march200910q.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 March 31, 2009
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
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 MAY 1,
2009
|
Common
Stock, $2 Par Value
|
2,870,753
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
|
|
122
|
ITEM
3.Quantitative and Qualitative Disclosures about Market Risk
|
|
166
|
ITEM
4.Controls and Procedures
|
|
177
|
ITEM
4T.Controls and Procedures
|
|
177
|
PART
II - OTHER INFORMATION
ITEM
1.Legal Proceedings
|
|
188
|
ITEM
1A.Risk Factors
|
|
18
|
ITEM
2.Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
181
|
ITEM
3.Defaults Upon Senior Securities
|
|
188
|
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)
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
Cash and due from
banks
|
|
$ |
10,677 |
|
|
$ |
7,111 |
|
Interest bearing deposits with
banks
|
|
|
29 |
|
|
|
21 |
|
Total cash and cash
equivalents
|
|
|
10,706 |
|
|
|
7,132 |
|
|
|
|
|
Investment securities available
for sale
|
|
|
127,545 |
|
|
|
114,771 |
|
Restricted investments in bank
stock
|
|
|
4,567 |
|
|
|
3,967 |
|
|
|
|
|
Loans
receivable
|
|
|
210,643 |
|
|
|
215,933 |
|
Allowance for loan
losses
|
|
|
(1,806 |
) |
|
|
(1,821 |
) |
Net loans
|
|
|
208,837 |
|
|
|
214,112 |
|
|
|
Premises and equipment,
net
|
|
|
3,592 |
|
|
|
3,549 |
|
Investment in life
insurance
|
|
|
14,676 |
|
|
|
14,555 |
|
Other assets
|
|
|
2,808 |
|
|
|
2,413 |
|
|
|
Total assets
|
|
$ |
372,731 |
|
|
$ |
360,499 |
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
Deposits (all
domestic):
|
|
Non-interest
bearing
|
|
$ |
67,381 |
|
|
$ |
67,067 |
|
Interest
bearing
|
|
|
195,935 |
|
|
|
190,020 |
|
Total deposits
|
|
|
263,316 |
|
|
|
257,087 |
|
|
|
Short-term
borrowings
|
|
|
35,000 |
|
|
|
31,175 |
|
Long- term
borrowings
|
|
|
30,000 |
|
|
|
30,000 |
|
Other
liabilities
|
|
|
3,579 |
|
|
|
3,169 |
|
Total liabilities
|
|
|
331,895 |
|
|
|
321,431 |
|
|
|
Shareholders'
equity:
|
|
Common stock, par value $2 per
share; 10,000,000
|
|
shares authorized; 3,600,000
issued; 2,872,753 and
|
|
2,880,953 shares outstanding in
2009 and 2008
|
|
|
7,200 |
|
|
|
7,200 |
|
Retained
earnings
|
|
|
42,254 |
|
|
|
41,616 |
|
Accumulated other comprehensive
income
|
|
|
3,747 |
|
|
|
2,490 |
|
Treasury stock, at cost,
727,247and 719,047 shares in 2009 and 2008
|
|
|
(12,365 |
) |
|
|
(12,238 |
) |
Total shareholders'
equity
|
|
|
40,836 |
|
|
|
39,068 |
|
|
|
Total liabilities
and
|
|
shareholders'
equity
|
|
$ |
372,731 |
|
|
$ |
360,499 |
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
COMMERCIAL
NATIONAL FINANCIAL CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
(Dollars
in thousands, except per share data)
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
|
March
31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
Interest and fees on
loans
|
|
$ |
3,089 |
|
|
$ |
3,376 |
|
Interest and dividends on
investments:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,923 |
|
|
|
1,621 |
|
Exempt from federal income
tax
|
|
|
13 |
|
|
|
33 |
|
Other
|
|
|
1 |
|
|
|
12 |
|
Total interest
income
|
|
|
5,026 |
|
|
|
5,042 |
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
Interest on
deposits
|
|
|
869 |
|
|
|
1,555 |
|
Interest on short-term
borrowings
|
|
|
58 |
|
|
|
131 |
|
Interest on long- term
borrowings
|
|
|
285 |
|
|
|
229 |
|
Total interest
expense
|
|
|
1,212 |
|
|
|
1,915 |
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
|
3,814 |
|
|
|
3,127 |
|
PROVISION
FOR LOAN LOSSES
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME AFTER
|
|
|
|
|
|
|
|
|
PROVISION FOR LOAN
LOSSES
|
|
|
3,814 |
|
|
|
3,127 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME
|
|
|
|
|
|
|
|
|
Asset management and trust
income
|
|
|
