
|
|
|
381
|
|
|
367
|
|
Furniture and equipment
expense
|
|
136
|
|
|
144
|
|
|
|
270
|
|
|
257
|
|
Pennsylvania shares
tax
|
|
133
|
|
|
134
|
|
|
|
266
|
|
|
274
|
|
Legal and
professional
|
|
129
|
|
|
111
|
|
|
|
242
|
|
|
231
|
|
Other expenses
|
|
715
|
|
|
785
|
|
|
|
1,499
|
|
|
1,533
|
|
Total other operating
expenses
|
|
2,714
|
|
|
2,707
|
|
|
|
5,522
|
|
|
5,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
1,344
|
|
|
979
|
|
|
|
2,462
|
|
|
1,965
|
|
Income
tax expense
|
|
383
|
|
|
263
|
|
|
|
685
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
$
|
961
|
|
$
|
716
|
|
|
$
|
1,777
|
|
$
|
1,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding
|
|
2,992,615
|
|
|
3,044,813
|
|
|
|
3,010,714
|
|
|
3,044,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC
|
$
|
0.32
|
|
$
|
0.24
|
|
|
$
|
0.59
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared Per Share
|
$
|
0.20
|
|
$
|
0.20
|
|
|
$
|
0.40
|
|
$
|
0.40
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COMMERCIAL
NATIONAL FINANCIAL CORPORATION
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
(dollars
in thousands, except per share data)
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Other
|
Total
|
|
Common
|
Retained
|
Treasury
|
Comprehensive
|
Shareholders’
|
|
Stock
|
Earnings
|
Stock
|
Income(Loss)
|
Equity
|
(unaudited)
|
|
|
|
|
|
Balance
at December 31, 2007
|
$7,200
|
$40,505
|
$(10,681)
|
$1,437
|
$38,461
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
Net
income
|
-
|
1,777
|
-
|
-
|
1,777
|
|
|
|
|
|
|
Other
comprehensive (loss), net of tax:
|
|
|
|
|
|
Unrealized net loss on
securities
|
-
|
-
|
-
|
(823)
|
(823)
|
Total
Comprehensive Income
|
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect accounting adjustment
|
|
|
|
|
|
on
benefit plan reserve (See note 1)
|
-
|
(431)
|
-
|
-
|
(431)
|
Cash
dividends declared
|
|
|
|
|
|
$0.40
per share
|
-
|
(1,212)
|
-
|
-
|
(1,212)
|
Treasury
shares purchased
|
-
|
-
|
(1,317)
|
-
|
(1,317)
|
|
|
|
|
|
|
Balance
at June 30, 2008
|
$7,200
|
$40,639
|
$(11,998)
|
$ 614
|
$36,455
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Balance
at December 31, 2006
|
$7,200
|
$39,869
|
$(10,406)
|
$ 566
|
$37,229
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
Net
income
|
-
|
1,456
|
-
|
-
|
1,456
|
|
|
|
|
|
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
Unrealized net losses on
securities
|
-
|
-
|
-
|
(1,262)
|
(1,262)
|
Total
Comprehensive Income
|
|
|
|
|
194
|
|
|
|
|
|
|
Cash
dividends declared
|
|
|
|
|
|
$0.40
per share
|
-
|
(1,218)
|
-
|
-
|
(1,218)
|
|
|
|
|
|
|
Balance
at June 30, 2007
|
$7,200
|
$40,107
|
$(10,406)
|
$ (696)
|
$36,205
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COMMERCIAL
NATIONAL FINANCIAL CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(dollars
in thousands)
|
|
(unaudited)
|
|
|
|
For
Six Months
|
|
|
|
Ended
June 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$ |
1,777 |
|
|
$ |
1,456 |
|
Adjustments to reconcile net
income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
207 |
|
|
|
208 |
|
Amortization of
intangibles
|
|
|
49 |
|
|
|
49 |
|
Provision for loan
losses
|
|
|
- |
|
|
|
90 |
|
Net accretion of loans and
securities
|
|
|
(138 |
) |
|
|
(58 |
) |
Income from investment in life
insurance
|
|
|
(280 |
) |
|
|
(270 |
) |
Decrease in other
liabilities
|
|
|
(554 |
) |
|
|
(326 |
) |
(Increase) decrease in other
assets
|
|
|
57 |
|
|
|
(328 |
) |
Net cash provided by operating
activities
|
|
|
1,118 |
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Decrease
in federal funds sold
|
|
|
- |
|
|
|
(375 |
) |
Maturities and calls of
securities
|
|
|
9,707 |
|
|
|
5,194 |
|
Purchase of restricted
investments in bank stock
|
|
|
(983 |
) |
|
|
(290 |
) |
Redemption of restricted
investments in bank stock
|
|
|
239 |
|
|
|
254 |
|
Net decrease in
loans
|
|
|
10,425 |
|
|
|
4,912 |
|
Proceeds from sale of foreclosed
real estate
|
|
|
5 |
|
|
|
158 |
|
Purchase of premises and
equipment
|
|
|
(126 |
) |
|
|
(93 |
) |
Net cash provided by investing
activities
|
|
|
19,267 |
|
|
|
9,760 |
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net decrease in
deposits
|
|
|
(30,311 |
) |
|
|
(3,204 |
) |
Increase (decrease) in other
short-term borrowings
|
|
|
11,150 |
|
|
|
(5,000 |
) |
Dividends paid
|
|
|
(1,212 |
) |
|
|
(1,218 |
) |
Purchase
of treasury stock
|
|
|
(1,317 |
) |
|
|
- |
|
Net cash used in financing
activities
|
|
|
(21,690 |
) |
|
|
(9,422 |
) |
Increase (decrease) in cash and
cash equivalents
|
|
|
(1,305 |
) |
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
9,929 |
|
|
|
10,156 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of quarter
|
|
$ |
8,624 |
|
|
$ |
11,315 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period
for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
3,796 |
|
|
$ |
3,389 |
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
$ |
530 |
|
|
$ |
763 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COMMERCIAL NATIONAL FINANCIAL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
Note
1 Basis of
Presentation
The
accompanying consolidated financial statements include the accounts of
Commercial National Financial Corporation (the Corporation) and its wholly owned
subsidiary, Commercial Bank & Trust of PA. All material intercompany
transactions have been eliminated.
