Attached files
file | filename |
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10-K - DECEMBER 2010 10-K FOR COMMERCIAL NATIONAL FINANCIAL CORPORATION - COMMERCIAL NATIONAL FINANCIAL CORP /PA | form10k2010.htm |
EX-14 - CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS - COMMERCIAL NATIONAL FINANCIAL CORP /PA | codeofethics2010.htm |
EX-31.1 - SECTION 302 CERTIFICATION FOR CEO - COMMERCIAL NATIONAL FINANCIAL CORP /PA | section302ceo2010.htm |
EX-31.2 - SECTION 302 CERTIFICATION FOR CFO - COMMERCIAL NATIONAL FINANCIAL CORP /PA | section302cfo2010.htm |
EX-32.2 - SECTION 1350 CFO CERTIFICATION - COMMERCIAL NATIONAL FINANCIAL CORP /PA | section1350cfo2010.htm |
EX-32.1 - SECTION 1350 CEO CERTIFICATION - COMMERCIAL NATIONAL FINANCIAL CORP /PA | section1350ceo2010.htm |
Commercial National Financial Corporation
FINANCIAL
INFORMATION
1
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 Annual Report on Form 10-K 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 Commercial National Financial Corporation (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 Policies
Disclosure of the Corporation's significant accounting policies is included in Note 1 to the consolidated financial statements. Certain of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management. Additional information is contained in this management's discussion and analysis and in the Corporation’s notes to financial statements for the most sensitive of these issues, including the provision and allowance for loan losses.
In determining the allowance for loan losses, management makes significant estimates. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, its borrowers' perceived financial and managerial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors.
Overview
The purpose of this discussion and the accompanying financial data is to provide aid in understanding and evaluating the financial condition and results of operations of the Corporation for the years ended December 31, 2010 and 2009. This information should be read in conjunction with the consolidated financial statements and related footnotes for the years under review.
The Corporation is a one-bank holding company, with wholly-owned subsidiaries Commercial Bank & Trust of PA (the Bank), and Ridge Properties, Inc.
The Corporation reported net income of $5.5 million or $1.92 per share for the year ended 2010 compared to $5.1 million or $1.79 per share for the year ended 2009. The Corporation’s return on average assets ratios for 2010 and 2009 were 1.50% and 1.39%, respectively. Return on average equity for the two periods were 12.08% and 12.39%, respectively. The corporations’ dividend payout ratios for 2010 and 2009 were 45.77% and 49.16%, respectively. The average equity to average asset ratios were 12.38% for 2010 and 11.18% for 2009.
The Corporation’s largest segment of operating results is dependent upon net interest income. Net interest income is calculated as earnings on interest-earning assets less interest paid on interest-bearing liabilities. For the years ended 2010 and 2009, net interest income was $15.5 million and $15.3 million. The related tax-equivalent net interest margin for these two years was 5.14% and 4.68%, respectively. The 2010 increase in the margin is mostly due to the decrease in the cost of interest-bearing liabilities, which decreased significantly more than the decrease in yields on earning assets. The Corporation anticipates margins in 2011 will be approximately the same as 2010. In addition the Corporation anticipates it will be difficult to increase volume of outstanding loans in 2011 due to the slow economic recovery within Westmoreland County. Other factors that can affect the Corporation’s operating results are activity in the loan loss provision and components of non-interest income and non-interest expense.
2
Overview (Continued)
The business strategy for 2011 is to continue to pursue loan and deposit growth, acknowledging the difficult economic environment. Management anticipates net interest income in 2011 will be similar to 2010 with potentially lower earning assets outstanding with similar margins. Loans and deposits will continue to be competitively priced by the Corporation with the intention of acquiring profitable market share.
The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund (DIF). The Board also took action to ensure the continued strength of the insurance fund by imposing a special assessment in 2009. The Corporation paid a FDIC special assessment of $166,000 in 2009 along with the regular quarterly assessments. The Corporation paid a prepaid assessment of $1.2 million on December 30, 2009. The prepaid assessment is recorded in other assets and represents an estimate of quarterly FDIC assessments through December 31, 2012.
Financial Condition
Total assets of the Corporation were $355.0 million on December 31, 2010 compared to $376.0 million on December 31, 2009. This decrease in assets is mainly due to a decrease in investments and a decrease in loans receivable. The decrease in total liabilities is due to the decrease in FHLB borrowings offset by an increase in customer deposits.
The loan portfolio is comprised mostly of residential and commercial real estate secured loans. These loans consist of residential mortgages, commercial mortgages and home equity term loans and lines of credit. Additionally, the loan portfolio includes commercial, tax-free and other consumer loans.
The total loan portfolio decreased $13.1 million in 2010, with an end of year balance of $190.2 million compared with the 2009 end of year balance of $203.3 million. The majority of the year-to-year change is due to decreases in residential mortgage loans of $8.4 million, a decrease in home equity installment loans of $2.8 million and a decrease of $985,000 in commercial loans.
Total investment securities decreased $7.8 million during 2010. The Corporation purchased $25.2 million of municipal bonds in 2010. These purchases were off set by the following; $30.2 million in principal pay-downs of mortgage-backed securities and a $2.2 million in calls of municipal bonds. The Corporation’s investments decreased in fair value by $725,000. All of the Corporation’s investment securities are held as available for sale. These securities consist of mortgage-backed securities and taxable and tax-free municipal bonds. All of the mortgage-backed securities are US Government Agencies and are triple ‘A’ rated bonds. The Corporation also owns restricted Federal Home Loan Bank stock. Depending upon market fluctuations or other circumstances that may arise, such as changes in prepayment rates, the Corporation may sell securities for asset/liability management and liquidity purposes.
At December 31, 2010, total deposits were $276.5 million compared with $269.7 million as of December 31, 2009. This $6.8 million increase was the result of the following: an increase of $2.9 million in non-interest bearing demand deposits, a $1.5 million increase in NOW accounts, a $7.6 million increase in money market accounts, a $5.8 million increase in savings accounts. These increases were offset by a $10.8 million decrease in certificates of deposits in 2010. The decrease in the certificate of deposits was due to the Corporation maintaining a conservative position when pricing certificates of deposits. The Corporation attributes the increase in the other interest bearing deposits to customers placing their funds in liquid, FDIC insured accounts that provide flexibility and safety.
Total short-term borrowings decreased $31.1 million in 2010, ending the year at $17.7 million compared to the 2009 balance of $48.9 million. Long-term borrowings remained the same at $10.0 million in 2010 and 2009.
3
Financial Condition (Continued)
Shareholders’ equity was $46.0 million on December 31, 2010, compared to $43.5 million on December 31, 2009, an increase of $2.5 million. The change in shareholders’ equity consists of net income of $5.5 million offset by a decrease in other comprehensive income of $464,000 and dividends paid of $2.5 million. Book value per common share at year-end 2010 increased by 5.79% to $16.08 from $15.20 at year-end 2009.
Share Repurchase
During 2010 the Corporation did not purchase any treasury shares.
Results of Operations
Net income increased $372,000, or 7.25%, to $5.5 million for the year ended December 31, 2010 from $5.1 million for the year ended December 31, 2009.
Net Interest Income
Interest income for 2010 was $18.2 million, compared with $19.5 million in 2009. Loan income in 2010 was $11.4 million compared to $12.0 million in 2009. The decrease in loan income was due to lower average loan balances and lower yields in 2010 compared to 2009. Loan outstanding averages in 2010 were $9.4 million lower than 2009, loan yields for 2010 decreased six (6) basis points to 5.73%. This decrease in the loan yield is due to lower market rates for new loans and existing loans tied to the prime rate. The security portfolio of the Corporation is significantly different in composition in 2010 compared with 2009. The Corporation’s average balance for tax-free municipal bonds was $54.8 million in 2010 compared with $15.0 million in 2009. These bonds provided a significant benefit of decreasing the Corporation’s overall tax rate in 2010. Investment income from securities decreased $605,000 or 8.12% in 2010 compared with 2009. The average securities balances increased 2.60% in 2010 compared to 2009. The yield on total average earning assets for 2010 and 2009 was 5.48% and 5.76%, respectively.
For 2010, interest expense was $2.7 million compared to $4.2 million in 2009, representing a $1.5 million or 35.71% decrease in interest expense. The average interest bearing liabilities in 2010 were $242.2 million, a decrease of 4.75% compared with the 2009 averages. The cost of interest bearing liabilities decreased from 1.64% to 1.13% in 2010. This decrease in interest cost is mainly due to lower rates on FHLB advances in 2010 and a $21.0 decrease in average outstanding FHLB advances in 2010 compared with 2009. In addition higher cost certificate of deposit balances have decreased and been replaced by less expensive savings and money market accounts. Certificate of deposit interest expense decreased $600,000 in 2010 and FHLB interest expense decreased $724,000 in 2010.
As a result of these factors, net interest income in 2010 was $15.5 million compared to $15.3 million in 2009.
4
Net Interest Income (Continued)
The following table displays the Corporation’s average balance sheet, annual tax equivalent interest earned and paid, and annual yields on interest earning assets and interest-bearing liabilities for 2010 and 2009.
Financial Comparisons
|
Consolidated Average Balance Sheet, Interest Income/Expense and Rates
|
(Dollars in Thousands)
|
2010
|
2009
|
Average Balance
|
Interest Income/
Expense
|
Yield or Rate (a)
|
Average Balance
|
Interest Income/
Expense
|
Yield or Rate (a)
|
Interest-earning assets
|
||||||||||||||||||||||||||
Loans net of unearned
income (b) (c)
|
$ | 198,537 | $ | 11,532 | 5.81 | % | $ | 207,972 | $ | 12,221 | 5.88 | % | ||||||||||||||
Taxable securities (d)
|
74,045 | 4,476 | 6.04 | 114,970 | 6,809 | 5.92 | ||||||||||||||||||||
Non-taxable securities (d)
|
54,774 | 3,595 | 6.56 | 15,048 | 974 | 6.47 | ||||||||||||||||||||
Interest-bearing deposits with banks
|
458 | 2 | 0.43 | 301 | 3 | 1.00 | ||||||||||||||||||||
Federal funds sold
|
0 | 0 | 0.00 | 97 | - | 0.00 | ||||||||||||||||||||
Total earning assets
|
327,814 | 19,605 | 5.98 | 338,388 | 20,007 | 5.91 | ||||||||||||||||||||
Non-interest-earning assets
|
||||||||||||||||||||||||||
Cash
|
6,668 | 6,952 | ||||||||||||||||||||||||
Allowance for loan losses
|
(1,703 | ) | (1,812 | ) | ||||||||||||||||||||||
Other assets
|
34,731 | 26,718 | ||||||||||||||||||||||||
Total non-interest-earning assets
|
39,696 | 31,858 | ||||||||||||||||||||||||
Total assets
|
$ | 367,510 | $ | 370,246 | ||||||||||||||||||||||
Liabilities and Shareholders’ Equity
|
||||||||||||||||||||||||||
Interest-bearing deposits
|
||||||||||||||||||||||||||
NOW accounts
|
$ | 23,105 | $ | 33 | 0.14 | % | $ | 21,067 | $ | 35 | 0.17 | % | ||||||||||||||
Money Market accounts
|
33,339 | 224 | 0.67 | 27,988 | 242 | 0.86 | ||||||||||||||||||||
Savings deposits
|
48,651 | 231 | 0.47 | 43,099 | 246 | 0.57 | ||||||||||||||||||||
Time deposits
|
95,144 | 1,878 | 1.97 | 101,298 | 2,560 | 2.53 | ||||||||||||||||||||
Short-term borrowings
|
31,945 | 139 | 0.45 | 36,401 | 200 | 0.55 | ||||||||||||||||||||
Long-term borrowings
|
10,000 | 237 | 2.37 | 24,411 | 899 | 3.68 | ||||||||||||||||||||
Total interest-bearing
liabilities
|
242,184 | 2,742 | 1.13 | 254,264 | 4,182 | 1.64 | ||||||||||||||||||||
Non-interest-bearing deposits
|
75,799 | 70,873 | ||||||||||||||||||||||||
Other liabilities
|
4,000 | 3,724 | ||||||||||||||||||||||||
Shareholders' equity
|
45,527 | 41,385 | ||||||||||||||||||||||||
Total non-interest-bearing
|
||||||||||||||||||||||||||
Funding sources
|
125,326 | 115,982 | ||||||||||||||||||||||||
Total liabilities and
|
||||||||||||||||||||||||||
shareholders' equity
|
$ | 367,510 | $ | 370,246 | ||||||||||||||||||||||
Net interest income and net
|
||||||||||||||||||||||||||
Yield on interest earning assets
|
$ | 16,863 | 5.14 | % | $ | 15,825 | 4.68 | % |
,055
|
4.68%
|
||||||||||||||||
(a)
|
Yields on interest earning assets have been computed on a tax-equivalent basis using the 34% federal income tax statutory rate.