247 |
|
|
|
257 |
|
Service charges on deposit
accounts
|
|
|
139 |
|
|
|
150 |
|
Other service charges and
fees
|
|
|
202 |
|
|
|
207 |
|
Income from investment in life
insurance
|
|
|
146 |
|
|
|
140 |
|
Other income
|
|
|
50 |
|
|
|
45 |
|
Total other income
|
|
|
784 |
|
|
|
799 |
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
1,434 |
|
|
|
1,445 |
|
Net occupancy
expense
|
|
|
208 |
|
|
|
199 |
|
Furniture and equipment
expense
|
|
|
123 |
|
|
|
134 |
|
Pennsylvania shares
tax
|
|
|
130 |
|
|
|
133 |
|
Legal and
professional
|
|
|
123 |
|
|
|
113 |
|
Other expense
|
|
|
770 |
|
|
|
784 |
|
Total other
expenses
|
|
|
2,788 |
|
|
|
2,808 |
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
1,810 |
|
|
|
1,118 |
|
Income tax expense
|
|
|
541 |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
1,269 |
|
|
$ |
816 |
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
2,876,191 |
|
|
|
3,028,813 |
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC
|
|
$ |
0.44 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
Dividend
declared per share
|
|
$ |
0.22 |
|
|
$ |
0.20 |
|
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
|
|
|
Equity
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
7,200 |
|
|
$ |
41,616 |
|
|
$ |
(12,238 |
) |
|
$ |
2,490 |
|
|
$ |
39,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
1,269 |
|
|
|
- |
|
|
|
- |
|
|
|
1,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive gain, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gains on
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,257 |
|
|
|
1,257 |
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.22
per share
|
|
|
- |
|
|
|
(631 |
) |
|
|
- |
|
|
|
- |
|
|
|
(631 |
) |
Treasury
shares purchased
|
|
|
- |
|
|
|
- |
|
|
|
(127 |
) |
|
|
- |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2009
|
|
$ |
7,200 |
|
|
$ |
42,254 |
|
|
$ |
(12,365 |
) |
|
$ |
3,747 |
|
|
$ |
40,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
7,200 |
|
|
$ |
40,505 |
|
|
$ |
(10,681 |
) |
|
$ |
1,437 |
|
|
$ |
38,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
816 |
|
|
|
- |
|
|
|
- |
|
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive gain, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gains on
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
831 |
|
|
|
831 |
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect accounting adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
benefit plan reserve (See note 1)
|
|
|
- |
|
|
|
(431 |
) |
|
|
- |
|
|
|
- |
|
|
|
(431 |
) |
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.20
per share
|
|
|
- |
|
|
|
(606 |
) |
|
|
- |
|
|
|
- |
|
|
|
(606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
$ |
7,200 |
|
|
$ |
40,284 |
|
|
$ |
(10,681 |
) |
|
$ |
2,268 |
|
|
$ |
39,071 |
|
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
Three Months
|
|
|
|
Ended
March 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$ |
1,269 |
|
|
$ |
816 |
|
Adjustments to reconcile net
income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
100 |
|
|
|
103 |
|
Amortization of
intangibles
|
|
|
24 |
|
|
|
24 |
|
Net accretion of loans and
securities
|
|
|
(110 |
) |
|
|
(79 |
) |
Income from investment in life
insurance
|
|
|
(146 |
) |
|
|
(140 |
) |
Increase in other
assets
|
|
|
(421 |
) |
|
|
(88 |
) |
Decrease in other
liabilities
|
|
|
(214 |
) |
|
|
(209 |
) |
Net cash provided by operating
activities
|
|
|
502 |
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Increase
in federal funds sold
|
|
|
- |
|
|
|
(3,950 |
) |
Purchase
of securities
|
|
|
(19,960 |
) |
|
|
- |
|
Maturities and calls of
securities
|
|
|
9,204 |
|
|
|
5,076 |
|
Purchase of restricted
investments in bank stock
|
|
|
(600 |
) |
|
|
(650 |
) |
