Item 1. BUSINESS
The Commercial National Financial Corporation (the “Corporation”) is a Pennsylvania corporation and is registered as a bank holding company under the Bank Holding Company Act of 1956 as amended. Through its subsidiary the Corporation is engaged in banking and trust operations.
The Corporation is owner of 100% of the outstanding shares of common stock of Commercial Bank & Trust of PA (the “Bank”). The Bank has been providing banking services since 1934. At the present time, two (2) banking offices are in operation in Latrobe, Pennsylvania, two (2) in Unity Township, Pennsylvania, two (2) in Hempfield Township, Pennsylvania and one (1) each in Ligonier, West Newton, Greensburg and North Huntington, Pennsylvania. All of these offices are within the boundaries of Westmoreland County, Pennsylvania. In addition, the building that houses the Bank’s downtown Latrobe banking office is the location of the Corporation's and the Bank's executive and administrative offices. The institution's operations center is located at the Latrobe Plaza in Latrobe.
Each of the banking offices is equipped with a 24 hour a day automatic teller machine (ATM). Bank ATM units are also located on the campus of Saint Vincent College in Unity Township, the terminal of the Arnold Palmer Regional Airport, at the Latrobe Area Hospital, an in-store machine in the Norvelt Open Pantry and Latrobe 30 Shop-N- Save. A separate freestanding drive-up teller staffed banking facility is attached to the Lincoln Road office in Latrobe. This facility also provides ATM service.
The Bank offers the full range of banking services normally associated with a general commercial banking business. Services include extending credit, providing deposit services, marketing non-deposit investments and offering financial counseling. The ATM system described above is a part of the Cirrus, Honor, Plus and Star networks, which provides the Bank's customers access to an extensive regional and national network. The Bank also has implemented a comprehensive electronic Online Banking system. By using a personal computer with internet access, customers can access their Commercial Bank accounts, perform common banking tasks and pay bills 24 hours a day, seven days a week, 365 days a year.
The Corporation purchased Ridge Properties Inc. in 2008, Ridge Properties’ only asset is Commercial National Financial Corporation stock. The Corporation currently has one inactive subsidiary, Commercial National Investment Corp. There are no current plans for this subsidiary.
Competition
All aspects of the Corporation’s business are highly competitive. The Corporation competes for deposits, loans and banking services with major financial institutions, several national and state banks, thrift institutions, credit unions, mortgage brokers, finance companies, insurance companies, investment companies and mutual funds.
Customers are generally influenced by convenience of location, quality of service, price of services and availability of products. The Corporation believes that it effectively competes with other financial service providers within its market area.
Supervision and Regulation
Introduction
The Corporation and the Bank are subject to extensive regulation by federal and state agencies. The primary focus of these regulations is for the protection of depositors, federal deposit insurance funds and the banking system, not for the protection of security holders. Set forth below is a brief description of certain laws which relate to the regulation of the Corporation and its subsidiaries. The description is not meant to be complete and is qualified by reference to applicable laws and regulations.
Holding Company. The Corporation, as a bank holding company is subject to regulation by the Federal Reserve Board (FRB), the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation (FDIC). The nature of the supervision extends to such areas as safety and soundness, truth-in-lending, truth-in-savings, rate restrictions, consumer protection, community reinvestment lending, permissible loan and securities activities, merger and acquisition limitations, reserve requirements, dividend payments, required disclosures and regulations concerning activities by corporate officers and directors. No regulatory restrictions or actions are currently pending against the Corporation.
Subsidiary Bank The Bank is subject to regulation and examination primarily by the FDIC and Pennsylvania Department of Banking (the “Department”).
Capital Requirements
Banks are required to be in compliance with the FRB’s risk-based capital standards. These standards require that (1) at least 50% of total capital must be “Tier 1 capital”. This consists primarily of common and certain other “core” equity 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 1 capital to average assets must be maintained. The Department requires state chartered banks to maintain a 6% leverage capital and 10% risk based capital, defined substantially the same as the federal regulations. The Bank is subject to almost identical capital requirements adopted by the FDIC.
Effects of Governmental Policies
In addition to regulatory requirements, the Corporation and its subsidiary Bank are affected by the national economy and the influence on that economy exerted by governmental bodies through monetary and fiscal policies and their efforts to implement such policies. In particular, the impact of the open market operations on interest rates, the establishment of reserve requirements and the setting of the discount rate will continue to affect business volumes and earnings. The exact nature or the full extent of this impact is almost impossible to predict; however, management continues to monitor these activities on a regular basis and seeks to modify its policies and procedures accordingly.