|
(b)
|
Income on non-accrual loans is accounted for on the cash basis, and the loan balances are included in interest earning assets.
|
(c)
|
Loan income includes net loan fees/costs.
|
(d)
|
The yield information does not give effect to changes in fair value that are reflected as a component of stockholders’ equity.
|
5
Net Interest Income (Continued)
The following table illustrates the impact and interaction of rate and volume changes for the years under review. Yields on earning assets have been computed on a tax-equivalent basis using 34% tax rate.
|
|
Analysis of Year-to-Year Changes in Net Interest Income
|
(Dollars in Thousands)
|
2010 Change from 2009
|
||||||||||||
Total
|
Change Due
|
Change Due
|
||||||||||
Change
|
To Volume
|
To Rate
|
||||||||||
Interest-earning assets
|
||||||||||||
Loans net of unearned income
|
$ | (689 | ) | $ | (554 | ) | $ | (135 | ) | |||
Securities
|
||||||||||||
Taxable
|
(2,333 | ) | (2,424 | ) | 91 | |||||||
Non-taxable
|
2,621 | 2,571 | 50 | |||||||||
Interest-bearing deposits with banks
|
(1 | ) | 2 | (3 | ) | |||||||
Total interest income
|
(402 | ) | (405 | ) | 3 | |||||||
Interest-bearing liabilities
|
||||||||||||
Deposits
|
(717 | ) | 108 | (825 | ) | |||||||
Short-term borrowings
|
(61 | ) | (24 | ) | (37 | ) | ||||||
Long-term borrowings
|
(662 | ) | (531 | ) | (131 | ) | ||||||
1,22 | ||||||||||||
Total interest expense
|
(1,440 | ) | (447 | ) | (993 | ) | ||||||
Net interest income
|
$ | 1,038 | $ | 42 | $ | 996 | ||||||
Other Operating Income and Expense
Total other operating income declined slightly with 2010 at $2.9 million compared with $3.0 million in 2009. Other operating income year-to-year changes were: service charges on deposit accounts decreased $78,000 and other service charges and fees increased $19,000. Trust income increased $22,000 due to an increase in market values of the assets under management. Income from investment in life insurance increased $23,000 because of higher cash surrender values. Other income is lower in 2010 mainly due to $21,000 recognized from proceeds of a life insurance policy in 2009.
Non-interest expense was $11.5 million for 2010 compared with $11.2 million in 2009. The increase in non-interest expense consisted primarily of the salaries and employee benefits increase of $346,000, resulting from increased salary expenses of $152,000 and increased health care insurance premiums of $189,000. Net occupancy increased $18,000 mainly due a $19,000 increase in rent, a $22,000 increase in janitor services, a $5,000 increase in utilities. These increases were offset by a $25,000 decrease in repairs and maintenance. The increases in rent, janitor services and utilities were due to the opening of a new bank branch in the fall of 2009. Professional fees increased by $47,000 and Pennsylvania shares tax decreased by $6,000. FDIC insurance cost decreased by $109,000 compared with 2009. FDIC insurance expense was higher in 2009 due to a special assessment of $166,000. ATM expenses decreased by $15,000 in 2010 when compared with 2009. Other expenses increased by $44,000 due to a variety of small increases and decreases in other expenses.
Federal income tax for 2010 was $1.3 million compared with $1.9 million in 2009. The Corporation’s effective tax rates were 19.2% in 2010 and 27.1% in 2009. The large reduction in the effective tax rate in 2010 is the result of carrying a higher percentage of tax-exempt municipal bonds in the investment portfolio.
6
Liquidity and Capital Resources
Liquidity measurements evaluate the Corporation’s ability to meet the cash-flow needs 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 available-for-sale securities. The Bank is a member of the 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.
As of December 31, 2010, the Corporation had available funding of approximately $93.2 million at the FHLB with an additional $11.3 million of short-term funding available through federal funds lines of credit.
The Corporation has outstanding commitments to fund loans that are made in the normal course of business. At December 31, 2010, the commitments stood at $38.6 million. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Cash flows provided from operating activities in 2010 increased $2.6 million compared with 2009. The majority of the increase in 2010 cash flows from operations is due to 2009 amount being reduced by the prepayment made to the FDIC in 2009.
Cash flows provided by investing activities totaled $20.3 million in 2010, compared to cash used by investing activities in 2009 of $10.7 million. The majority of cash provided by investing activities in 2010 was the result of the $7.1 million decrease in investments and the $13.0 million in cash provided from the decrease in loan balances.
Cash used by financing activities totaled $26.9 million in 2010, compared to $7.5 million provided by financing activities in 2009. In 2010, $31.1million was used to reduce short-term debt and pay $2.5 million in dividends; these uses were offset by cash provided by the $6.8 million growth in deposits.
Interest Sensitivity and Market Risk
Time deposits of $100,000 or more at December 31, 2010 are as follows:
Amount
|
Percent
|
|||||||
(in thousands)
|
||||||||
Remaining maturity:
|
||||||||
3 months or less
|
$ | 4,784 | 15.3 | % | ||||
Over 3 through 6 months
|
8,589 | 27.5 | ||||||
Over 6 months through 12 months
|
8,590 | 27.5 | ||||||
Over 12 months
|
9,248 | 29.7 | ||||||
Total
|
$ | 31,211 | 100 | % | ||||
For additional information on deposits see Note 8 of Consolidated Financial Statements.
7
Interest Sensitivity and Market Risk (Continued)
The following table shows final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment, mortgage and non-accrual loans and excluding unearned income at December 31, 2010 (in thousands):
Within
|
One-Five
|
After
|
||||
One Year
|
Years
|
Five Years
|
Total
|
|||
Commercial and industrial
|
$ 3,783
|
$ 11,030
|
$ 687
|
$ 15,500
|
||
Real estate-construction
|
669
|
-
|
803
|
1,472
|
||
Other
|
888
|
1,364
|
5,930
|
8,182
|
||
Totals
|
$ 5,340
|
12,394
|
$ 7,420
|
$ 25,154
|
||
Loans at fixed interest rates
|
$ 9,794
|
$ 7420
|
||||
Loans at variable interest rates
|
2,600
|
-
|
||||
$ 12,394
|
$ 7,420
|
The following table presents a five-year summary of loan classifications at December 31 of each such year:
Loans by Classification at December 31,
|
||||||||||||||||||||
(in thousands)
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Commercial
|
|
|
|
|
|
|||||||||||||||
Commercial ,
|
||||||||||||||||||||
Industrial & Other
|
$ | 36,213 | $ | 40,282 | $ | 37,820 | $ | 41,990 | $ | 42,897 | ||||||||||
Commercial real estate
|
63,466 | 61,359 | 61,408 | 62,779 | 65,786 | |||||||||||||||
Residential mortgages
|
68,758 | 77,216 | 85,575 | 86,412 | 80,918 | |||||||||||||||
Loans to Individuals
|
23,296 | 26,050 | 24,617 | 35,533 | 39,728 | |||||||||||||||
|
||||||||||||||||||||
Total loans
|
191,733 | 204,907 | 215,750 | 226,814 | 229,329 | |||||||||||||||
Net unamortized
|
||||||||||||||||||||
costs/(fees)
|
173 | 185 | 183 | 191 | 199 | |||||||||||||||
Total loans, net of
|
||||||||||||||||||||
costs/(fees)
|
$ | 191,906 | $ | 205,092 | $ | 215,933 | $ | 227,005 | $ | 229,528 | ||||||||||
8
Interest Sensitivity and Market Risk (Continued)
The following table presents the maturity distribution of securities at December 31, 2010.
Maturity Distribution of Securities at December 31, 2010
|
||||||||||||||||
(in thousands)
|
||||||||||||||||
U.S
|
State &
|
Total
|
Weighted
|
|||||||||||||
Govt.
|
Political
|
Amortized
|
Average
|
|||||||||||||
Agencies (1)
|
Subdivisions (2)
|
Cost
|
TE Yield (2)
|
|||||||||||||
Within 1 year
|
$ | - | $ | - | $ | - | 0.00 | % | ||||||||
After 1 but within 5 years
|
- | - | - | 0.00 | % | |||||||||||
After 5 but within 10 years
|
- | - | - | 0.00 | % | |||||||||||
After 10 years
|
60,181 | 64,691 | 124,872 | 6.25 | % | |||||||||||
$ | 60,181 | $ | 64,691 | $ | 124,872 | 6.25 | % | |||||||||
Included in U.S. Government Agencies are mortgage-backed securities. These securities carry an amortized cost of $60.2 million and mature based upon their estimated contractual maturities. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay with or without prepayment penalties.
(1) Includes mortgage-backed securities (see above)
(2) Yield on tax-exempt obligations has been computed on a fully
tax-equivalent basis (using statutory federal income tax rate of 34%)
Fair Values of Securities at December 31,
|
||||||||||||
(in thousands)
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
U.S. Govt. Agencies
|
$ | 65,711 | $ | 96,555 | $ | 112,028 | ||||||
Obligations of State &
Political Subdivisions
|
65,448 | 42,363 | 2,743 | |||||||||
|
$ | 131,159 | $ | 138,918 | $ | 114,771 |
9
Interest Sensitivity and Market Risk (Continued)
The Corporation’s market risk is primarily interest rate risk. Interest rate risk arises due to timing differences between interest sensitive assets and liabilities. Management monitors its interest sensitivity position with the intent of structuring the balance sheet so that movements of interest rates on assets and liabilities produce a relatively constant net interest margin. The Corporation’s interest rate risk management is the responsibility of the Asset/Liability Management Committee, which reports to the Board of Directors. This Committee establishes policies for monitoring and coordinating the Corporation’s sources, uses and pricing of funds.