Redemption of restricted
investments in bank stock
|
|
|
- |
|
|
|
25 |
|
Net decrease in
loans
|
|
|
5,272 |
|
|
|
6,155 |
|
Proceeds from sale of foreclosed
real estate
|
|
|
2 |
|
|
|
- |
|
Purchase of premises and
equipment
|
|
|
(142 |
) |
|
|
(97 |
) |
Net cash provided by (used in)
investing activities
|
|
|
(6,224 |
) |
|
|
6,559 |
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
deposits
|
|
|
6,229 |
|
|
|
(14,430 |
) |
Increase in other short-term
borrowings
|
|
|
3,825 |
|
|
|
6,825 |
|
Dividends paid
|
|
|
(631 |
) |
|
|
(606 |
) |
Purchase
of treasury stock
|
|
|
(127 |
) |
|
|
- |
|
Net cash provided by (used in)
financing activities
|
|
|
9,296 |
|
|
|
(8,211 |
) |
Increase (decrease) in cash and
cash equivalents
|
|
|
3,574 |
|
|
|
(1,225 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
7,132 |
|
|
|
9,929 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of quarter
|
|
$ |
10,706 |
|
|
$ |
8,704 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period
for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,272 |
|
|
$ |
2,003 |
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
$ |
510 |
|
|
$ |
280 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COMMERCIAL NATIONAL FINANCIAL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
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 and Ridge Properties, Inc. 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, 2008, 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 March 31, 2009 and the results of operations for the three-month
period ended March 31, 2009 and 2008. The results of operations for the three
months ended March 31, 2009 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. Such classifications had no effect on 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 three-month periods ended March
31, 2009 and 2008.
Description
of changes:
(dollars
in thousands)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Allowance
balance January 1
|
|
$ |
1,821 |
|
|
$ |
1,869 |
|
|
|
|
|
|
|
|
|
|
Provision
charged to operating expenses
|
|
|
0 |
|
|
|
0 |
|
Recoveries
on previously charged off loans
|
|
|
0 |
|
|
|
9 |
|
Loans
charged off
|
|
|
(15 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
Allowance
balance March 31
|
|
$ |
1,806 |
|
|
$ |
1,832 |
|
Note 3
Comprehensive
Income
The
components of other comprehensive income (loss) and related tax effects for the
three month periods ended March 31, 2009 and 2008 are as follows: (dollars in
thousands)
|
For three months
|
|
|
ended March 31
|
|
|
2009
|
2008
|
|
Net
unrealized gains on
|
|
|
|
securities
available for sale
|
$ 1,904
|
$ 1,258
|
|
|
|
|
|
Tax
effect
|
(647)
|
(427)
|
|
Net
of tax amount
|
$ 1,257
|
$ 831
|
|
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 any of its 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, $448,000 automatically renews within the next twelve
months and $2,357,000 will expire within thirteen to one hundred and twenty-five
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 March 31,
2009 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 three
months ended March 31, 2009 and 2008 was 2,876,191 and 3,028,813
respectively.
Note
7 New Accounting Standards
Adopted
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment of
Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends
the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income
and Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective
for interim and annual reporting periods ending after December 15, 2008, and
shall be applied prospectively. Retrospective application to a prior interim or
annual reporting period is not permitted. The Corporation has determined this
pronouncement had no impact on the consolidated financial
statements.