The
accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. However, they do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the annual financial
statements of the Corporation for the year ended December 31, 2007, including
the notes thereto. In the opinion of management, the unaudited interim
consolidated financial statements include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair statement of financial
position as of June 30, 2008 and the results of operations for the three and
six-month period ended June 30, 2008 and 2007. The results of operations for the
three and six months ended June 30, 2008 are not necessarily indicative of the
results to be expected for the entire year.
On
January 1, 2008, the Corporation changed its accounting policy and recognized a
cumulative-effect adjustment to retained earnings totaling $431,245 related to
accounting for certain endorsement split-dollar life insurance arrangements in
connection with the adoption of Emerging Issues Task Force (“EITF”) Issue No.
06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split Dollar Life Insurance Arrangements.” See Note 7 – New
Accounting Standards Adopted.
Reclassifications
Certain
comparative amounts for the prior year have been reclassified to conform to
current year classifications. Any such reclassifications had no
material effect no net income or equity.
Note
2 Allowance for Loan
Losses
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
management through an evaluation of the size and quality of the loan portfolio,
economic conditions, concentrations of credit, recent loan loss trends,
delinquencies and other risks inherent within the loan portfolio.
The
corporation did not record a provision for the six-month period ended June 30,
2008. By comparison, during the Corporation’s six-month period ended June 30,
2007, the Corporation recorded a $90,000 provision.
Description
of changes:
(dollars in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Allowance
balance January 1
|
|
$ |
1,869 |
|
|
$ |
1,806 |
|
|
|
|
|
|
|
|
|
|
Provision
charged to operating expenses
|
|
|
0 |
|
|
|
90 |
|
Recoveries
on previously charged off loans
|
|
|
9 |
|
|
|
10 |
|
Loans
charged off
|
|
|
(46 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
Allowance
balance June 30
|
|
$ |
1,832 |
|
|
$ |
1,857 |
|
COMMERCIAL
NATIONAL FINANCIAL CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3
Comprehensive
Income
The
components of other comprehensive income (loss) and related tax effects for the
three and six month periods ended June 30, 2008 and 2007 are as follows:
(dollars in thousands)
|
|
For
three months
|
|
|
For
six months
|
|
|
|
ended
June 30
|
|
|
ended
June 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
unrealized losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
$ |
(2,505 |
) |
|
$ |
(1,896 |
) |
|
$ |
(1,247 |
) |
|
$ |
(1,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
851 |
|
|
|
645 |
|
|
|
424 |
|
|
|
650 |
|
Net
of tax amount
|
|
$ |
(1,654 |
) |
|
$ |
(1,251 |
) |
|
$ |
(823 |
) |
|
$ |
(1,262 |
) |
Note
4 Legal
Proceedings
Other
than proceedings which occur in the normal course of business, there are no
legal proceedings to which either the Corporation or it’s subsidiaries is a
party, which, in the opinion of management, will have any material effect on the
financial position or results of operations of the Corporation and its
subsidiaries.
Note
5 Guarantees
The
Corporation does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of
credit. Standby letters of credit written are conditional commitments
issued by the Bank to secure the performance of a customer to a third party. Of
these letters of credit, $592,000 automatically renews within the next twelve
months and $2,562,000 will expire within thirteen to one hundred and
thirty-three months. The Bank, generally, holds collateral and/or personal
guarantees supporting these commitments. The credit risk involved in issuing
letters of credit is essentially the same as those that are involved in
extending loan facilities to customers. The current amount of the liability as
of June 30, 2008 for guarantees under standby letters of credit issued is not
material.