The following table lists the amounts of interest sensitive assets and liabilities subject to change as of December 31, 2010, the gap between interest sensitive assets and liabilities of similar maturities, the cumulative gap and the ratio of the cumulative gap to interest sensitive assets.
Interest Sensitivity Analysis (In Thousands)
0-30 Days
|
31-90 Days
|
91-180 Days
|
181-365 Days
|
1-5 Years
|
Over 5 Years
|
Totals
|
||||||||||||||||||||||
Interest-earning assets:
|
||||||||||||||||||||||||||||
Securities
|
$ | 1,607 | $ | 2,594 | $ | 3,223 | $ | 6,033 | $ | 32,789 | $ | 78,626 | $ | 124,872 | ||||||||||||||
Loans
|
17,203 | 12,291 | 13,586 | 26,247 | 116,689 | 5,926 | 191,942 | |||||||||||||||||||||
Total interest-sensitive
|
||||||||||||||||||||||||||||
Assets
|
18,810 | 14,885 | 16,809 | 32,280 | 149,478 | 84,552 | 316,814 | |||||||||||||||||||||
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||
Certificates of deposit
|
5,934 | 8,531 | 18,410 | 21,661 | 33,647 | 581 | 88,764 | |||||||||||||||||||||
Other interest-bearing deposits
|
39,071 | 267 | 401 | 802 | 42,962 | 27,018 | 110,521 | |||||||||||||||||||||
Short term borrowings
|
17,700 | - | - | - | - | - | 17,700 | |||||||||||||||||||||
Long term borrowings
|
- | - | - | - | 10,000 | - | 10,000 | |||||||||||||||||||||
Total interest-sensitive
|
||||||||||||||||||||||||||||
Liabilities
|
62,705 | 8,798 | 18,811 | 22,463 | 86,609 | 27,599 | 226,985 | |||||||||||||||||||||
Interest sensitivity gap
|
$ | (43,895 | ) | $ | 6,087 | $ | (2,002 | ) | $ | 9,817 | $ | 62,869 | $ | 56,953 | $ | 89,829 | ||||||||||||
Cumulative gap
|
$ | ( 43,895 | ) | $ | (37,808 | ) | $ | (39,810 | ) | $ | (29,993 | ) | $ | 32,876 | $ | 89,829 | ||||||||||||
Ratio of cumulative gap to
|
||||||||||||||||||||||||||||
Interest sensitive assets
|
(13.86 | %) | (11.93 | %) | (12.57 | %) | ( 9.47 | %) | 10.38 | % | 28.35 | % | ||||||||||||||||
Loan and security assumptions are based upon contractual maturity and prepayment estimates. Included in other interest bearing deposits are savings, money market and interest-bearing transaction accounts. These accounts are subject to immediate withdrawal. However, based upon historical performance, management considers a certain portion of the accounts to be stable core deposits.
Although useful, there are certain deficiencies in this static gap model. Assets and liabilities are subject to competitive pressures throughout the Corporation’s market area. Additionally, the timing and degree of repricing on assets and liabilities may vary significantly as interest rates change.
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 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.
10
Interest Sensitivity and Market Risk (Continued)
The December 31, 2010 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 decrease 1.2% if rates rise 100 bps, will decrease 3.4% if rates rise 200 bps and projects a 5.8% decrease of net interest income if rates rise 300 bps. If rates decrease 100 bps, the model projects a 1.7% decrease in net interest income, a 3.6% decrease if rates decrease 200 bps and if rates decrease 300 bps, the model projects net interest income will decrease 5.2%.
In the event of a shift in interest rates, management may take certain actions intended to mitigate the negative impact to net interest income or to maximize the positive impact to net interest income. These actions may include, but are not limited to, restructuring of earning assets and interest-bearing liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or terms of loans and deposits.
Allowance for Loan Losses and Credit Review
Maintaining a high quality loan portfolio is of great importance to the Corporation. The Corporation manages the risk characteristics of the loan portfolio through the use of prudent lending policies and procedures and monitors risk through a periodic review process provided by internal auditors, regulatory authorities and internal loan review procedures. These reviews include an analysis of credit quality, diversification of industry, compliance with policies and procedures, and current economic conditions. In addition to these reviews, the Corporation annually has commercial loan reviews performed by a third party specializing in this area.
The Corporation’s credit culture fosters and actively supports the extension of credit on sound, fundamental lending policies. Each credit is to be logical, legal, constructive and acceptable within policy guidelines.
The allowance for loan losses is a valuation reserve that is intended to account for credit losses which may be expected in the Corporation’s loan portfolio as a result of the credit risk involved in the normal granting of credit. Adequate management of the allowance is an integral part of the credit risk management process. The Corporation will maintain an adequate allowance in anticipation of losses reflected as of the evaluation date. Management is cognizant of the subjective nature of decisions regarding loan portfolio factors and the variability over time of internal and external factors affecting portfolio quality, and realizes that an effective asset review system is essential to establishing the basis for an adequate allowance. To improve the accuracy of determining the allowance, management will continuously monitor all factors and current conditions that may affect loss recognition.
The amount of the provision (credit) for loan losses was $0 in 2010 and $0 in 2009. For each of the same years, the net charge-offs (recoveries) against the allowance for loan losses was $36,000 and $99,000, respectively. The allowance for loan losses is maintained at a level that represents management’s best estimates of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses that may be realized in the future, or that additional provisions for losses on loans will not be required.
11
Allowance for Loan Losses and Credit Review (Continued)
The table below provides an analysis of the allowance for loan losses for each of the five years ended December 31:
Years Ended December 31,
(Dollars in thousands)
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Loans outstanding at end of the year,
|
||||||||||||||||||||
net of unearned income
|
$ | 191,906 | $ | 205,092 | $ | 215,933 | $ | 227,005 | $ | 229,528 | ||||||||||
Average loans outstanding
|
$ | 198,537 | $ | 207,972 | $ | 219,000 | $ | 226,713 | $ | 218,944 | ||||||||||
Allowance for loan losses:
|
||||||||||||||||||||
Balance, beginning of year
|
$ | 1,722 | $ | 1,821 | $ | 1,869 | $ | 1,806 | $ | 1,636 | ||||||||||
Loans charged off:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Commercial, industrial & other
|
0 | 9 | 39 | 20 | 47 | |||||||||||||||
Commercial real estate
|
0 | 0 | 0 | 28 | 0 | |||||||||||||||
Residential mortgages
|
25 | 49 | 31 | 0 | 0 | |||||||||||||||
Loans to individuals
|
14 | 42 | 5 | 18 | 13 | |||||||||||||||
Total loans charged off
|
39 | 100 | 75 | 66 | 60 | |||||||||||||||
Recoveries:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Commercial, industrial & other
|
1 | 0 | 8 | 24 | 3 | |||||||||||||||
Commercial real estate
|
0 | 0 | 2 | 5 | 8 | |||||||||||||||
Residential mortgages
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Loans to individuals
|
2 | 1 | 2 | 10 | 9 | |||||||||||||||
Total recoveries
|
3 | 1 | 12 | 39 | 20 | |||||||||||||||
Net loans charged off/(recovered)
|
36 | 99 | 63 | 27 | 40 | |||||||||||||||
Provision charged/(credited) to expense
|
0 | 0 | 15 | 90 | 210 | |||||||||||||||
Balance, end of year
|
$ | 1,686 | $ | 1,722 | $ | 1,821 | $ | 1,869 | $ | 1,806 | ||||||||||
Ratios:
|
||||||||||||||||||||
Net (recoveries)/charge-offs as a
|
||||||||||||||||||||
percentage of average loans
|
||||||||||||||||||||
outstanding
|
0.02 | % | 0.05 | % | 0.03 | % | 0.01 | % | 0.02 | % | ||||||||||
Allowance for loan losses
|
||||||||||||||||||||
as a percentage of average loans
|
||||||||||||||||||||
outstanding
|
0.85 | % | 0.83 | % | 0.83 | % | 0.82 | % | 0.83 | % |
Management’s review and evaluation of loan loss experience and loan loss potential on outstanding loans occurs on a quarterly basis and includes a review of such factors as charge-off history, delinquent loans, loan collateral value, the borrower’s financial condition, current economic conditions and the current requirements of the appropriate regulatory agencies. As a result of this on-going study, management believes that the allowance for loan loss amount for December 31, 2010 is adequate.
12
Allowance for Loan Losses and Credit Review (Continued)
The following table summarizes the allocation of the allowance for loan losses for the past five years.
Years Ended December 31,
(Dollars in thousands)
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Commercial
|
|
|
|
|
|
|||||||||||||||
Commercial, industrial & other
|
$ | 107 | $ | 109 | $ | 108 | $ | 110 | $ | 169 | ||||||||||
Commercial real estate
|
1,378 | 1,423 | 1,520 | 1,480 | 1,422 | |||||||||||||||
Residential mortgages
|
110 | 134 | 145 | 104 | 97 | |||||||||||||||
Loans to individuals
|
31 | 36 | 48 | 35 | 42 | |||||||||||||||
Unallocated
|
60 | 20 | 0 | 140 | 76 | |||||||||||||||
Total
|
$ | 1,686 | $ | 1,722 | $ | 1,821 | $ | 1,869 | $ | 1,806 | ||||||||||
The following table details for each of the most recent five years, the year-end loan amounts which were accounted for on a non-accrual basis, past due 90 days or more and renegotiated:
Dec. 31, 2010
|
||||
Loans on non-accrual basis
|
$ | 149 | ||
Loans past due 90 days or more
|
- | |||
Renegotiated loans
|
674 | |||
Total
|
$ | 823 | ||
Dec. 31, 2009
|
||||
Loans on non-accrual basis
|
$ | 261 | ||
Loans past due 90 days or more
|
- | |||
Renegotiated loans
|
979 | |||
Total
|
$ | 1,240 | ||
Dec. 31, 2008
|
||||
Loans on non-accrual basis
|
$ | 29 | ||
Loans past due 90 days or more
|
- | |||
Renegotiated loans
|
3,566 | |||
Total
|
$ | 3,595 | ||
Dec. 31, 2007
|
||||
Loans on non-accrual basis
|
$ | 156 | ||
Loans past due 90 days or more
|
- | |||
Renegotiated loans
|
350 | |||
Total
|
$ | 506 | ||
Dec. 31, 2006
|
||||
Loans on non-accrual basis
|
$ | 561 | ||
Loans past due 90 days or more
|
- | |||
Renegotiated loans
|
2,823 | |||
Total
|
$ | 3,384 |
Loans that were past due 90 days or more, or were on non-accrual represented 0.08% of total loans on December 31, 2010, which was a decrease from 0.13% on December 31, 2009 and an increase from 0.01% on December 31, 2008. The Corporation’s policy is to place a loan on non-accrual basis when it becomes 90 days past due provided that the loan is well collateralized and evidence indicates a reasonable likelihood for collection. Also, a loan is placed on non-accrual in the event of a material decline in business activity that may hinder the borrower’s ability to repay the loan.