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.
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 fair value option for any
financial assets or financial liabilities as of January 1, 2008.
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 March 31, 2009 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 -
$ 127,545 -
For
assets measured at fair value on a recurring basis, the fair value measurement
by level within the fair value hierarchy used at December 31, 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 -
$ 114,771 -
The
following valuation techniques were used to measure fair value for available for
sale securities as of March 31, 2009 and December 31, 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.
We may be
required to measure certain other financial assets at fair value on a
nonrecurring basis. These adjustments to fair value usually result
from the application of lower-of-cost-or-market accounting or write-downs of
individual assets. The Level 3 disclosures shown below represent the
carrying value of loans for which adjustments are primarily based on the
appraised value of collateral or the present value of expected future cash
flows, which often results in significant management assumptions and input with
respect to the determination of fair value. There were no realized or
unrealized gains or losses relating to Level 3 financial assets and liabilities
measured on a nonrecurring basis for the quarter ended March 31, 2009 and
December 31, 2008.
For
assets measured at fair value on a nonrecurring basis, the fair value
measurement by level within the fair value hierarchy used at March 31, 2009 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
Impaired
Loans -
-
$652
Impaired
loans at March 31, 2009, which are measured using the fair value of the
collateral less estimated costs to sell for collateral-dependent loans, had a
carrying amount of $724,000 with a valuation allowance of $72,000.
For
assets measured at fair value on a nonrecurring basis, the fair value
measurement by level within the fair value hierarchy used at December 31, 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
Impaired
Loans
-
- $3,570
The
decrease in impaired loans is due to an upgrade of one $2.8 million
relationship, which had lost a sizable anchor tenant, resulting in a need for
restructured terms of repayment. Since year-end 2008, the borrower has
been able to negotiate a favorable lease with a replacement tenant.
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 January1, 2009 in accordance with FSP- FAS
157-2. The option of FAS 157-2 had no impact on the results of
operations or financial condition as of March 31, 2009.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not
Active” (FSP 157-3), to clarify the application of the
provisions of SFAS 157 in an inactive market and how an entity would
determine fair value in an inactive market. FSP 157-3 is
effective immediately and applies to our first quarter 2009 financial
reporting. The application of the provisions of FSP 157-3 did
not materially affect our results of operations or financial condition as of and
for the period ended March 31, 2009.
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 Corporation has determined this FSP has had no
material effect on our result of operations or financial condition as of and for
the period ended March 31,2009.
In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 08-6, “Equity Method
Investment Accounting Considerations”. EITF 08-6 clarifies the accounting
for certain transactions and impairment considerations involving equity method
investments. EITF 08-6 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Corporation has
determined this EITF has no impact on our result of operations or financial
condition as of and for the period ended March 31,2009.
Note
8 New Accounting
Standards
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 Corporation is
currently evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
In
November 2008, the SEC released a proposed roadmap regarding the potential use
by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (IFRS). IFRS is a comprehensive
series of accounting standards published by the International Accounting
Standards Board (“IASB”). Under the proposed roadmap, the Corporation may be
required to prepare financial statements in accordance with IFRS as early as
2014. The SEC will make a determination in 2011 regarding the mandatory adoption
of IFRS. The Corporation is currently assessing the impact that this potential
change would have on its consolidated financial statements, and it will continue
to monitor the development of the potential implementation of IFRS.
In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP FAS
157-4). FASB Statement 157, Fair Value Measurements,
defines fair value as the price that would be received to sell the asset or
transfer the liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. FSP FAS 157-4 provides additional guidance
on determining when the volume and level of activity for the asset or liability
has significantly decreased. The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly.
FSP FAS
157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with Statement 157.
This FSP
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly. The FSP provides a
list of circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given
little, if any, weight when estimating fair value.