Note
6 Earnings per
share
The
Corporation has a simple capital structure. Basic earnings per share equals net
income divided by the weighted average common shares outstanding during each
period presented. The weighted average common shares outstanding for the six
months ended June 30, 2008 and 2007 was 3,010,714 and 3,044,813
respectively.
Note
7 New Accounting Standards
Adopted
EITF
06-4
In
September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue
No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF
06-4"). EITF 06-4 requires the recognition of a liability related to
the postretirement benefits covered by an endorsement split-dollar life
insurance arrangement. The consensus highlights that the employer
(who is also the policyholder) has a liability for the benefit it is providing
to its employee. As such, if the policyholder has agreed to maintain
the insurance policy in force for the employee's benefit during his or her
retirement, then the liability recognized during the employee's active service
period should be based on the future cost of insurance to be incurred during the
employee's retirement. Alternatively, if the policyholder has agreed to provide
the employee with a death benefit, then the liability for the future death
benefit should be recognized by following the guidance in SFAS No. 106 or
Accounting Principles Board (APB) Opinion No. 12, as appropriate. For
transition, an entity can choose to apply the guidance using either of the
following approaches: (a) a change in accounting principle through retrospective
application to all periods presented or (b) a change in accounting principle
through a cumulative-effect adjustment to the balance in retained earnings at
the beginning of the year of adoption. The Company recorded a
cumulative effect adjustment to retained earnings of $431,245 on January 1,
2008.
COMMERCIAL
NATIONAL FINANCIAL CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Corporation adopted FASB Statement No.157 “Fair Value Measurements” (SFAS 157)
effective January 1, 2008 for financial assets and liabilities that are measured
and reported at fair value. There was no impact from the adoption of
SFAS 157 on the amounts reported in the consolidated financial statements. SFAS
157 primary impact on the Corporation’s financial statements was to expand
required disclosures pertaining to the methods used to determine fair
values.
SFAS
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under SFAS 157 are
as follows:
Level 1: Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical,unrestricted assets or liabilities.
Level 2: Quoted prices in
markets that are not active, or inputs that are observable either directly or
indirectly, forsubstantially the full term of the asset or
liability.
Level 3: Prices or
valuation techniques that require inputs that are both significant to the fair
value measurement andunobservable (ie., supported with little or no market
activity).
For
assets measured at fair value on a recurring basis, the fair value measurement
by level within the fair value hierarchy used at June 30, 2008 are as
follows (in thousands).
(
Level 1)
(Level
2)
(Level 3)
Quoted
Prices
Significant
Other
Significant
In active
Markets Observable
Unobservable
For Identical
Assets Inputs
Inputs
Securities
available for
sale
-
$ 99,156 -
The
following valuation techniques were used to measure fair value for available for
sale securities as of June 30, 2008.
Securities
Available for Sale: The Corporation utilizes a third party in determining the
fair values for securities held as available for sale. For the
Corporation’s agency mortgage backed securities, the third party utilizes market
data, pricing models that vary based on asset class and include available trade,
bid and other market information. Methodology includes broker quotes,
proprietary modes, vast descriptive terms and conditions. The third
party uses their own proprietary valuation Matrices in determining fair values
for municipal bonds. These Matrices utilize comprehensive municipal
bond interest rate tables daily to determine market price, movement and yield
relationships.
The
Corporation’s adoption of SFAS 157 applies only to its financial instruments
required to be reported at fair value. The adoption did not apply to
those non-financial assets and non-financial liabilities for which the adoption
was delayed until January 1, 2009 in accordance with FSP- FAS
157-2.
SFAS
159
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. The Corporation adopted
the provisions of FAS 159 but did not elect the fair value option for any
financial assets or financial liabilities as of January 1,
2008.
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
8 New Accounting
Standards
FASB
Statement No. 162
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.” The Company is
currently evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
FSP FAS
142-3
In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets.” This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). The intent of this FSP is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141R, and other GAAP. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is
prohibited. The Company is currently evaluating the potential impact
the new pronouncement will have on its consolidated financial
statements.
Note
9 Equity Investment held as
Treasury Shares
The
Corporation purchased all of the stock of Ridge Properties, Inc. on June 6,
2008. The only assets of Ridge Properties, Inc. consist of 131,760 shares of
Commercial National Financial Corporation common stock and sufficient cash to
pay the estimated tax liabilities of Ridge Properties for the period from July
1, 2007, through the closing date of the stock purchase. The purchase
price for Ridge Properties was $1,317,600. For financial reporting
and federal tax purposes, Ridge Properties will be treated as a part of
Commercial National’s consolidated group, and for financial reporting purposes
the shares of Commercial National owned by Ridge Properties will be treated as
treasury shares. The repurchase that occurred with the acquisition of Ridge
Properties is not part of the Corporations approved stock buyback
program. For additional information on this transaction, see Form 8-K
filed on May 5, 2008.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS
|
SAFE
HARBOR STATEMENT
Forward-looking
statements (statements which are not historical facts) in this Quarterly Report
on Form 10-Q are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as “may,” “will,” “to,” “expect,” “believe,” “anticipate,” “intend,”
“could,” “would,” “estimate,” or “continue” or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements are based on information currently available to the
Corporation, and the Corporation assumes no obligation to update these
statements as circumstances change. Investors are cautioned that all
forward-looking statements involve risk and uncertainties, including changes in
general economic and financial market conditions, unforeseen credit problems,
and the Corporation’s ability to execute its business plans. The actual results
of future events could differ materially from those stated in any
forward-looking statements herein.