As of December 31, 2010, $82,000 of non-accrual loans were paying principal or principal and interest with payments recognized on a cash basis. Renegotiated loan balances decreased primarily due to the removal of a $265,000 loan.
13
Allowance for Loan Losses and Credit Review (Continued)
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 the current loan repayment terms. As of December 31, 2010 the Corporation had $716,000 in foreclosed real estate compared to $639,000 at the end of 2009.
In 2009, the gross amount of interest that would have been recorded on non-accrual loans would have been $9,000. The actual interest reflected in income on these loans was $6,000.
Capital
The shareholders’ equity or the capital base represents the investment by the Corporation’s owners either initially or through retention of earnings (net after income tax less dividend payments). This investment acts as a safeguard against future uncertainties. The amount of capital which is deemed appropriate is dependent upon an assessment of the Corporation’s total assets, the quality of its loans and securities, its historical earnings record, its business prospects for the near and long term, the management and information systems in place and the general competence and abilities of the Corporation’s management.
The Federal Reserve Board’s risk-based capital adequacy standards are designed principally as a measure of credit risk. These standards require that (1) at least 50% of total capital must be common and certain other “core” equity capital (“Tier I Capital”); (2) assets and off-balance sheet items must be weighted according to risk; (3) the total capital to risk-weighted asset ratio must be at least 8%; and (4) a minimum 4% leverage ratio of Tier I Capital to average total assets must be maintained.
As of December 31, 2010, Commercial Bank & Trust of PA had Tier I and total equity capital to risk adjusted asset ratios of 19.9% and 20.7%, respectively. In 2010 the leverage ratio was 11.9%. At December 31, 2009, Commercial Bank & Trust of PA had Tier I and total equity capital to risk adjusted assets ratios of 18.2% and 19.1%, respectively. The leverage ratio was 10.5%.
The table below presents Commercial Bank & Trust of PA’s capital position at December 31, 2010.
(dollar amounts in thousands)
Percent
|
||||||||
of Adjusted
|
||||||||
Amount
|
Assets
|
|||||||
Tier I Capital
|
$ | 41,640 | 19.9 | % | ||||
Tier I Capital Requirement
|
8,355 | 4.0 | ||||||
Total Equity Capital
|
$ | 43,326 | 20.7 | % | ||||
Risk-Based Requirement
|
16,710 | 8.0 | ||||||
Leverage Capital
|
$ | 41,640 | 11.9 | % | ||||
Leverage Requirement
|
14,000 | 4.0 |
Inflation and Changing Prices
Inflation can be significant to a banking institution because of its implication for the interest rate environment and its influence on personnel expenses and the costs of supplies and materials needed for daily operations. However, such a large portion of the Corporation’s assets and liabilities are represented by monetary investments, inflationary impact tends to be dampened except for the differences caused by maturity variances. Management efforts to gauge and control these variances have been discussed earlier under rate sensitivity. Inflation can have a more direct impact on non-interest expenses. Expenses are closely monitored by management and consistent attention is given to controlling these cost areas in an attempt to limit their increase to manageable levels.
Interest rate movements will continue to influence ongoing earnings levels. Even though the exact impact of these factors cannot be predicted, the Corporation believes that given its financial strength and stability, it will be able to meet these situations in a positive manner.
14
Market Makers
The following firms have committed to make a market in the stock of Commercial National Financial Corporation. Inquiries concerning their services should be directed to:
RBC Capital Markets
|
Stifel Nicolaus & Company, Inc.
|
60South 6th Street
|
1 South Street
|
Minneapolis, MN 55402
800-285-4964
|
Baltimore, MD 21202
800-682-0300
|
Knight Capital
|
Boenning & Scattergood
|
545 Washington Blvd
|
4 Tower Bridge, Suite 300
|
30th Floor
Jersey City, NJ 07310
800-544-7508
|
200 Bar Harbor Drive
West Conshohocken, PA 19428
800-842-8928
|
UBS Securities
|
Citadel Securities LLC
|
677 Washington Blvd
|
131 South Dearborn Street
|
6th Floor
|
32nd Floor
|
Stamford, CT 06901
|
Chicago, IL 60603
|
203-719-7400
|
312-395-2100
|
Goldman Sachs
|
Merrill Lynch
|
200 West Street
|
One Bryant Park
|
4th Floor
|
6th Floor
|
New York, NY 10282
|
New York, NY 10036
|
212-902-8585
|
800-937-0501
|
Hudson Securities
|
Susquehanna Capital
|
111 Town Square Place
|
401 City Avenue
|
15h Floor
|
Bala Cynwd, PA 19004
|
Jersey City, NJ 07310
|
800-825-9550
|
201-216-9100
|
|
Transfer Agent
Should you need assistance regarding changes in the registration of certificates or in reporting lost certificates please contact:
Registrar and Transfer Company
Attn: Investor Relations
10 Commerce Drive
Cranford, NJ 07016-3572
Telephone (800) 368-5948
Email: info@rtco.com
Internet Address:www.rtco.com
Form 10-K
THE CORPORATION WILL PROVIDE WITHOUT CHARGE TO ANY SHAREHOLDER A COPY OF ITS 2010 ANNUAL REPORT ON FORM 10-K AS REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. REQUESTS SHOULD BE MADE IN WRITING TO:
Commercial National Financial Corporation
Attn: Wendy S. Schmucker, Secretary
P.O. Box 429
Latrobe, PA 15650
15
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Commercial National Financial Corporation
Latrobe, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Commercial National Financial Corporation and subsidiaries (“Corporation”) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial National Financial Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ ParenteBeard LLC
Pittsburgh, Pennsylvania
March 29, 2011
16
December 31,
|
|||
2010
|
2009
|
||
(Dollars in Thousands, Except per Share Amounts)
|
Assets
Cash and due from banks
|
$ | 5,578 | $ | 6,610 | ||||
Interest bearing deposits with banks
|
16 | 131 | ||||||
Cash and Cash Equivalents
|
5,594 | 6,741 | ||||||
Securities available for sale
|
131,159 | 138,918 | ||||||
Restricted investments in bank stock
|
4,339 | 4,567 | ||||||
Loans receivable, net of allowance for loan losses of $1,686 in 2010 and $1,722 in 2009
|
190,220 | 203,370 | ||||||
Premises and equipment, net
|
3,323 | 3,548 | ||||||
Accrued interest receivable
|
1,519 | 1,456 | ||||||
Investment in life insurance
|
15,471 | 14,921 | ||||||
Other assets
|
3,852 | 2,483 |
Total Assets
|
$355,477
|
$376,004
|
Liabilities and Shareholders’ Equity
|
Liabilities
|
Deposits:
|
||||||||
Non-interest bearing
|
$ | 77,209 | $ | 74,260 | ||||
Interest bearing
|
199,285 | 195,470 | ||||||
Total Deposits
|
276,494 | 269,730 | ||||||
Short-term borrowings
|
17,700 | 48,850 | ||||||
Long-term borrowings
|
10,000 | 10,000 | ||||||
Other liabilities
|
5,271 | 3,932 |
Total Liabilities
|
309,465
|
332,512
|
|
Shareholders’ Equity
|
Common stock, par value $2 per share; authorized 10,000,000 shares; issued 3,600,000 shares; outstanding 2,860,953 shares in 2010 and 2009
|
7,200 | 7,200 | ||||||
Retained earnings
|
47,207 | 44,223 | ||||||
Accumulated other comprehensive income
|
4,149 | 4,613 | ||||||
Treasury stock, at cost, 739,047 shares in 2010 and 2009
|
(12,544 | ) | (12,544 | ) |
Total Shareholders’ Equity
|
46,012
|
43,492
|
Total Liabilities and Shareholders’ Equity
|
$355,477
|
$376,004
|
See notes to consolidated financial statements.
17
Consolidated Statements of Income
Years Ended December 31,
|
||||
2010
|
2009
|
|||
(In Thousands, Except per Share Amounts)
|
|
Interest Income
|
Interest and fees on loans
|
$11,368
|
$12,041
|
||
Interest and dividends on securities:
|
||||
Taxable
|
4,474
|
6,809
|
||
Exempt from federal income taxes
|
2,373
|
643
|
||
Other
|
2
|
3
|
Total Interest Income
|
18,217
|
19,496
|
|
Interest Expense
|
Deposits
|
2,366
|
3,083
|
||
Short-term borrowings
|
139
|
200
|
||
Long-term borrowings
|
237
|
899
|
Total Interest Expense
|
2,742
|
4,182
|
Net Interest Income
|
15,475
|
15,314
|
Provision for Loan Losses
|
-
|
-
|
Net Interest Income after Provision
for Loan Losses
|
15,475
|
15,314
|
|
Other Operating Income
|
Service charges on deposit accounts
|
505
|
583
|
||
Other service charges and fees
|
772
|
753
|
||
Net security losses
|
(5)
|
-
|
||
Trust department income
|
947
|
925
|
||
Income from investment in life insurance
|
508
|
485
|
||
Other income
|
181
|
221
|
Total Other Operating Income
|
2,908
|
2,967
|
|
Other Operating Expenses
|
Salaries and employee benefits
|
6,070
|
5,724
|
||
Net occupancy
|
837
|
819
|
||
Furniture and equipment
|
537
|
525
|
||
Professional fees
|
432
|
385
|
||
Pennsylvania shares tax
|
501
|
507
|
||
FDIC insurance expense
|
343
|
452
|
||
ATM expenses
|
352
|
367
|
||
Director fees
|
471
|
476
|
||
Other expenses
|
2,035
|
1,991
|
Total Other Operating Expenses
|
11,578
|
11,246
|
Income before Income Taxes
|
6,805
|
7,035
|
Income Tax Expense
|
1,304
|
1,906
|
Net Income
|
$ 5,501
|
$ 5,129
|
Earnings per Share, Basic
|
$ 1.92
|
$ 1.79
|
See notes to consolidated financial statements.
18
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2010 and 2009
Common
Stock
|
Retained Earnings
|
Accumulated
Other Comprehensive Income
|
Treasury
Stock
|
Total
Shareholders’
Equity
|
||||||
|
(In Thousands, Except per Share Amounts)
|
Balance – December 31, 2008
|
$ | 7,200 | $ | 41,616 | $ | 2,490 | $ | (12,238 | ) | $ | 39,068 | |||||||||
Comprehensive income:
|
||||||||||||||||||||
Net income
|
- | 5,129 | - | - | 5,129 | |||||||||||||||
Change in unrealized net gains on securities
available for sale, net of deferred income tax expense
|
- | - | 2,123 | - | 2,123 | |||||||||||||||
Total Comprehensive Income
|
- | - | - | - | 7,252 | |||||||||||||||
Cash dividends paid, $0.88 per share
|
- | (2,522 | ) | - | - | (2,522 | ) | |||||||||||||
Purchases of treasury stock (20,000 shares)
|
- | - | - | (306 | ) | (306 | ) | |||||||||||||
Balance – December 31, 2009
|
7,200 | 44,223 | 4,613 | (12,544 | ) | 43,492 | ||||||||||||||
Comprehensive income:
|
||||||||||||||||||||
Net income
|
- | 5,501 | - | - | 5,501 | |||||||||||||||
Change in unrealized net loss on securities
available for sale, net of reclassification
adjustment and deferred income tax benefit
|
- | - | (464 | ) | - | (464 | ) | |||||||||||||
Total Comprehensive Income
|
5,037 | |||||||||||||||||||
Cash dividends paid, $0.88 per share
|
- | (2,517 | ) | - | - | (2,517 | ) | |||||||||||||
Balance – December 31, 2010
|
$ | 7,200 | $ | 47,207 | $ | 4,149 | $ | (12,544 | ) | $ | 46,012 |
See notes to consolidated financial statements.