This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 157-4 must also early adopt
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. The Company is currently
reviewing the effect this new pronouncement will have on its consolidated
financial statements.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS
124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction
of the factors that should be considered when determining whether a debt
security is other-than-temporarily impaired. For debt securities, management
must assess whether (a) it has the intent to sell the security and
(b) it is more likely than not that it will be required to sell the
security prior to its anticipated recovery. These steps are done before
assessing whether the entity will recover the cost basis of the investment.
Previously, this assessment required management to assert it has both the intent
and the ability to hold a security for a period of time sufficient to allow for
an anticipated recovery in fair value to avoid recognizing an
other-than-temporary impairment. This change does not affect the need to
forecast recovery of the value of the security through either cash flows or
market price.
In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation
and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a) the
amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all
other factors. The amount of the total other-than-temporary impairment related
to the credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also
early adopt FSP FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. The Company is currently reviewing the effect this
new pronouncement will have on its consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS
107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion
No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods.
This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also
early adopt FSP FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. The Company is currently
reviewing the effect this new pronouncement will have on its consolidated
financial statements.
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, 2008
(the 2008 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 2008 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 $1.3 million or $0.44 per share, for the first
quarter ended March 31, 2009 compared to $816,000 or $0.27 per share for the
quarter ended March 31, 2008. The Corporation’s return on average assets for the
first quarter of 2009 and 2008 was 1.37% and 0.90%,
respectively. Return on average equity for the same two periods was
12.76% and 8.44%, 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 first quarter
ended March 31, 2009 and 2008, net interest income was $3.8 million and $3.1
million, respectively.
The Board
of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend
the restoration plan for the Deposit Insurance Fund (DIF). The FDIC Board also
took action to ensure the continued strength of the insurance fund by imposing a
special assessment on insured institutions of 20 basis points, implementing
changes to the risk-based assessment system, and setting rates beginning the
second quarter of 2009. The amended restoration plan was accompanied
by a final rule that sets assessment rates and makes adjustments that improve
how the assessment system differentiates for risk. Currently most banks are in a
risk category with assessments between 12 cents per $100 of deposits to 14 cents
per $100 of deposits in insurance. Under the final rule, most banks will pay
initial base rates of between 12 and 16 cents per $100 in deposits on an annual
basis beginning April 1, 2009. The FDIC board also adopted an interim
rule imposing a special emergency assessment of 20 cents per $100, payable
September 30, 2009. In addition, the interim FDIC ruling also permits the Board
to impose an emergency special assessment after June 30, 2009 of up to 10 basis
points if necessary to maintain public confidence in federal deposit insurance.
The FDIC may reduce the emergency assessment payable on September 30, 2009 from
20 cents to 10 cents per $100 if congress expands the FDIC’s borrowing authority
with the Treasury Department to $100 billion. The Corporation
anticipates special assessment will effect the quarter ending June 30,
2009.
FINANCIAL
CONDITION
The
Corporation’s total assets increased by $12.2 million, or 3.4% from December 31,
2008 to March 31, 2009. Investments Available for Sale increased by
$12.8 million. The increase in investments was due to the purchase of $20.0
million in GNMA mortgage backed securities, principal pay-downs on mortgage
backed securities of $9.2 million and $1.9 million increase in the fair value of
the securities. Net loans outstanding decreased by $5.3
million. The decrease in loans was a result of declines in the
following categories; $500,000 in commercial loans, $1.7 million in commercial
mortgages, $1.2 million in installment loans and $1.8 million in mortgages. The
Corporation attributes the loan declines to consumer and commercial customers
being cautious in the first quarter of 2009.
The
Corporation’s total deposits increased $6.2 million from December 31, 2008 to
March 31, 2009. Non-interest bearing deposits increased by $300,000
and interest-bearing deposits increased by $5.9 million. The increase in
interest-bearing deposits was mainly due to a $4.6 million increases in money
market accounts, a $2.0 million increase in savings accounts, a $200,000
increase in now accounts and a $300,000 increase in individual retirement
accounts. These increases were offset by $1.4 million decline in certificate of
deposits. The Corporation attributes the increase in money market
accounts to customers placing their funds in liquid, FDIC insured accounts that
provide flexibility and safety.