Employees
As of December 31, 2009, the Corporation employed 96 fulltime and 16 parttime positions. Approximately 57 employees are represented by the United Auto Workers, Local 1799. In 2008, the Corporation and bargaining unit employees entered into a five-year labor agreement effective February 2009 through February 2014.
Executive Officers of the Corporation
The following table shows the names and ages of the current executive officers and the present and previous positions held by them for at least the past five years.
Name
Age
Present and Previous Positions
Gregg E. Hunter
Vice chairman, president and chief executive officer (February 2004 -
present), Vice chairman and chief financial officer
(December 1995 to January 2004)
Thomas D. Watters, CPA
Executive vice president and chief financial officer (July 2005-
present), Chief Auditor (January 1998-July 2005)
Wendy S. Schmucker
Secretary/treasurer and senior vice president, division manager
corporate administration (February 2004 - present) Secretary/treasurer
and vice president, manager corporate administration (November
1997 to January 2004)
Susan R. Skoloda
Vice president, corporate controls and community relations officer
(March 2004 to present); assistant vice president (April 2001 to
February 2004); assistant secretary/treasurer (April 1998 to present)
Item 1A.
Item 1A. RISK FACTORS
Not Applicable
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None
Item 2.
Item 2. PROPERTIES
All of the Corporation’s facilities are owned with the exception of the Lincoln Road banking office and adjacent drive-up facility, the Norwin Hills banking office and the West Point banking office. All of the properties are used in their entirety for banking purposes. In each case, the properties have been maintained in good repair, are well suited for their present use and appear to be adequate for the immediate needs of the Corporation and its subsidiary.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Corporation, in the normal course of business, is subject to various legal proceedings. Management does not expect the outcome of these proceedings to have a material adverse impact on the Corporation’s financial condition or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Corporation’s security holders during the last quarter of its fiscal year ended December 31, 2009.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of March 3, 2010 there were 419 shareholders of record of the Corporation's common stock. The number of shareholders of record and those shareholders listed by each registered clearing agent is approximately 845. Commercial National Financial Corporation common stock is traded on The Nasdaq National Market under the trading symbol “CNAF” with an additional descriptive listing of “CmclNat.” The high and low closing sale prices and dividends per share of our common stocks for the four quarters of 2009 and 2008 are summarized in the following table:
Cash Dividend
High
Low
Per Share
First Quarter
$
16.65
$
13.25
$
.22
Second Quarter
19.70
12.75
.22
Third Quarter
18.70
14.44
.22
Fourth Quarter
19.71
16.60
.22
First Quarter
$
19.38
$
15.07
$
.20
Second Quarter
16.60
14.90
.20
Third Quarter
15.33
11.25
.22
Fourth Quarter
17.95
13.75
.22
We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of the Corporation to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future.
In 2000, the Board of Directors authorized the repurchase of up to 360,000 shares of the Corporation’s common stock from time to time when warranted by market conditions. There have been 245,174 shares purchased under this authorization through December 31, 2009.
The Corporation did not purchase any shares of treasury stock during the quarter ended December 31, 2009, see table below.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Not Applicable
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information appearing in the Annual Report in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference. See the applicable portion of the Annual Report attached hereto as an exhibit.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing in the Annual Report in the section titled “Interest Sensitivity and Market Risk” as part of the Corporation’s Management Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation’s consolidated financial statements, the notes thereto and the report of the independent registered public accounting firm of the Annual Report are incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Corporation has had no disagreements with its independent accountants.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Corporation in this Form 10-K, and in other reports required to be filed under the Securities Exchange Act of 1934 (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms for such filings. Management of the Corporation, under the direction of the Corporation's Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of the Corporation's disclosure controls and procedures (as defined in Rules 13a-15a(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer, along with other key management of the Corporation, have determined that the disclosure controls and procedures were and are effective as designed to ensure that material information relating to the Corporation and its consolidated subsidiaries required to be disclosed by the Corporation by the Exchange Act, was recorded, processed, summarized and reported within the applicable time periods.
Changes in Internal Controls
There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls during the quarter ended December 31, 2009.
Management’s Report on internal Control over Financial Reporting.