19
Consolidated Statements of Cash Flows
Years Ended December 31,
|
|||||
2010
|
2009
|
||||
(In Thousands)
|
|
Cash Flows from Operating Activities
|
Net income
|
$ 5,501
|
$ 5,129
|
||
Adjustments to reconcile net income to net cash provided by
Operating activities:
|
||||
Depreciation and amortization
|
407
|
414
|
||
Amortization of intangibles
|
98
|
98
|
||
Net accretion of securities and loan fees
|
(129)
|
(308)
|
||
Net security losses
|
5
|
-
|
||
Income from investment in life insurance
|
(508)
|
(485)
|
||
Gain on life insurance death benefit
|
-
|
(21)
|
||
Deferred tax expense (benefit)
|
30
|
59
|
||
Decrease (increase) in accrued interest receivable and
other assets
|
236
|
(1,598)
|
||
Decrease in accrued interest payable and other liabilities
|
(184)
|
(435)
|
Net Cash Provided by Operating Activities
|
5,456
|
2,853
|
|
Cash Flows from Investing Activities
|
Purchases of securities
|
(25,239)
|
(59,889)
|
||
Maturities, calls and principal repayments of securities
|
32,432
|
39,268
|
||
Purchases of restricted bank stock
|
-
|
(600)
|
||
Maturities of restricted bank stock
|
228
|
-
|
||
Net decrease in loans
|
13,058
|
10,710
|
||
Proceeds from life insurance death benefit
|
-
|
185
|
||
Proceeds from sale of foreclosed assets
|
3
|
5
|
||
Purchases of premises and equipment
|
(182)
|
(413)
|
Net Cash Provided by (Used in) Investing Activities
|
20,300
|
(10,734)
|
|
Cash Flows from Financing Activities
|
Net increase in deposits
|
6,764
|
12,643
|
||
Net (decrease) increase in short-term borrowings
|
(31,150)
|
17,675
|
||
Repayment of long-term borrowings
|
-
|
(20,000)
|
||
Dividends paid
|
(2,517)
|
(2,522)
|
||
Purchases of treasury stock
|
-
|
(306)
|
Net Cash (Used in) Provided by Financing Activities
|
(26,903)
|
7,490
|
Net Decrease in Cash and Cash Equivalents
|
(1,147)
|
(391)
|
Cash and Cash Equivalents – Beginning
|
6,741
|
7,132
|
Cash and Cash Equivalents – Ending
|
$ 5,594
|
$ 6,741
|
||
|
Supplementary Cash Flows Information
|
Interest paid
|
$ 2,862
|
$ 4,456
|
Income taxes paid
|
$ 1,375
|
$ 1,985
|
Loans transferred to foreclosed real estate
|
$ 80
|
$ 30
|
|
Non-Cash Investing Activities
|
Purchase of investment securities not settled until 2011
included in other assets and other liabilities
|
$ 1,731
|
$ 0
|
See notes to consolidated financial statements.
20
Notes to Consolidated Financial Statements
|
Note 1 – Summary of Significant Accounting Policies
|
General
The accompanying consolidated financial statements include the accounts of Commercial National Financial Corporation (the Corporation) and its wholly-owned subsidiaries, Commercial Bank & Trust of PA, and Ridge Properties, Inc. All material intercompany transactions have been eliminated in consolidation.
The Bank operates under a state bank charter and provides full banking services. The Corporation is subject to regulation by the Federal Reserve Board and the Bank is subject to regulation by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking. The Bank’s primary business consists of taking deposits and granting loans to customers who generally do business in the area of Westmoreland County, Pennsylvania.
As of December 31, 2010, the Corporation employed 108 people in full-time and part-time positions. Fifty-seven (57) employees are represented by the United Auto Workers, Local 1799. In 2008, the Corporation and bargaining unit employees entered into a labor agreement that will expire in February 2014.
The following summary of accounting and reporting policies is presented to aid the reader in obtaining a better understanding of the consolidated financial statements and related financial data of the Corporation and its wholly-owned subsidiaries contained in this report. Such policies conform to generally accepted accounting principles (GAAP) and to general practice within the banking industry.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the evaluation of other than temporary impairment of securities.
Significant Concentrations of Credit Risk
Most of the Corporation’s activities are with customers located within Westmoreland County, Pennsylvania. Note 3 discusses the types of securities that the Corporation invests in. Note 4 discusses the types of lending that the Corporation engages in. The Corporation does not have any significant concentrations to any one industry or customer. Although the Corporation has a diversified loan portfolio, exposure to credit loss can be adversely impacted by downturns in local economic and employment conditions.
Securities
Debt securities are classified as “securities available for sale” and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of the related deferred income tax effect.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
21
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Corporation is generally amortizing these amounts over the contractual life of the loan.
The loans receivable portfolio is segmented into commercial, residential mortgage, and loans to individuals. Commercial loans consist of the following classes: commercial, industrial and other commercial financing, and commercial real estate. The residential loan segment has one class, one- to four-family first lien residential mortgage loans. Loans to individuals consist of one class, which includes all consumer loans to individuals.
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally twelve months) and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable is charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 90 days past due on a contractual basis, earlier in the event of Bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial
22
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
|
Allowance for Loan Losses (Continued)
|
loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:
1.
|
Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
|
2.
|
National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
|
3.
|
Nature and volume of the portfolio and terms of loans.
|
4.
|
Experience, ability, and depth of lending management and staff.
|
5.
|
Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications.
|
6.
|
Quality of the Corporation’s loan review system, and the degree of oversight by the Corporation’s Board of Directors.
|
7.
|
Existence and effect of any concentrations of credit and changes in the level of such concentrations.
|
8.
|
Effect of external factors, such as competition and legal and regulatory requirements.
|
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
The following discusses key risk within each portfolio segment:
Commercial, industrial and other financing – these loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.
Commercial real estate – These loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as strip malls and apartment buildings. Individual projects as well as global cash flows are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied.
Residential mortgages – These are loans secured by 1-4 family residences, including purchase money mortgages. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 15 to 30 years. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this portfolio, since low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.
Loans to individuals – Loans made to individuals may be secured by junior lien positions on a borrower’s primary residence or other assets of the borrower, as well as unsecured loans. This segment includes home equity loans, auto loans, and secured or unsecured lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.
23
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
|
Allowance for Loan Losses (Continued)
|
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are not collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for twelve consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound
24
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
|
Allowance for Loan Losses (Continued)
|
net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet when they are funded.
Foreclosed Real Estate
Foreclosed real estate is comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosure. A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Foreclosed real estate is initially recorded at fair value, net of estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other expenses. Foreclosed real estate at December 31, 2010 and 2009 was $716,000 and $639,000, respectively, and is included in other assets.
Intangible Assets
The Corporation has amortizable intangible assets related to core deposit intangibles acquired in 2002 through the acquisition of a branch office. These intangible assets are being amortized on a straight-line basis over a period of ten years. The balance of these amortizable intangible assets at December 31, 2010 was $146,000 net of accumulated amortization of $829,000, which is included in other assets. Amortization expense of $98,000 was recorded for the years ended December 31, 2010 and 2009. Amortization expense is estimated to be $98,000 for 2011 and $48,000 in 2012.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. For financial statement reporting and income tax purposes, depreciation is computed both on straight-line and accelerated methods over the estimated useful life of the premises and equipment. Charges for maintenance and repairs are expensed as incurred. Amortization is charged over the term of the respective lease or the estimated useful life of the asset, whichever is shorter.
Bank Owned Life Insurance
The Corporation invests in bank owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The Corporation is the owner and beneficiary of the policies. This life insurance investment is carried at the
25
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
Bank Owned Life Insurance (Continued)
cash surrender value of the underlying policies. Income from the investment in the policies is included in other operating income on the income statement.
Advertising Costs
The Corporation follows the policy of charging the costs of advertising to expense as incurred. Total advertising expense for the years ended December 31, 2010 and 2009 was $170,000 and $180,000, respectively.
Trust Operations
Trust income is recorded on the cash basis, which approximates the accrual basis. Securities and other property held by the Corporation in a fiduciary or agency capacity for customers of the Trust Department are not assets of the Corporation and, accordingly, are not included in the accompanying consolidated financial statements. Assets under management in the trust department totaled $183,766,000 and $165,163,000 at December 31, 2010 and 2009, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined based on the differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Corporation and its subsidiaries file a consolidated federal income tax return.
Earnings per Share
Basic earnings per share have been calculated on the weighted average number of shares outstanding of 2,860,953 in 2010 and 2,866,338 in 2009. The Corporation currently maintains a simple capital structure, thus there are no dilutive effects on earnings per share.
Treasury Stock
The acquisition of treasury stock is recorded under the cost method. At the date of subsequent reissue, the treasury stock is reduced by the cost of such stock on the average cost basis, with any excess proceeds being credited to retained earnings.
Segment Reporting
The Corporation acts as an independent community financial services provider and offers traditional banking and related financial services to individual, business and government customers. The Corporation offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits, the making of commercial, consumer and mortgage loans and providing other financial services.
Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Corporation. As such, discrete information is not available and segment reporting would not be meaningful.
Statements of Cash Flows
For purposes of reporting cash flows, the Corporation has defined cash and cash equivalents as those amounts included in the balance sheet captions, “Cash and due from banks” and “Interest-bearing deposits with banks.”
26
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right)to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Restricted Investment in Bank Stock
Federal law requires the Bank, a member institution of the Federal Home Loan Bank system, to hold stock of its district Federal Home Loan Bank (FHLB) according to a predetermined formula. This restricted stock is carried at cost and as of December 31, 2010, consists of the common stock of FHLB of Pittsburgh. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock. The FHLB of Pittsburgh repurchased 5% or $228,000 of capital stock from the corporation in 2010. The FHLB dividend suspension remains in effect.
The Corporation evaluates impairment in FHLB stock when certain conditions warrant further consideration. In December 2008, the FHLB voluntarily suspended dividend payments on its stock as well as the repurchase of excess stock from members. The FHLB stated that this was due to a reduction in core earnings and concern over the FHLB's capital position. After evaluating such factors as the capital adequacy of the FHLB, its overall operating performance and the FHLB's liquidity and funding position, the Corporation concluded that the par value was ultimately recoverable and no impairment charge was recognized at December 31, 2010.
Management believes no impairment charge is necessary related to the FHLB stock as of December 31, 2010. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.
Subsequent Events
Commercial National Financial Corporation has evaluated subsequent events through the date these consolidated financial statements were filed with the Securities and Exchange Commission. We have incorporated into these consolidated financial statements the effect of all material known events determined by ASC Topic 855, “Subsequent Events,” to be recognizable events.
