U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from __________ to _____________.
Commission File Number: 0-23411
-------
Community National Corporation
- ----------------------------------------------------------------
(Exact Name of Small Business Issuer
as Specified in Its Charter)
Tennessee 62-1700975
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19 Natchez Trace Drive, Lexington, Tennessee 38351
- --------------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (901) 968-6624
--------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's common stock as of the latest practicable date.
Class Outstanding at July 31, 1998
- ----------------------------- -----------------------------
Common Stock, $1.00 par value 712,866 shares
COMMUNITY NATIONAL CORPORATION
CONTENTS
PART I FINANCIAL INFORMATION
Item 1: Financial Statements Page
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive
Income 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II OTHER INFORMATION 15
Signature 16
1
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 and DECEMBER 31, 1997
(Unaudited)
June 30, December 31,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents:
Non-interest bearing $ 536,040 $ 211,969
Interest bearing 2,425,629 2,529,814
Investment securities:
Securities held-to-maturity (estimated
market value of $668,925 (1998) and
$1,189,106 (1997)) 657,631 1,157,492
Securities available-for-sale, at
estimated market value 3,352,325 2,518,019
Mortgage-backed and related securities:
Securities held-to-maturity (estimated
market value of $465,987 (1998) and
$563,295 (1997)) 463,377 556,783
Securities available-for-sale, at
estimated market value 2,928,294 3,461,579
Loans receivable, net 21,887,644 19,544,222
Accrued interest receivable 210,766 138,047
Real estate held for investment - 336
Premises and equipment 769,596 579,148
Stock investments:
Stock in Federal Home Loan Bank, at cost 273,400 263,900
Stock in Federal Reserve Bank, at cost 237,150 237,150
Stock in Savings and Loan Data Corporation,
at cost 15,000 15,000
Other assets 65,400 2,243
------------ ------------
Total Assets $ 33,822,252 $ 31,215,702
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 24,036,899 $ 21,416,047
Advances from FHLB 778,655 821,777
Advances from borrowers for taxes
and insurance 1,659 454
Accrued interest payable 177,804 169,954
Income taxes payable:
Current 44,021 83,507
Deferred (3,918) 4,935
Accrued expenses and other liabilities 149,751 151,055
------------ ------------
Total Liabilities $ 25,184,871 $ 22,647,729
----------------- ------------ ------------
Stockholders' Equity
Preferred stock, 2,000,000 shares
authorized, non issued or outstanding $ -- $ --
Common stock of $1.00 par value;
8,000,000 shares authorized
712,866 issued 712,866 712,866
Additional paid-in capital 4,489,512 4,489,512
Retained earnings - substantially
restricted 3,432,518 3,371,864
Accumulated other comprehensive income,
net of taxes 2,484 (6,269)
------------ ------------
Total Stockholders' Equity $ 8,637,381 $ 8,567,973
------------ ------------
Total Liabilities & Stockholders
Equity $ 33,822,252 $ 31,215,702
============ ============
/TABLE
2
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
----------- --------- --------------------
INTEREST INCOME
First mortgage loans $370,791 $352,726 $ 717,631 $711,755
Consumer & other loans 106,395 13,113 183,249 18,960
Interest & dividends on investments:
Taxable 43,182 32,833 90,175 87,441
Tax-exempt 12,565 18,060 25,130 36,530
Dividends 11,970 4,521 16,687 8,100
Interest on deposits with banks 24,943 21,153 53,807 26,323
Interest on mortgage-backed securities 59,813 57,198 126,560 109,430
-------- -------- ---------- --------
Total interest income $629,659 $499,604 $1,213,239 $998,539
--------------------- -------- -------- ---------- --------
INTEREST EXPENSE
Interest on deposits $294,984 $255,176 $ 552,124 $508,020
Interest on advances from FHLB 15,225 18,306 31,094 36,816
-------- -------- ---------- --------
Total interest expense $310,209 $273,482 $ 583,218 $544,836
---------------------- -------- -------- ---------- --------
Net interest income $319,450 $226,122 $ 630,021 $453,703