Shareholders'
equity was $40.8 million on March 31, 2009 compared to $39.1 million on December
31, 2008. Total shareholders equity increased due to the $1.3 million in net
income and a $1.3 million net of tax increase in other comprehensive income due
to increases in fair value of securities available for sale. These increases
were offset by $631,000 paid in dividends to shareholders and $127,000 in
Treasury stock purchases. Book value per common share increased
from $13.56 at December 31, 2008 to $14.21 at March 31,
2009.
RESULTS
OF OPERATIONS
First Three Months of 2009
as compared to the First Three Months of 2008
Net
income for the first three months of 2009 was $1.3 million compared to $816,000
for the same period of 2008, representing a 55.51% increase.
Interest
income for the three months ended March 31, 2009 was $5.0 million, the same as
March 31, 2008. Loan income decreased in 2009 due to lower average loan balances
in 2009 and lower yields. The yield on the loan portfolio for the first three
months of 2009 decreased twenty-two (22) basis points to 5.80% from 6.02% in
2008. In addition, average loan balances decreased 5.00% in 2009
compared with the averages for the first quarter 2008. Security income for the
three months ended March 31, 2009 was $1.9 million, an increase of 16.27% or
$200,000 in comparison to $1.7 million security income in 2008. The yield on the
securities portfolio for the first three months of 2009 increased one (1) basis
point to 6.04%. In addition, average securities balances increased 16.02% in
2009 compared to 2008. The yield on total average earning assets for the first
three months of 2009 decreased thirteen (13) basis points to 5.89% compared to
2008.
Total
interest expense of $1.2 million for the first three months of 2009 decreased by
$703,000 or 36.71% from the first three months of 2008. In the first quarter of
2009, the average interest bearing liabilities balances increased 1.47% and the
cost of these liabilities decreased to 1.85% in 2009 from 2.96% in
2008. The cost of interest-bearings liabilities declined in 2009 due
to lower market rates for certificates of deposits and short-term borrowings in
comparison to 2008.
As a
result of the foregoing, net interest income for the first three months of 2009
was $3.8 million compared to $3.1 million for the first three months of
2008.
The
Corporation did not record a provision for loan losses for the three months
ended March 31, 2009, or March 31, 2008. The Corporation’s high credit quality
and the decrease in loan balances led to the determination that no provision was
necessary for the first three months of 2009.
Non-
interest income for the first three months of 2009 was $784,000, a decrease from
$799,000 for first three months of 2008. Asset management and trust
income declined by $10,000, service charges on deposit accounts decreased by
$11,000 and other service charges decreased by $5,000. These
decreases were partially offset by a $6,000 increase in income from investments
in life insurance and a $5,000 increase in other income.
Non-interest
expense for the first three months of 2009 was $2.8 million, the same as 2008.
Personnel costs decreased $11,000, net occupancy increased $9,000, furniture and
equipment expense decreased $11,000. PA shares tax decreased slightly by $3,000
and legal and audit increased by $10,000. Other expenses decreased by
$14,000.
Federal
income tax for the first three months of 2009 was $541,000 compared to $302,000
for the same period in 2008. The effective tax rates for the first three months
of 2009 and 2008 were 29.9% and 27.0%, 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 three months of 2009, indicates cash was
provided by the decrease in loan balances, the maturities and calls of
securities, the increase in deposits and the increase in short term borrowings.
These sources of cash were used to purchase securities within the
quarter.