New Accounting Standards
Disclosure of Supplementary Pro Forma Information for Business Combinations
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to address diversity in practice concerning pro forma revenue and earnings disclosure requirements for business combinations. This update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings. These requirements are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Adoption of this standard is not anticipated to have a material effect on the financial statements, results of operations or liquidity of the Corporation.
27
|
Note 1 – Summary of Significant Accounting Policies (Continued)
|
New Accounting Standards (Continued)
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to provide financial statement users with greater transparency about credit quality of financing receivables and allowance for credit losses. This update requires additional disclosures as of the end of a reporting period and additional disclosures about activity that occurs during a reporting period that will assist financial statement users in assessing credit risk exposures and evaluating the adequacy of the allowance for credit losses.
The additional disclosures are required to be provided on a disaggregated basis. ASU No. 2010-20 defines two levels of disaggregation and provides additional implementation guidance to determine the appropriate level of disaggregation of information. The disclosures should facilitate evaluation of the nature of the credit risk inherent in a portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses.
The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Disclosures required by this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.
Modification of a Loan That is Part of a Pool That is Accounted for as a Single Asset
In April 2010, the FASB issued ASU No. 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset. ASU No. 2010-18 provides that modifications of acquired loans with deteriorated credit quality that are accounted for within a pool do not result in removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled asset restructuring. ASU No. 2010-18 is effective for modifications occurring in the first interim or annual reporting period ending on or after July 15, 2010. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.
Fair Value Disclosures
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. The ASU clarifies existing disclosure requirements and requires additional disclosures regarding fair value measurements. This standard clarifies that an entity should provide fair value disclosures by class rather than major category of assets and liabilities, resulting in a greater level of disaggregated information presented in all fair value disclosures. ASU 2010-06 also clarifies that, for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3), an entity is required to describe valuation techniques and the inputs used in determining the fair values of each class of assets and liabilities and to disclose a change in valuation technique and the reason for making that change. Additionally, the ASU requires an entity to discuss the reasons for transfers in or out of Level 3 and, if significant, to disclose these transfers on a gross basis, to disclose on a gross basis the amounts and reasons for significant transfers between Level 2 and Level 3 of the fair value hierarchy, and to disclose its policy for determining when transfers between Levels are recognized. This standard was effective for interim and annual reporting periods that began after December 15, 2009. Adoption of this standard did not have a material effect on the financial statements, results of operations or liquidity of the Corporation.
28
|
Note 2 - Cash and Due from Banks
|
Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository institutions with transaction accounts and non-personal time deposits. Reserves are maintained in the form of vault cash or a non-interest bearing balance held with the Federal Reserve Bank. The Bank also maintains deposits with the Federal Reserve Bank and other banks for various services such as check clearing. The required reserve at December 31, 2010 and 2009 was approximately $100,000.
|
Note 3 - Securities
|
The amortized cost and fair values of securities available for sale are as follows:
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||
(In Thousands)
|
December 31, 2010:
|
|||||||
Obligations of states and political
subdivisions
|
$ 64,691
|
$ 937
|
$ (180)
|
$ 65,448
|
|||
Mortgage-backed securities
|
60,181
|
5,530
|
-
|
65,711
|
$124,872
|
$6,467
|
$ (180)
|
$131,159
|
December 31, 2009:
|
|||||||
Obligations of states and political
subdivisions
|
$ 41,629
|
$ 975
|
$ (241)
|
$ 42,363
|
|||
Mortgage-backed securities
|
90,300
|
6,255
|
-
|
96,555
|
$131,929
|
$7,230
|
$ (241)
|
$138,918
|
The amortized cost and fair value of securities at December 31, 2010 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Cost
|
Fair
Value
|
|||
(In Thousands)
|
Due within one year
|
$ -
|
$ -
|
||
Due after one year through five years
|
-
|
-
|
||
Due after five years through ten years
|
-
|
-
|
||
Due after ten years
|
124,872
|
131,159
|
$124,872
|
$131,159
|
Securities with amortized cost and fair values of $17,631,000 and $18,989,000, respectively, at December 31, 2010 and $19,979,000 and $21,357,000 respectively, at December 31, 2009 were pledged to secure public deposits and for other purposes required or permitted by law.
There were no gross gains and a gross loss of $5,000, incurred on one municipal bond that was called in 2010. There were no gross gains or losses realized on sales and calls of securities during 2009.
29
|
Note 3 - Securities (Continued)
|
The following table shows the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 and 2009:
(In Thousands)
|
|||||||||||||||||
December 31, 2010
|
|||||||||||||||||
Less than 12 Months
|
12 Months or More
|
Total
|
|||||||||||||||
Fair
Value
|
Unrealized Losses
|
Fair
Value
|
Unrealized Losses
|
Fair
Value
|
Unrealized Losses
|
||||||||||||
Obligations of states and political subdivisions
|
$11,183
|
$(180)
|
-
|
-
|
$11,183
|
$(180)
|
|||||||||||
(In Thousands)
|
|||||||||||||||||
December 31, 2009
|
Obligations of states and political subdivisions
|
$12,900
|
$(241)
|
-
|
-
|
$12,900
|
$(241)
|
The Corporation reviews its position quarterly to determine if there is Other-Than-Temporary Impairment (OTTI) on any of its securities. All of the Corporation’s securities are debt securities and we assess whether OTTI is present when the fair value of a security is less than its amortized cost basis. The Corporation monitors the credit ratings of all securities for downgrades as well as any other indication of OTTI condition. As of December 31, 2010 there were ten municipal bonds in an unrealized loss position. These unrealized losses are considered to be temporary impairments. The decline in the value of these debt securities is due only to interest rate fluctuations and not any deterioration in credit quality. As a result, the Corporation currently expects full payment of contractual cash flows, including principal from these securities. Management has the intent and ability to hold these securities until market recovery or maturity, therefore none of the unrealized losses on securities are deemed to be other than temporary.
At December 31, 2010, all debt securities with temporarily impaired losses have been rated by Moody’s and/or S&P with an “A” or better debt rating.
The Corporation has entered an agreement in December 2010 to purchase two municipal securities with a January 2011 settlement date. The corporation’s commitment is $1.71 million to purchase bonds with a par value of $1.73 million. The commitments are recognized in other assets and other liabilities as of December 31, 2010.
|
Note 4 - Loans
|
Loans are summarized as follows:
December 31,
|
|||||
2010
|
2009
|
||||
(In Thousands)
|
Commercial
|
|||||
Commercial , Industrial & Other
|
$ 36,245
|
$ 40,316
|
|||
Commercial real estate
|
63,529
|
61,412
|
|||
Residential mortgages
|
68,755
|
77,211
|
|||
Loans to Individuals
|
23,377
|
26,153
|
$191,906
|
$205,092
|
30
Note 5 – Credit Quality Indicators
The allowance for loan loss calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include categories of “pass,” “special mention,” “substandard” and “doubtful.” Assets which do not currently expose the insured institution to sufficient risk, warrant classification as pass. Assets that are not classified as pass and possess weaknesses are required to be designated “special mention.” If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Corporation's internal risk rating system as of December 31, 2010:
(Dollars in Thousands)
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
||||
Commercial
|
|
|
|
|
|
|||
Commercial,
|
||||||||
Industrial & Other
|
$ 35,802
|
$ 90
|
$ 353
|
$ 0
|
$ 36,245
|
|||
Commercial real estate
|
50,554
|
5,362
|
7,613
|
0
|
63,529
|
|||
Residential mortgages
|
68,498
|
105
|
152
|
0
|
68,755
|
|||
Loans to Individuals
|
23,331
|
46
|
0
|
0
|
23,377
|
|||
|
||||||||
Total
|
$178,185
|
$ 5,603
|
$ 8,118
|
$ 0
|
$191,906
|
|||
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2010:
(Dollars in Thousands)
30-89 Days
Past Due
|
>90 Days Past Due
and Still Accruing
|
Non-Accrual
|
Total Past Due
|
Current
|
Total Loans
|
|||||||||||||||||||
Commercial
|
|
|
|
|
|
|
||||||||||||||||||
Commercial,
|
||||||||||||||||||||||||
Industrial & Other
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 36,245 | $ | 36,245 | ||||||||||||
Commercial real estate
|
0 | 0 | 16 | 16 | 63,513 | 63,529 | ||||||||||||||||||
Residential mortgages
|
6 | 0 | 99 | 105 | 68,650 | 68,755 | ||||||||||||||||||
Loans to individuals
|
29 | 0 | 34 | 63 | 23,314 | 23,377 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total
|
$ | 35 | $ | 0 | $ | 149 | $ | 184 | $ | 191,722 | $ | 191,906 |
31
Note 5 – Credit Quality Indicators (Continued)
Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The Corporation places a loan on non-accrual status and discontinues interest accruals when principal or interest is due and has remained unpaid for 90 days. When a loan is placed on non-accrual status, all unpaid interest recognized in the current year is reversed and interest accrued in prior years is charged to the allowance for loan losses. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate collectability of the remaining principal and interest is reasonably assured.
Loans on which the accrual of interest has been discontinued amounted to $149,000 and $261,000 at December 31, 2010 and 2009, respectively. There were no loan balances past due 90 days or more and still accruing interest at December 31, 2010 and 2009.
The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2010.
(Dollars in Thousands)
Recorded Investment
|
Unpaid Principal Balance
|
Related Allowance
|
Average Recorded Investment
|
Interest Income Recognized
|
||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Commercial
|
|
|
|
|
|
|||||||||||||||
Commercial,
|
||||||||||||||||||||
Industrial & Other
|
$ | 44 | $ | 44 | $ | 0 | $ | 52 | $ | 4 | ||||||||||
Commercial real estate
|
317 | 317 | 0 | 336 | 22 | |||||||||||||||
Residential mortgages
|
40 | 40 | 0 | 44 | 3 | |||||||||||||||
Loans to Individuals
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Subtotal
|
401 | 401 | 0 | 432 | 29 | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Commercial,
|
||||||||||||||||||||
Industrial & Other
|
236 | 236 | 26 | 254 | 11 | |||||||||||||||
Commercial real estate
|
741 | 741 | 87 | 748 | 37 | |||||||||||||||
Residential mortgages
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Loans to Individuals
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Subtotal
|
977 | 977 | 113 | 1,002 | 48 | |||||||||||||||
Total
|
$ | 1,378 | $ | 1,378 | $ | 113 | $ | 1,434 | $ | 77 |
At December 31, 2010 and 2009, the total recorded investment in loans considered to be impaired was $1,378,000 and $1,504,000, respectively. The average recorded investment in impaired loans during 2010 and 2009 was $1,434,000 and $1,530,000, respectively. Impaired loans with balances of $977,000 and $985,000 at December 31, 2010 and 2009 had related allowance for loan loss of $113,000 and $119,000, respectively. Interest income on impaired loans of $77,000 and $86,000 was recognized in 2010 and 2009, respectively.