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control-Integrated Framework, we have concluded that the internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Because of its inherent limitations, internal control over the financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B.
Item 9B. OTHER INFORMATION
None
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERANCE
Information concerning (i) directors, appearing under the captions “Election of Directors” and “Corporate Governance” in the Corporation’s Proxy Statement, related to the Annual Meeting of Shareholders to be held May 18, 2010 (the “Proxy Statement”) (ii) information concerning executive officers, appearing under the caption “Executive Officers of the Registrant” in Part I of this Form 10-K, and (iii) information contained under the section “Section 16(a) Beneficial Ownership Reporting Compliance”, in the Proxy Statement, are incorporated herein by reference to this Item 10.
The Corporation has adopted a Code of Ethics for Senior Financial Officers which is applicable to the Corporation’s principal executive officer and principal financial officer. A copy of such Code of Ethics has been filed as an exhibit to this Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information contained in the Corporation’s Proxy Statement under the following sections is hereby incorporated into this Item 11: (i) “Summary Compensation Table,” (ii) “Compensation ” (iii) “Compensation of Directors,” and “Director Compensation Table.”
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in the sections titled "Beneficial Ownership of Common Stock" and "Beneficial Ownership by Officers, Directors and Nominees" in the Proxy Statement is incorporated herein by reference to this Item 12.
Equity Compensation Plan Information
None
Item 13.
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information contained in the section titled “Corporate Governance”, as well as information contained in “Related Party Transactions” as part of the “Compensation” in the Proxy Statement is incorporated herein by reference to this Item 13.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the section titled “Auditor and Audit Fees” in the Proxy Statement is incorporated by reference to this Item 14.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The consolidated financial statements and exhibits listed below are filed as part of this report. Financial statement schedules are omitted as they are not applicable.
(1)
The Corporation’s consolidated financial statements, the notes thereto and the report of the independent registered public accounting firm of the Annual Report and are incorporated herein by reference.
Exhibit
Page Number or Incorporated by
Number
Description
Reference to
3.1
Articles of Incorporation
Exhibit C to Form S-4 Registration
Statement Filed April 9, 1990
3.2
By-laws of Registrant
Exhibit D to Form S-4 Registration
Statement Filed April 9, 1990
3.3
Amended Articles of Incorporation
Exhibit 3.6 to Form 10-Q
Filed for the quarter ended
September 30, 2004
3.4
Amended Bylaws of Registrant
Exhibit 3.8 to Form 10-Q
Filed for the quarter ended
September 30, 2004
10.1
Amended and Restated Employment Agreement between Gregg E. Hunter and Commercial Bank & Trust of PA
Exhibit 10.1 to Form 10-K
Filed for the year ended
December 31, 2008
10.3
Mutual Release and Non-Disparagement Agreement between Commercial Bank of Pennsylvania and Louis T. Steiner
Exhibit 10-3 to Form 10-K
Filed for the year ended
December 31, 2003
10.4
Stock Purchase Agreement between the Corporation and all of the Shareholders of Ridge Properties, Inc.
Exhibit 10.4 to Form 10-Q
Filed for the quarter ended
June 30, 2008
10.5
Change in Certifying Accountant
Filed herewith
Portions of the Annual Report to Shareholders for the Fiscal year Ended December 31, 2009
Filed herewith
Code of Ethics for Senior Financial Officers
Filed herewith
Subsidiaries of the Registrant
Filed herewith
31.1
Rule 13a-15(e) and 15d-15(e) Certification of Chief Executive Officer
Filed herewith
31.2
Rule 13a-15(e) and 15d-15(e) Certification of Chief Financial Officer
Filed herewith
32.1
Section 1350 Certification of Chief Executive Officer
Filed herewith
32.2
Section 1350 Certification of Chief Financial Officer
Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMERCIAL NATIONAL FINANCIAL CORPORATION
(Registrant)
By:/s/ Gregg E. Hunter
Gregg E. Hunter, Vice Chairman, President
March 26, 2010
and Chief Executive Officer
By:/s/ Thomas D. Watters
Thomas D. Watters, Executive Vice President
and Chief Financial Officer
March 26, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit 21 - Subsidiaries of Commercial National Financial Corporation
State or Jurisdiction
Subsidiary
of Incorporation
Commercial Bank & Trust of PA
Pennsylvania
Ridge Properties, Inc.
Pennsylvania
Commercial National Investment Corp. (Inactive)
Pennsylvania