CRITICAL
ACCOUNTING ESTIMATES
Disclosure
of the Corporation’s significant accounting policies is included in Note 1 to
the Corporation’s Consolidated Financial Statements contained in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007
(the 2007 Annual Report). Some of these policies are particularly sensitive,
requiring that significant judgments, estimates and assumptions be made by
management. Additional information is contained in the Management’s Discussion
and Analysis section of the 2007 Annual Report for the most sensitive of these
issues, including the provision and allowance for loan losses.
Significant
estimates are made by management in determining the allowance for loan losses.
Management considers a variety of factors in establishing these estimates,
including current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, financial and
managerial strengths of borrowers, adequacy of collateral (if collateral
dependent) and other relevant factors. Estimates related to the value of
collateral also have a significant impact on whether or not the Corporation
continues to accrue income on delinquent loans and on the amounts at which
foreclosed real estate is recorded in the Consolidated Statements of Financial
Condition. Management discussed the development and selection of critical
accounting estimates and related Management and Discussion and Analysis
disclosure with the Corporation’s Audit Committee. There were no material
changes made to the critical accounting estimates during the periods presented
within.
OVERVIEW
The
Corporation had net income of $1.8 million or $0.59 per share, for the six
months ended June 30, 2008 compared to $1.5 million or $0.48 per share for the
six months ended June 30, 2007. The Corporation’s return on average assets for
the first half of 2008 and 2007 was 0.99% and 0.87%,
respectively. Return on average equity for the same two periods was
9.20% and 7.95%, respectively.
The
Corporation’s largest segment of operating results is dependent upon net
interest income. Net interest income is interest earned on interest-earning
assets less interest paid on interest-bearing deposits. For the six months ended
June 30, 2008 and 2007, net interest income was $6.4 million and $5.9 million,
respectively.
FINANCIAL
CONDITION
The
Corporation’s total assets decreased by $21.6 million, or 5.9%, from December
31, 2007 to June 30, 2008. Total cash and cash equivalents decreased
by $1.3 million and investment securities available for sale decreased by $10.8
million. The decrease in investments was mainly due to $9.7 million
in principal pay-downs on mortgage-backed securities and a $1.2 million decrease
in fair value of securities. Net loans outstanding decreased by $10.4
million. The decrease in loans was a result of declines in the
following categories; $2.9 million in mortgages, $3.2 million in installment
loans, $2.1 million in commercial loans mortgage secured, $1.2 million in
commercial loans, $544,000 in lines of credits and $456,000 in tax-free loans.
The Corporation attributes the loan declines to consumer and commercial
customers being cautious in the first half of 2008.
The
Corporation’s total deposits decreased $30.3 million from December 31, 2007 to
June 30, 2008. The non-interest bearing deposits increased by $2.6 million and
the interest-bearing deposits decreased by $32.9 million. The increase in
non-interest bearing deposits is considered a normal fluctuation in our
customer’s checking accounts. The decline in the interest-bearing deposits was
due to decreases in certificates of deposits of $30.2 million and a $1.7 million
decline in savings accounts. The decrease in the savings was mainly due to the
closing of a $5.2 million savings account for trust customers. The
loss of the trust
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS
|
deposit
was partially offset by a $3.5 million increase in regular savings accounts. The
Corporation made the decision within the first half of the year not to match
higher rates on certificates of deposits, which led to the decrease in interest
bearing deposits.
Shareholders'
equity was $36.4 million on June 30, 2008 compared to $38.5 million on December
31, 2007. Total shareholders equity decreased due to following; the $1.8 million
in net income was offset by a $823,000 decline in other comprehensive income,
due to decreases in the fair value of securities available for sale, a $1.3
million decrease from the purchase of treasury stock, a $1.2 million decrease
from cash dividends to shareholders and a $431,000 adjustment (decrease) to
retained earnings to account for post retirement benefits expenses (see Note 1).
Book value per common share decreased from $12.70 at December 31,
2007 to $12.58 at June 30, 2008.
RESULTS
OF OPERATIONS
First Six Months of 2008 as
compared to the First Six Months of 2007
Net
income for the first six months of 2008 was $1.8 million compared to $1.5
million for the same period of 2007, representing a 22.04%
increase. The increase is due to higher net interest income in 2008
compared with 2007.