32
Note 5 – Credit Quality Indicators (Continued)
The following table provides detail related to the allowance for loan losses as of December 31, 2010:
(Dollars in Thousands)
Commercial, Industrial & Other
|
Commercial Real Estate
|
Residential Mortgages
|
Loans to Individuals
|
Unallocated
|
Total
|
|||||||||||||||||||
Allowance for credit
losses:
|
|
|
|
|
|
|
||||||||||||||||||
Beginning Balance
|
$ | 109 | $ | 1,423 | $ | 134 | $ | 36 | $ | 20 | $ | 1,722 | ||||||||||||
Charge-offs
|
0 | 0 | (25 | ) | (14 | ) | 0 | (39 | ) | |||||||||||||||
Recoveries
|
1 | 0 | 0 | 2 | 0 | 3 | ||||||||||||||||||
Provision
|
(3 | ) | (45 | ) | 1 | 7 | 40 | 0 | ||||||||||||||||
Ending Balance
|
$ | 107 | $ | 1,378 | $ | 110 | $ | 31 | $ | 60 | $ | 1,686 | ||||||||||||
Ending balance: individually evaluated for impairment
|
$ | 26 | $ | 87 | $ | 0 | $ | 0 | $ | 0 | $ | 113 | ||||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 81 | $ | 1,291 | $ | 110 | $ | 31 | $ | 60 | $ | 1,573 | ||||||||||||
Ending balance: loans acquired with deteriorated credit quality
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Loans receivable:
|
||||||||||||||||||||||||
Ending Balance
|
$ | 36,245 | $ | 63,529 | $ | 68,755 | $ | 23,377 | $ | 0 | $ | 191,906 | ||||||||||||
Ending balance: individually evaluated for impairment
|
$ | 280 | $ | 1,058 | $ | 40 | $ | 0 | $ | 0 | $ | 1,378 | ||||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 35,965 | $ | 62,471 | $ | 68,715 | $ | 23,377 | $ | 0 | $ | 190,528 | ||||||||||||
Ending balance: loans acquired with deteriorated credit quality
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
33
Note 5 – Credit Quality Indicators (Continued)
The following table provides detail related to the allowance for loan losses as of December 31, 2009:
(Dollars in Thousands)
Commercial, Industrial & Other
|
Commercial Real Estate
|
Residential Mortgages
|
Loans to Individuals
|
Unallocated
|
Total
|
|||||||||||||||||||
Allowance for credit
losses:
|
|
|
|
|
|
|
||||||||||||||||||
Beginning Balance
|
$ | 108 | $ | 1,520 | $ | 145 | $ | 48 | $ | 0 | $ | 1,821 | ||||||||||||
Charge-offs
|
(9 | ) | 0 | (49 | ) | (42 | ) | 0 | (100 | ) | ||||||||||||||
Recoveries
|
0 | 0 | 0 | 1 | 0 | 1 | ||||||||||||||||||
Provision
|
10 | (97 | ) | 38 | 29 | 20 | 0 | |||||||||||||||||
Ending Balance
|
$ | 109 | $ | 1,423 | $ | 134 | $ | 36 | $ | 20 | $ | 1,722 | ||||||||||||
Ending balance: individually evaluated for impairment
|
$ | 47 | $ | 72 | $ | 0 | $ | 0 | $ | 0 | $ | 119 | ||||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 62 | $ | 1,351 | $ | 134 | $ | 36 | $ | 20 | $ | 1,603 | ||||||||||||
Ending balance: loans acquired with deteriorated credit quality
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Loans receivable:
|
||||||||||||||||||||||||
Ending Balance
|
$ | 40,316 | $ | 61,412 | $ | 77,211 | $ | 26,153 | $ | 0 | $ | 205,092 | ||||||||||||
Ending balance: individually evaluated for impairment
|
$ | 291 | $ | 1,164 | $ | 49 | $ | 0 | $ | 0 | $ | 1,504 | ||||||||||||
Ending balance: collectively evaluated for impairment
|
$ | 40,025 | $ | 60,248 | $ | 77,162 | $ | 26,153 | $ | 0 | $ | 203,588 | ||||||||||||
Ending balance: loans acquired with deteriorated credit quality
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
34
|
Note 6 - Financial Instruments with Off-Balance Sheet Risk
|
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, financial standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amount of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation does not issue any other instruments with significant off-balance-sheet risk.
The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial standby letters of credit written is represented by the contract or notional amount of those instruments. The Corporation uses the same credit policies in making such commitments and conditional obligations as it does for on-balance-sheet instruments. The following table identifies the contract or notional amount of those instruments:
December 31,
|
|||||||||
2010
|
2009
|
||||||||
(In Thousands)
|
|||||||||
Financial instruments whose contract amounts represent credit risk:
|
|||||||||
Commitments to extend credit, including unused lines of credit
|
$ | 36,406 | $ | 30,282 | |||||
Standby letters of credit
|
243 | 435 | |||||||
Financial standby letters of credit
|
1,947 | 2,152 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Outstanding letters of credit written are conditional commitments issued by the Corporation to secure the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Corporation requires collateral supporting these letters of credit as deemed necessary. The maximum undiscounted exposure related to these commitments at December 31, 2010 was $2,190,000 and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $2,032,000. The amount of the liability as of December 31, 2010 and 2009 for guarantees under standby letters of credit issued is not material.
35
|
Note 7 - Premises and Equipment
|
The composition of premises and equipment at December 31, 2010 and 2009 is as follows:
2010
|
2009
|
||||
(In Thousands)
|
Land
|
$ | 437 | $ | 437 | ||||
Premises
|
5,815 | 5,789 | ||||||
Leasehold improvements
|
301 | 301 | ||||||
Furniture and equipment
|
5,953 | 5,873 | ||||||
12,506 | 12,400 | |||||||
Accumulated depreciation and amortization
|
(9,183 | ) | (8,852 | ) |
$ 3,323
|
$ 3,548
|
Depreciation and amortization expense was $407,000 and $414,000 for the years ended December 31, 2010 and 2009, respectively.
Note 8 - Interest Bearing Deposits
Interest bearing deposits include time deposits issued in denominations of $100,000 or more which amounted to $31,211,000 and $36,626,000 at December 31, 2010 and 2009 respectively.
Interest bearing deposits at December 31, 2010 and 2009 are detailed as follows:
2010
|
2009
|
||||
(In Thousands)
|
Savings accounts
|
$ | 51,184 | $ | 45,347 | ||||
NOW accounts
|
22,621 | 21,089 | ||||||
Money market accounts
|
36,716 | 29,166 | ||||||
Time deposits
|
88,764 | 99,868 |
$199,285
|
$195,470
|
Time deposits at December 31, 2010 had the following scheduled maturities (in thousands):
2011
|
$ | 54,877 | ||
2012
|
12,918 | |||
2013
|
5,289 | |||
2014
|
7,164 | |||
2015
|
8,516 |
$ | 88,764 |
|
Note 9 - Short-Term Borrowings
|
Short-term borrowings at December 31, 2010 consisted of federal funds purchased of $7,700,000 and $10,000,000 of FHLB borrowings. The December 31, 2009 borrowings consisted of $3,850,000 of federal funds purchased and $45,000,000 of FHLB borrowings.
36
|
Note 9 - Short-Term Borrowings (Continued)
|
|
The outstanding balances and related information of short-term borrowings are summarized as follows:
|
Years Ended December 31,
|
|||||
2010
|
2009
|
||||
(Dollars in Thousands)
|
Average balance during the year
|
$ | 31,945 | $ | 36,401 | ||||
Average interest rate during the year
|
0.43 | % | 0.55 | % | ||||
Maximum month-end balance
|
$ | 50,775 | $ | 49,850 | ||||
Weighted average interest rate at end of the year
|
0.37 | % | 0.35 | % |
At December 31, 2010, the Corporation had approved but unused funding availability from lines of credit of $11,300,000.
|
Note 10 - Long-Term Borrowings
|
Long-term borrowings outstanding at December 31, 2010 and 2009 were $10,000,000. The $10,000,000 outstanding as of December 31, 2010, represents one advance for an interest rate of 2.34% and a maturity date of January 3, 2012. Advances from the FHLB of Pittsburgh are secured by the Bank’s stock in the FHLB of Pittsburgh and qualifying loans. The maximum remaining borrowing capacity from the FHLB at December 31, 2010 is approximately $93,216,000.
|
Note 11 - Employee Benefit Plans
|
The Corporation sponsors an employee profit sharing plan available to all employees with at least one year of service. The Corporation contributes to the plan, as determined by the Board of Directors, in an amount not to exceed 15% of compensation of eligible participants. For the years ended December 31, 2010 and 2009, the amount was 5% of compensation of eligible participants. The Corporation also has a supplemental retirement plan for certain retired employees. The expense for the employee benefit plans was $260,000 and $253,000, for the years ended December 31, 2010 and 2009, respectively.
|
Note 12 - Comprehensive Income
|
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects for the years ended December 31, 2010 and 2009 are as follows:
2010
|
2009
|
||||||||
(In Thousands)
|
|||||||||
Unrealized (losses) gains
On securities available for sale
|
$ | (707 | ) | $ | 3,216 | ||||
Reclassification adjustment for loss realized in income
|
5 | - | |||||||
Net Unrealized (Losses) Gains
|
(702 | ) | 3,216 | ||||||
Tax effect (benefit)
|
(238 | ) | 1,093 | ||||||
Net of Tax Amount
|
$ | (464 | ) | $ | 2,123 |
37
|
Note 13 - Lease Commitments
|
The Corporation rents offices under operating leases that expire through 2019. Lease expense amounted to $134,000 in 2010 and $119,000 in 2009. Operating lease obligations at December 31, 2010 are as follows (in thousands):
2011
|
$ | 144 | ||
2012
|
96 | |||
2013
|
94 | |||
2014
|
96 | |||
2015
|
88 | |||
Thereafter
|
197 | |||
$ | 715 |
|
Note 14 - Income Taxes
|
The components of the net deferred tax liability at December 31, 2010 and 2009 are as follows:
2010
|
2009
|
|||
(In Thousands)
|
Allowance for loan losses
|
$ | 340 | $ | 340 | ||||
Accrued benefits
|
34 | 42 | ||||||
Intangible assets
|
94 | 70 | ||||||
Other
|
12 | 10 | ||||||
Total Deferred Tax Assets
|
480 | 462 | ||||||
Deferred loan fees
|
64 | 68 | ||||||
Securities accretion
|
53 | 69 | ||||||
Unrealized net gain on securities available for sale
|
2,138 | 2,376 | ||||||
Depreciation
|
400 | 339 | ||||||
Other
|
7 | - | ||||||
Total Deferred Tax Liabilities
|
2,662 | 2,852 | ||||||
Net Deferred Tax Liability
|
$ | (2,182 | ) | $ | (2,390 | ) |
The income tax provision for the years ended December 31, 2010 and 2009 is summarized as follows:
2010
|
2009
|
||||||
(In Thousands)
|
Current
|
$ | 1,274 | $ | 1,847 | ||||
Deferred
|
30 | 59 | ||||||
$ | 1,304 | $ | 1,906 |
38
|
Note 14 - Income Taxes (Continued)
|
The tax provision for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes. The differences for the years ended December 31, 2010 and 2009 are as follows:
2010
|
2009
|
||
(In Thousands)
|
Tax at statutory rates
|
$ | 2,314 | 34.0 | % | $ | 2,392 | 34.0 | % | ||||||||
Increase (decrease) resulting from:
|
||||||||||||||||
Tax-exempt income
|
(915 | ) | (13.4 | ) | (337 | ) | (4.8 | ) | ||||||||
Non-deductible interest expense
|
54 | 0.8 | 15 | 0.2 | ||||||||||||
Increase in investment in life insurance
|
(158 | ) | (2.3 | ) | (165 | ) | (2.3 | ) | ||||||||
Other
|
9 | 0.1 | 1 | 0.0 | ||||||||||||
$ | 1,304 | 19.2 | % | $ | 1,906 | 27.1 | % |
The Corporation adopted the revised provisions of ASC Topic 740, Income Taxes, as of January 1, 2007. The Corporation periodically reviews its tax position and applies a “more likely than not” recognition threshold for all tax uncertainties. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation establishes a valuation allowance when it is more likely than not that the Corporation will not be able to realize the benefit of the deferred tax assets or when future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessment of realizable deferred tax assets. The Corporation had no unrecognized tax positions at December 31, 2010 and 2009. The Corporation is no longer subject to U.S. federal income tax examinations for the years prior to 2008. With limited exception, the Corporation is no longer subject to state income tax examinations for years prior to 2007.