As of
March 31, 2009, the Corporation had available funding of approximately $139
million at the FHLB, with an additional $19 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 March 31, 2009
was $204 million, with $65 million borrowed resulting in the $139 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. 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 and
obligations under letters of credit as of March 31, 2009 (dollars in
thousands):
|
Financial
instruments whose contractual amounts represent credit
risk:
|
|
|
|
Commitments to extend
credit
|
|
$33,156
|
|
Standby letters of
credit
|
|
448
|
|
Financial standby letters of
credit
|
|
2,357
|
|
|
|
|
|
|
|
|
CREDIT QUALITY
RISK
The
following table presents a comparison of loan quality as of March 31, 2009 with
that as of December 31, 2008. 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
Three
months ended
|
|
|
At
or For the
Year
ended
|
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
(dollars
in thousands)
|
|
Non-performing
loans:
|
|
|
|
|
|
|
Loans on non-accrual
basis
|
|
$ |
138 |
|
|
$ |
29 |
|
Past due loans > 90
days
|
|
|
- |
|
|
|
- |
|
Renegotiated
loans
|
|
|
3,560 |
|
|
|
3,566 |
|
Total non-performing
loans
|
|
|
3,698 |
|
|
|
3,595 |
|
Foreclosed
real estate
|
|
|
612 |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
Total non-performing
assets
|
|
$ |
4,310 |
|
|
$ |
4,209 |
|
|
|
|
|
|
|
|
|
|
Loans
outstanding at end of period
|
|
$ |
210,643 |
|
|
$ |
215,933 |
|
Average
loans outstanding (year-to-date)
|
|
$ |
212,977 |
|
|
$ |
219,000 |
|
|
|
|
|
|
|
|
|
|
Non-performing
loans as a percent of total loans
|
|
|
1.76 |
% |
|
|
1.66 |
% |
Provision
for loan losses
|
|
$ |
0 |
|
|
$ |
15 |
|
Net
charge-offs
|
|
$ |
15 |
|
|
$ |
63 |
|
Net
charge-offs as a percent of average loans
|
|
|
0.01 |
% |
|
|
0.03 |
% |
Provision
for loan losses as a percent of net charge-offs
|
|
|
0.00 |
% |
|
|
23.81 |
% |
Allowance
for loan losses
|
|
$ |
1,806 |
|
|
$ |
1,821 |
|
Allowance
for loan losses as a percent of average loans outstanding
|
|
|
0.85 |
% |
|
|
0.83 |
% |
As of
March 31, 2009, $25,000 of non-accrual loans were paying principal or principal
and interest with payments recognized on a cash basis. The majority of
renegotiated loans is two loans, a $2.8 million loan and a $715,000 loan
relationship. These two renegotiated loan relationships are involved in the
retail segment. The $2.8 million relationship lost a sizable anchor
tenant, resulting in a need for
restructured
terms of repayment. Since year-end 2008, the borrower has been able to
negotiate a favorable lease with a replacement tenant. 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.
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 March
31, 2009, Commercial Bank & Trust of PA, under these guidelines, had Tier I
and total equity capital to risk weighted assets ratios of 17.60% and 18.46%
respectively. The leverage ratio was 10.01%.
The table below presents the Bank’s
capital position at March 31, 2009
(Dollar amounts in
thousands)
|
Percent
|
|
of
Adjusted
|
|
Amount
|
Assets
|
|
|
|
Tier
I Capital
|
$ 36,710
|
17.60%
|
Tier
I Capital Requirement
|
8,345
|
4.00
|
|
|
|
Total
Equity Capital
|
$ 38,517
|
18.46%
|
Total
Equity Capital Requirement
|
16,690
|
8.00
|
|
|
|
Leverage
Capital
|
$ 36,710
|
10.01%
|
Leverage
Requirement
|
14,675
|
4.00
|
|
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Corporation’s primary market risk is interest rate risk. Interest rate risk
arises due to timing differences between interest sensitive assets and
liabilities. Interest rate management seeks to maintain a balance between
consistent income growth and the risk that is created by variations in the
ability to reprice deposit and investment categories. The effort to determine
the effect of potential interest rate changes normally involves measuring the
"gap" between assets (loans and securities) subject to rate fluctuation and
liabilities (interest bearing deposits and long-term borrowings) subject to rate
fluctuation as related to earning assets over different time periods and
calculating the ratio of interest sensitive assets to interest sensitive
liabilities.