Interest
income for the six months ended June 30, 2008 was $9.9 million, an increase of
7.45% from interest income of $9.2 million for the six months ended June 30,
2007. Loan income for the six months ended June 30, 2008 was $6.7 million
compared to $6.8 million in 2007. The decrease in loan income was due
to lower average loan balances in 2008 compared to 2007, averages in 2008 were
$3.3 million lower than 2007. In addition, loan yields for the first six months
of 2008 decreased four (4) basis points to 6.00%. This decrease in the loan
yield is due to lower market rates for new loans and existing loans tied to the
prime rate. Investment income from securities increased $828,000 or
34.66% for the first six months of 2008 compared with the same period of 2007.
The yield on the securities portfolio for the first six months of 2008 increased
thirteen (13) basis points to 5.98%. This increase in security yield
is attributable to the purchase of higher earning securities in the third
quarter of 2007. These purchases also raised the average securities outstanding
for the first six months of 2008 by $22.9 million or 31.75% compared to same
period 2007. The yield on total average earning assets for the first six months
of 2008 and 2007 was 5.99% for both periods.
Total
interest expense of $3.5 million for the first six months of 2008 increased
by $157,000 or 4.76% compared with the first six months of
2007. The average interest bearing liabilities in 2008 were $250.9
million, an increase of 9.00% over 2007 averages. Interest on
deposits decreased $479,000 or 14.83% in 2008 compared to 2007. The cost of
certificates of deposits decreased, in addition total average outstanding
certificates of deposit balances decreased in comparison to
2007. Interest expense on short- and long-term borrowings increased
in 2008. The expense on short-term borrowings increased $178,000 from
the first six months of 2007 compared to the same period in
2008. Long-term borrowing expense increased from $0 in 2007 to
$458,000 in 2008. The corporation increased short and long-term
borrowing from the FHLB to fund the purchase of mortgage-backed securities and
to allow the run off of expensive non-core deposits. The average cost of
interest-bearing liabilities for the first six months of 2008 was 2.75%, an
eleven (11) basis points decrease from the same period in
2007. These factors led to the increase in interest expense for the
first six months of 2008.
As a
result of the foregoing, net interest income for the first six months of 2008
was $6.4 million compared to $5.9 million for the first six months of
2007.
The
Corporation recorded a loan loss provision expense in the amount of $0 for the
six months ended June 30, 2008 compared to provision in the
amount of $90,000 for the six months ended June 30, 2007.
Non-interest
income for the first six months of 2008 was $1.6 million, a slight increase of
$26,000 from non-interest income for the first six months of
2007. The $26,000 increase is the result of the following; asset
management and trust income declined by $12,000 and service charges on deposit
accounts decreased by $8,000. Other service charges and fees increased by
$25,000, mainly due a $21,000 increase in debit card fees, life insurance income
increased by $10,000 and other income increased by $11,000.
Non-interest
expense for the first six months of 2008 was $5.5 million, an increase of
$147,000 or 2.73% from non-interest expense for the first six months of 2007.
Personnel costs increased by $151,000, or 5.56% due to increases in employee
wages and higher employee benefit costs, net occupancy increased $14,000,
furniture and equipment expense increased $13,000 and legal and
professional increased by $11,000. These increases were offset by a $34,000
decrease in other expenses. Within other expenses, advertising
decreased by $50,000, due to the Corporations decision to reduce advertising in
2008 compared to 2007. Director fees were $29,000 lower in 2008
compared to 2007, due to fewer amount of special meetings in 2008 and
miscellaneous expense was $30,500 lower in 2008. These decreases, within other
expenses were offset by a $18,700 increase in internet banking
expense.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS
|
Federal
income tax for the first six months of 2008 was $685,000 compared to $509,000
for the same period in 2007. The effective tax rates for the first six months of
2008 and 2007 were 27.82% and 25.90%, respectively. The effective tax rates are
lower than the federal statutory rate of 34% due principally to income from
tax-exempt loans, securities, and bank owned life insurance.
RESULTS
OF OPERATIONS
Three Months Ended June 30,
2008 as Compared to the Three Months Ended June 30, 2007
The
Corporation’s net income for the three months ended June 30, 2008 was $961,000,
compared to $716,000 for the same period of 2007, representing a 34.21%
increase. Net income was higher due to higher total interest income
and lower interest expense in 2008 compared to 2007.
Interest
income for the three months ended June 30, 2008 was $4.8 million, an increase of
5.25% from interest income of $4.6 million for the three months ended June 30,
2007. Security income increased $339,000 or 27.97% in 2008 compared
to 2007. This increase in security income was due to higher average
investment securities in 2008, along with higher yields on investment
securities. The investments yielded 5.94% for the three months ended
June 30, 2008 compared to 5.85% for the same period in 2007. The loan
yield decreased seven (7) basis points to 5.98% from
6.05%. The yield on total average earning assets decreased
three (3) basis points to 5.96% in 2008 from 5.99% in
2007.