Note 15 - Fair Value of Financial Instruments
The Corporation adopted FASB ASC 820 “Fair Value Measurements” 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 FASB ASC-820 on the amounts reported in the consolidated financial statements. The primary impact of FASB ASC-820 on the Corporation’s financial statements was to expand required disclosures pertaining to the methods used to determine fair values.
FASB ASC-820 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 FASB ASC-820 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, for substantially 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 and unobservable (i.e., supported with little or no market activity).
39
Note 15 - Fair Value of Financial Instruments (Continued)
For assets measured at fair value on a recurring basis, the fair value measurement by level within the fair value hierarchy are as follows:
(Level 1)
Quoted Prices In active Markets For Identical Assets
|
(Level 2)
Significant Other Observable Inputs
|
(Level 3)
Significant Unobservable Inputs
|
|||
December 31, 2010:
|
(In Thousands)
|
|||||
Obligations of states and political
subdivisions
|
$ 0
|
$ 65,448
|
$ 0
|
|||
Mortgage-backed securities
|
0
|
65,711
|
0
|
$ 0
|
$131,159
|
$ 0
|
December 31, 2009:
|
||||||
Obligations of states and political
subdivisions
|
$ 0
|
$ 42,363
|
$ 0
|
|||
Mortgage-backed securities
|
0
|
96,555
|
0
|
$ 0
|
$138,918
|
$ 0
|
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 year ended December 31 2010 and December 31, 2009.
For assets measured at fair value on a nonrecurring basis, the fair value measurement by level within the fair value hierarchy used are as follows:
(Level 1)
Quoted Prices In active Markets For Identical Assets
|
(Level 2)
Significant Other Observable Inputs
|
(Level 3)
Significant Unobservable Inputs
|
|||
December 31, 2010:
|
(In Thousands)
|
|||||
Impaired Loans
|
$ 0
|
$ 0
|
$ 864
|
December 31, 2009:
|
||||||
Impaired Loans
|
$ 0
|
$ 0
|
$ 866
|
40
Note 15 - Fair Value of Financial Instruments (Continued)
Impaired loans at December 31, 2010, which are measured using the fair value of the collateral less estimated costs to sell for collateral-dependent loans, had a carrying amount of $977,000 with a valuation allowance of $113,000.
Impaired loans at December 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 $985,000 with a valuation allowance of $119,000.
The impaired loans at December 31, 2010 are the same loans as of December 31, 2009, with minor changes to principal outstanding and valuation allowances.
ASC 825-10-65, Transition Related to FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
The following methods and assumptions were used by the Corporation in estimating financial instrument fair values:
Cash and Short-Term Investments
The carrying amounts for cash and short-term investments approximate the estimated fair values of such assets.
Securities 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 models, 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.
Restricted Investments in Bank Stock
The carrying amounts of restricted investments in bank stock approximate the estimated fair value of such assets.
Loans Receivable
The estimated fair values of our fixed rate loans are estimated by discounting the future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. Fair values of variable rate loans subject to frequent re-pricing and which entail no significant credit risk are based on the carrying values.
Deposits
For deposits which are payable on demand at the reporting date, representing all deposits other than time deposits, management estimated that the carrying value of such deposits is a reasonable estimate of fair value. Fair values of time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregate expected maturities.
Short-Term Borrowings
The carrying amounts for short-term borrowings approximate the estimated fair value of such liabilities.
41
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Note 15 - Fair Value of Financial Instruments (Continued)
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Long-Term Borrowings
Fair values of long-term borrowings are estimated by discounting the future cash flows using interest rates currently available for borrowings with similar terms and maturity.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and payable is considered a reasonable estimate of fair value.
Off-Balance Sheet Instruments
The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties.
The carrying amounts and fair values of the Corporation’s financial instruments as of December 31 are presented in the following table:
December 31, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying Amount
|
Fair
Value
|
Carrying Amount
|
Fair
Value
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Financial assets:
|
||||||||||||||||
Cash and short-term investments
|
$ | 5,594 | $ | 5,594 | $ | 6,741 | $ | 6,741 | ||||||||
Securities available for sale
|
131,159 | 131,159 | 138,918 | 138,918 | ||||||||||||
Restricted investments in bank stock
|
4,339 | 4,339 | 4,567 | 4,567 | ||||||||||||
Net loans receivable
|
190,220 | 191,109 | 203,370 | 203,553 | ||||||||||||
Accrued interest receivable
|
1,519 | 1,519 | 1,456 | 1,456 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Deposits
|
$ | 276,494 | $ | 272,035 | $ | 269,730 | $ | 264,300 | ||||||||
Short-term borrowings
|
17,700 | 17,700 | 48,850 | 48,850 | ||||||||||||
Long-term borrowings
|
10,000 | 10,172 | 10,000 | 10,139 | ||||||||||||
Accrued interest payable
|
331 | 331 | 451 | 451 | ||||||||||||
Off-balance sheet financial instruments
|
- | - | - | - |
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Note 16 - Related Party Transactions
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Some of the Corporation's or the Bank’s directors, principal officers, and their related interests had transactions with the Bank in the ordinary course of business. All loans and loan commitments in such transactions were made on substantially the same terms, including collateral and interest rates, as those prevailing at the time for comparable transactions with others. In the opinion of management, these transactions with related parties do not involve more than normal risk of collectibility or present other unfavorable features. It is anticipated that further such extensions of credit will be made in the future. The aggregate amount outstanding to these directors and principal officers was approximately $199,000 and $209,000 at December 31, 2010 and 2009, respectively. During 2010, advances totaled $200 and repayments were $10,000.
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Note 17 - Capital Requirements and Regulatory Restrictions
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The Bank is subject to legal limitations on the amount of dividends that can be paid to the Corporation. The Pennsylvania Banking Code restricts the payment of dividends, generally to the extent of its retained earnings.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the tables below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2010, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2010, the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since those notifications that management believes have changed those categories.
The following table presents the risk-based and leverage capital amounts and ratios at December 31, 2010 and 2009 for Commercial Bank & Trust of PA:
Actual
|
For Capital Adequacy Purposes
|
To be Well Capitalized Under Prompt Corrective Action Provisions
|
|||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||
(Dollars in Thousands)
|
As of December 31, 2010
|
||||||||||||||||||||||||
Total capital (to risk-weighted assets)
|
$ | 43,326 | 20.7 | % | $ | ³16,710 | ³8.0 | % | $ | ³20,888 | ³10.0 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets)
|
41,640 | 19.9 | ³ 8,355 | ³4.0 | ³12,533 | ³ 6.0 | ||||||||||||||||||
Tier 1 capital (to average assets)
|
41,640 | 11.9 | ³14,000 | ³4.0 | ³17,500 | ³ 5.0 |
As of December 31, 2009
|
||||||||||||||||||||||||
Total capital (to risk-weighted assets)
|
$ | 40,293 | 19.1 | % | $ | ³16,915 | ³8.0 | % | $ | ³21,144 | ³10.0 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets)
|
38,570 | 18.2 | ³ 8,458 | ³4.0 | ³12,686 | ³ 6.0 | ||||||||||||||||||
Tier 1 capital (to average assets)
|
38,570 | 10.5 | ³14,656 | ³4.0 | ³18,320 | ³ 5.0 |
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Note 18 - Condensed Financial Information of Commercial National Financial Corporation (Parent Only)
|
|
Statements of Financial Condition
|
December 31,
|
|||||
2010
|
2009
|
||||
(In Thousands)
|
Assets
|
||||||||
Cash
|
$ | 32 | $ | 41 | ||||
Investment in bank subsidiary
|
45,935 | 43,427 | ||||||
Other assets
|
108 | 54 | ||||||
Total Assets
|
$ | 46,075 | $ | 43,522 | ||||
Liabilities and Shareholders’ Equity
|
||||||||
Liabilities
|
$ | 63 | $ | 30 | ||||
Shareholders’ equity
|
46,012 | 43,492 | ||||||
Total Liabilities and Shareholders’ Equity
|
$ | 46,075 | $ | 43,522 |
|
Statements of Income
|
Years Ended December 31,
|
|||||
2010
|
2009
|
||||
(In Thousands)
|
Dividends from bank subsidiary
|
$ | 2,634 | $ | 2,943 | ||||
Fees from bank subsidiary
|
419 | 380 | ||||||
Expenses
|
(577 | ) | (533 | ) | ||||
Income before taxes and equity in undistributed
earnings of subsidiaries
|
2,476 | 2,790 | ||||||
Income tax benefit
|
(53 | ) | (52 | ) | ||||
2,529 | 2,842 | |||||||
Equity in undistributed earnings of subsidiaries
|
2,972 | 2,287 | ||||||
Net Income
|
$ | 5,501 | $ | 5,129 |
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Note 18 - Condensed Financial Information of Commercial National Financial Corporation (Parent Only) (Continued)
|
|
Statements of Cash Flows
|
Years Ended December 31,
|
|||||
2010
|
2009
|
||||
(In Thousands)
|
Cash Flows from Operating Activities
|
||||||||
Net income
|
$ | 5,501 | $ | 5,129 | ||||
Adjustments to reconcile net income to
net cash provided by operating
activities:
|
||||||||
Undistributed earnings from subsidiaries
|
(2,972 | ) | (2,287 | ) | ||||
Increase in other assets
|
(54 | ) | (39 | ) | ||||
Increase in liabilities
|
33 | 10 | ||||||
Net Cash Provided by Operating Activities
|
2,508 | 2,813 | ||||||
Cash Flows from Financing Activities
|
||||||||
Dividends paid
|
(2,517 | ) | (2,522 | ) | ||||
Purchase of treasury stock
|
- | (307 | ) | |||||
Net Cash Used in Financing Activities
|
(2,517 | ) | (2,829 | ) | ||||
Net Decrease in Cash
|
(9 | ) | (16 | ) | ||||
Cash – Beginning
|
41 | 57 | ||||||
Cash – Ending
|
$ | 32 | $ | 41 |
45