Repricing
periods for the loans, securities, interest bearing deposits and long-term
borrowings are based on contractual maturities, where applicable, as well as the
Corporation's historical experience regarding the impact of interest rate
fluctuations on the prepayment and withdrawal patterns of certain assets and
liabilities. Regular savings, NOW and other similar interest bearing demand
deposit accounts are subject to immediate withdrawal without penalty. However,
based upon historical performance, management considers a certain portion of the
accounts to be stable core deposits and therefore are projected to reprice over
a variety of time periods.
The
Corporation utilizes a computer simulation analysis that projects the impact of
changing interest rates on earnings. Simulation modeling projects a baseline net
interest income (assuming no changes in interest rate levels) and estimates
changes to that baseline resulting from changes in interest rate levels. The
Corporation utilizes the results of this model in evaluating its interest rate
risk. This model incorporates a number of additional factors. These factors
include: (1) the expected exercise of call features on various assets and
liabilities; (2) the expected rates at which various rate sensitive assets and
liabilities will reprice; (3) the expected relative movements in different
interest rate indexes that are used as the basis for pricing or repricing
various assets and liabilities; (4) expected changes in administered rates on
interest-bearing transaction, savings, money market and time deposit accounts
and the expected impact of competition on the pricing or repricing of such
accounts; and (5) other factors. Inclusion of these factors in the model is
intended to estimate the Corporation’s changes in net interest income resulting
from an immediate and sustained parallel shift in interest rates of up 100, 200
and 300 basis points or 100, 200 and 300 basis points down. While the
Corporation believes this model provides a useful projection of its interest
rate risk, the model includes a number of assumptions and predictions that are
subject to continual refinement. These assumptions and predictions include
inputs to compute baseline net interest income, growth rates and a variety of
other factors that are difficult to accurately predict.
The March
31, 2009 computer simulations analysis projects the following changes in net
interest income based on an immediate and sustained parallel shift in interest
rates for a twelve month period compared to baseline, with baseline representing
no change in interest rates. The model projects net interest income
will increase 0.8% if rates rise 100 bps, will decrease 1.1% if rates rise 200
bps and projects a 4.4% decrease of net interest income if rates rise 300
bps. If rates decrease 100 bps, the model projects a 0.2% decrease in
net interest income, a 1.5% decrease if rates decrease 200 bps and if rates
decrease 300 bps, the model projects net interest income will decrease
2.2%.
Management
regularly monitors the interest sensitivity position and considers this position
in its decisions with regard to the Corporation’s interest rates and maturities
for interest-earning assets and interest-bearing liabilities.
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 March 31, 2009. 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
March 31, 2009.
ITEM
4T. CONTROLS AND
PROCEDURES
See Item
4. above.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
Other than proceedings which 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 233,374 shares
purchased under this
authorization through
March 31, 2009, see table below.
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
|
January
1- January
31
|
3,000
|
15.42
|
3,000
|
131,826
|
February
1 –February 28
|
4,200
|
15.65
|
4,200
|
127,626
|
March
1-
March
31
|
1,000
|
15.00
|
1,000
|
126,626
|
Total
|
8,200
|
15.49
|
8,200
|
126,626
|
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not applicable.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not applicable
ITEM
5. OTHER
INFORMATION
Not
applicable
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
|
Amended
and Restated Employment agreement between Gregg E. Hunter and Commercial
Bank & Trust of PA
|
Exhibit
10.1 to Form 10-K for the yesr ended December 31, 2008
|
|
|
|
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.
|
Exhibit
10.4 to Form 10-Q for the quarter ended June 30, 2008
|
|
|
|
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: May
11, 2009
|
/s/
Gregg E. Hunter
|
|
Gregg
E. Hunter, Vice Chairman
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Dated: May
11, 2009
|
/s/
Thomas D. Watters
|
|
Thomas
D. Watters, Senior Vice President and
|
|
Chief
Financial Officer
|
|
|