Interest
expense during the second quarter of 2008 was $1.5 million, or $106,000 less
when compared to the second quarter of 2007. The interest bearing
liability cost decreased to 2.53%, a thirty-four (34) basis points decrease from
second quarter of 2007. The interest expense has declined due the Corporation’s
decision not to pay for high rate, non-core deposits and replace these deposits
with FHLB advances. The average interest bearing liabilities
increased $13.7 million in the second quarter of 2008 compared with
2007.
As a
result of the foregoing, net interest income increased $347,000 or 11.80% to
$3.3 million during the second quarter of 2008 and yielded 3.74% of average
total assets compared to 3.53% during the same period a year ago.
The
Corporation recorded no provision for loan losses for the second quarter of 2008
and 2007, respectively.
Non-interest
income increased slightly by $25,000 or 3.36%, to $770,000 during the second
quarter of 2008 compared with 2007. Asset management and trust income increased
$5,000, service charges on deposit accounts decreased $7,000, other service
charges and fees increased $10,000, bank owned life insurance income increased
$5,000 and other income increased $12,000.
Non-interest
expense increased $7,000 during the second quarter of 2008, a 0.26% increase
from the same period in 2007. Personnel costs increased by $59,000, due to
increases in wages and higher employee benefit costs. Occupancy cost increased
$9,000, furniture and fixture costs decreased $8,000 due to lower equipment
depreciation expense. Legal and professional costs increased for the
three-month period in 2008 by $18,000 compared to same period 2007. Other
expenses decreased by $70,000. Other expenses decreased partially due
to $42,500 less in advertising cost in 2008 and lower director fee expense in
2008. The Corporation decided to scale back advertising cost in 2008 compared
with 2007. Director fees decreased due to fewer special meetings in
2008 compared with 2007.
Federal
income tax on second quarter 2008 pretax earnings was $383,000 compared to
$263,000 a year ago. The second quarter effective tax rates for 2008 and 2007
were 28.49% and 26.86%, respectively.
LIQUIDITY
Liquidity
measurements evaluate the Corporation’s ability to meet the cash flow
requirements of its depositors and borrowers. The most desirable source of
liquidity is deposit growth. Additional liquidity is provided by the maturity of
investments in loans and securities and the principal and interest received from
those earning assets. Another source of liquidity is represented by the
Corporation’s ability to sell both loans and securities. The Bank is a member of
the Federal Home Loan Bank (FHLB) system. The FHLB provides an additional source
for liquidity for long- and short-term funding. Additional sources of funding
from financial institutions have been established for short-term funding
needs.
The
statement of cash flows for the first six months of 2008, indicates cash
provided by the decrease in loan balances and the maturities and calls of
securities, along with cash from increase in short term borrowings was used to
reduce deposit liabilities.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS
|
As of
June 30, 2008, the Corporation had available funding of approximately $156
million at the FHLB, with an additional $20 million of short term funding
available through other lines of credit. The Corporation’s maximum
borrowing capacity with the Federal Home Loan Bank (FHLB) as of June 30, 2008
was $196 million, with $40 million borrowed resulting in the $156 million as
available.
OFF
BALANCE SHEET ARRANGEMENTS
The
Corporation’s financial statements do not reflect off balance sheet arrangements
that consist of commitments to purchase securities or commitments to extend
credit. The Corporation has entered an agreement to purchase mortgage-backed
securities with a settlement in September 2008. The original face for these
agreements is $40 million, all purchased at a discount with total commitment to
purchase at $39.9 million. 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, if any, which the
Corporation obtains from the customer upon extension of credit, is based on
management's credit evaluation of the customer or other obligor. The
types of collateral obtained by the Corporation 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.
The
following table identifies the Corporation’s commitments to extend credit,
obligations under letters of credit and commitments to purchase securities as of
June 30, 2008 (dollars in thousands):
|
Financial
instruments whose contractual amounts represent credit
risk:
|
|
|
|
Commitments to extend
credit
|
|
$35,814
|
|
Standby letters of
credit
|
|
592
|
|
Financial standby letters of
credit
|
|
2,562
|
|
Commitments
to purchase securities
|
|
|
|
Commitments
to purchase GNMA Agency mortgage backed securities
|
|
39,900
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS
|
CREDIT QUALITY
RISK
The
following table presents a comparison of loan quality as of June 30, 2008 with
that as of December 31, 2007. Cash payments received on non-accrual loans are
recognized as interest income as long as the remaining balance of the loan is
deemed to be fully collectible. When doubt exists as to the collectibility of a
loan in non-accrual status, any payments received are applied to principal to
the extent the doubt is eliminated. Once a loan is placed on non-accrual status,
any unpaid interest is charged against income.
|
|
At
or For the
Six
month ended
|
|
|
At
or For the
Year
ended
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(dollars
in thousands)
|
|
Non-performing
loans:
|
|
|
|
|
|
|
Loans on non-accrual
basis
|
|
$ |
98 |
|
|
$ |
156 |
|
Past due loans > 90
days
|
|
|
- |
|
|
|
- |
|
Renegotiated
loans
|
|
|
339 |
|
|
|
350 |
|
Total non-performing
loans
|
|
|
437 |
|
|
|
506 |
|
Foreclosed
real estate
|
|
|
637 |
|
|
|
554 |
|
|
|
|
|
|
|
|
|
|
Total non-performing
assets
|
|
$ |
1,074 |
|
|
$ |
1,060 |
|
|
|
|
|
|
|
|
|
|
Loans
outstanding at end of period
|
|
$ |
216,531 |
|
|
$ |
227,005 |
|
Average
loans outstanding (year-to-date)
|
|
$ |
221,722 |
|
|
$ |
226,713 |
|
|
|
|
|
|
|
|
|
|
Non-performing
loans as a percent of total loans
|
|
|
0.20 |
% |
|
|
0.22 |
% |
Provision
for loan losses
|
|
$ |
0 |
|
|
$ |
90 |
|
Net
charge-offs
|
|
$ |
37 |
|
|
$ |
27 |
|
Net
charge-offs as a percent of average loans
|
|
|
0.02 |
% |
|
|
0.01 |
% |
Provision
for loan losses as a percent of net charge-offs
|
|
|
0.00 |
% |
|
|
333.00 |
% |
Allowance
for loan losses
|
|
$ |
1,832 |
|
|
$ |
1,869 |
|
Allowance
for loan losses as a percent of average loans outstanding
|
|
|
0.83 |
% |
|
|
0.82 |
% |
As of
June 30, 2008, $15,000 of non-accrual loans were paying principal or principal
and interest with payments recognized on a cash basis. At present,
the Corporation has no knowledge of other outstanding loans that present a
serious doubt in regard to the borrower’s ability to comply with current loan
repayment terms.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS
|
CAPITAL
RESOURCES
The
Federal Reserve Board's risk-based capital guidelines are designed principally
as a measure of credit risk. These guidelines require that: (1) at least 50% of
a banking organization's total capital be common and certain other "core" equity
capital ("Tier I Capital"); (2) assets and off-balance sheet items be weighted
according to risk; and (3) the total capital to risk-weighted assets ratio be at
least 8.00%; and (4) a minimum 4.00% leverage ratio of Tier I capital to average
total assets be maintained for financial institutions that meet certain
specified criteria, including asset quality, high liquidity, low interest-rate
exposure and the highest regulatory rating. As of June
30, 2008, Commercial Bank & Trust of PA, under these guidelines, had Tier I
and total equity capital to risk weighted assets ratios of 16.76% and 17.63%
respectively. The leverage ratio was 10.17%.
The table below represents the Bank’s
capital position at June 30, 2008
(Dollar amounts in
thousands)
|
|
|
Percent
|
|
|
|
|
of
Adjusted
|
|
|
|
Amount
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Tier
I Capital
|
|
$ |
35,417 |
|
|
|
16.76 |
% |
Tier
I Capital Requirement
|
|
|
8,452 |
|
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
Total
Equity Capital
|
|
$ |
37,249 |
|
|
|
17.63 |
% |
Total
Equity Capital Requirement
|
|
|
16,904 |
|
|
|
8.00 |
|
|
|
|
|
|
|
|
|
|
Leverage
Capital
|
|
$ |
35,417 |
|
|
|
10.17 |
% |
Leverage
Requirement
|
|
|
13,933 |
|
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
A smaller
reporting company is not required to provide information required of this
item.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Corporation maintains a system of disclosure controls and procedures that is
designed to ensure that information required to be disclosed by the Corporation
in this Form 10-Q, and in other reports required to be filed under the
Securities Exchange Act of 1934 (Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
for such filings. Management of the Corporation, under the direction of the
Corporation’s Chief Executive Officer and Chief Financial Officer, reviewed and
performed an evaluation of the effectiveness of the Corporation’s disclosure
controls and procedures (as defined in Rules 13a-15a(e) and 15d-15(e) under the
Exchange Act) as of June 30, 2008. Based on that review and evaluation, the
Chief Executive Officer and Chief Financial Officer, along with other key
management of the Corporation, have determined that the disclosure controls and
procedures were and are effective as designed to ensure that material
information relating to the Corporation and its consolidated subsidiaries
required to be disclosed by the Corporation by the Exchange Act, was recorded,
processed, summarized and reported within the applicable time
periods.
Changes
in Internal Controls
There
have been no significant changes in our internal controls or in other factors
that could significantly affect our internal controls during the quarter-ended
June 30, 2008.
ITEM
4T. CONTROLS AND
PROCEDURES
See Item
4. above.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
Other than proceedings that occur in
the normal course of business, there are no legal proceedings to which either
theCorporation or any of its subsidiaries is a party, which, in management’s
opinion, will have any material effect on the financialposition of the
Corporation and its subsidiaries.
ITEM
1A. RISK
FACTORS
A smaller reporting company is not
required to provide information required of this item.
ITEM
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
2 (a) None
2 (b) None
2
(c) In 2000, the Board of Directors authorized the repurchase of up to
360,000 shares of the Corporation’s common stock from time to time
when warranted by market conditions.
There have been 209,074 shares purchased under this authorization through
June 30, 2008, see table below.
The
shares repurchased in June and set forth in column (a) of the table reflect the
Corporation's purchase of all of the shares of Ridge Properties, Inc.
which, in turn, owned
131,760 of the Corporation's shares at the time it was purchased. For
more information see Note 9 to the Corporation's interim financial statements,
above, and the
Corporation's form 8-K filed May 5, 2008. The acquisition of the
Ridge Properties shares was not part of the approved repurchase
program.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
Period
|
|
(a)
Total Number of Shares Purchased
|
|
|
(b)
Average Price Paid per Share
|
|
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Plans
|
|
|
(d)
Maximum Number of Shares that May Yet Be Purchased Under the
Plans
|
|
April
1-
April
30
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
150,926 |
|
May
1 –
May
31
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
150,926 |
|
June
1-
June
30
|
|
|
131,760 |
|
|
|
10.00 |
|
|
|
0 |
|
|
|
150,926 |
|
Total
|
|
|
131,760 |
|
|
|
10.00 |
|
|
|
0 |
|
|
|
150,926 |
|
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not applicable.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
a. May 20, 2008
Annual Meeting of Shareholders
b. Directors elected
at the meeting and results of voting:
Director
|
|
For
|
|
Against
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond
H. Ferguson
|
|
2,528,186
|
|
3,678
|
|
|
|
|
Dorothy
D. Hunter
|
|
2,470,831
|
|
61,033
|
|
|
|
|
Joseph
A. Mosso
|
|
2,528,936
|
|
2,928
|
|
|
|
|
Bruce
A. Robinson
|
|
2,528,936
|
|
2,928
|
|
|
|
|
Continuing
directors:
John
T. Babilya
|
|
Steven
H. Landers
|
George
C. Conti, Jr.
|
|
Debra
L. Spatola
|
Gregg
E. Hunter
|
|
George
V. Welty
|
Frank
E. Jobe
|
|
C.
Edward Wible
|
|
|
|
Ratification
of the appointment of Beard Miller Company LLP, as independent
auditors:
For
|
|
|
Against
|
|
Withheld
|
|
Abstain
|
|
|
|
|
|
|
|
|
2,528,784
|
|
|
2,119
|
|
0
|
|
960
|
ITEM
5. OTHER
INFORMATION
Not
applicable
ITEM
6. EXHIBITS
Exhibit
Number
|
Description
|
Page
Number or
Incorporated
by
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 Incorporation
|
Exhibit
A to definitive Proxy Statement filed for the special meeting of
shareholders held September 18, 1990
|
|
|
|
3.4
|
Amendment
to Articles of Incorporation
|
Exhibit
A to definitive Proxy Statement filed for the meeting of shareholders held
on April 15, 1997
|
|
|
|
3.6
|
Amendment
to Articles of Incorporation
|
Exhibit
A to definitive Proxy Statement filed for the meeting of shareholders held
September 21, 2004
|
|
|
|
3.8
|
Amendment
to the Bylaws of Registrant
|
Exhibit
3.8 to Form 10-Q for the quarter
ended
September 30, 2004
|
|
|
|
10.1
|
Employment
agreement between Gregg E. Hunter and Commercial Bank of
Pennsylvania
|
Exhibit
10.1 to Form 10-Q for the quarter ended September 30,
2003
|
|
|
|
10.3
|
Mutual
Release and Non-Disparagement Agreement between Commercial Bank of
Pennsylvania and Louis T. Steiner
|
Exhibit
10.3 to Form 10-K for the year ended December 31, 2003
|
10.4
|
Stock
Purchase Agreement between the Corporation and all of the Shareholders of
Ridge Properties, Inc.
|
Filed
herewith
|
31.1
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Executive
Officer
|
Filed
herewith
|
|
|
|
31.2
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Financial
Officer
|
Filed
herewith
|
|
|
|
32.1
|
Section
1350 Certification of the Chief Executive Officer
|
Filed
herewith
|
|
|
|
32.2
|
Section
1350 Certification of the Chief Financial Officer
|
Filed
herewith
|
SIGNATURES
Pursuant
to the requirements 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: August
8, 2008
|
/s/
Gregg E. Hunter
|
|
Gregg
E. Hunter, Vice Chairman
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Dated: August
8, 2008
|
/s/
Thomas D. Watters
|
|
Thomas
D. Watters, Senior Vice President and
|
|
Chief
Financial Officer
|
|
|