-------------------
Provision for loan losses 34,448 2,945 65,989 9,174
-------- -------- ---------- --------
Net interest income after provision
-----------------------------------
for loan losses $285,002 $223,177 $ 564,032 $444,529
---------------
NON-INTEREST INCOME
Income from real estate held for
investment $ 2,275 $ 2,525 $ 5,050 $ 4,650
Service charges 31,175 22,588 62,438 36,435
Other operating income 5,821 2,830 9,948 1,525
-------- -------- ---------- --------
Total non-interest income $ 39,271 $ 27,943 $ 77,436 $ 42,610
------------------------- -------- -------- ---------- --------
NON-INTEREST EXPENSE
Compensation & benefits $113,609 $ 84,111 $ 220,669 $181,411
Occupancy & equipment 49,752 11,012 85,994 20,841
Federal deposit insurance premiums 3,505 3,598 6,869 7,434
Data processing fees 22,473 12,286 38,820 18,891
Other operating expenses 47,426 27,858 103,130 53,014
-------- -------- ---------- --------
Total non-interest expenses $236,765 $138,865 $ 455,482 $281,591
--------------------------- -------- -------- ---------- --------
Income before income taxes $ 87,508 $112,255 $ 185,986 $205,548
Income tax expense 22,614 37,988 54,043 74,274
-------- -------- ---------- --------
Net Income $ 64,894 $ 74,267 $ 131,943 $131,274
---------- ======== ======== ========== ========
Earnings per common share $ 0.09 $ 0.21 $ 0.19 $ 0.36
======== ======== ========== ========
Dividends paid per share $ 0.05 $ 0.20 $ 0.10 $ 0.40
======== ======== ========== ========
3
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
June 30,
-----------------------
1998 1997
----------- -----------
Net income $131,943 $131,274
Other comprehensive income, net of tax:
Unrealized gains on securities held
as available-for-sale, net of
applicable deferred income taxes
of $4,508 (1998) and $13,870 (1997) 8,753 18,458
-------- --------
Other comprehensive income $140,696 $149,732
======== ========
/TABLE
4
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
Accumulated
Common Stock Additional Other Total
----------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
------ ------ --------- --------- ------------- -----------
Balance at December 31, 1997 712,866 $712,866 $4,489,512 $3,371,864 $(6,269) $8,567,973
Comprehensive income:
Net income 131,943 131,943
Change in unrealized gain
(loss) on securities
available-for-sale, net of
applicable deferred income
taxes of $4,508 8,753 8,753
Dividends paid ($.10 per share) - - - (71,288) - (71,288)
------- -------- ---------- ----------- ------- ----------
Balance at June 30, 1998 712,866 $712,866 $4,489,512 $ 3,432,519 $ 2,484 $8,637,381
======= ======== ========== =========== ======= ==========
/TABLE
5
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
June 30,
----------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 131,943 $ 131,274
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 65,989 9,174
Provision for depreciation 68,401 7,942
Amortizations of investment securities -
premiums and discounts (net) 6,928 (836)
Stock in FHLB received as dividends (9,600) (8,700)
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable (72,719) 16,473
(Increase) decrease in other assets (63,158) (31,171)
Increase (decrease) in interest payable 7,850 11,710
Increase (decrease) in income taxes (52,847) 60,826
Increase (decrease) in other liabilities (1,304) 3,207
------------ ------------
Net Cash Provided by Operating Activities $ 81,483 $ 199,899
----------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans receivable $ (2,343,422) $ (1,113,414)
Net (increase) decrease in time deposits - (900,000)
Additions to premises & equipment (306,610) (165,363)
Purchase of mortgage-backed securities (495,000) (505,000)
Principal payments on mortgage-backed
securities 580,788 396,010
Purchases of investment securities (700,000) -
Proceeds from maturities of investment
securities 895,000 1,606,525
------------ ------------
Net Cash Provided by Investing Activities $ (2,369,244) $ (681,242)
- ----------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 2,620,852 $ 1,049,244
Repayments of FHLB advances (43,122) (58,303)
Net increase in advances from borrowers
for taxes and insurance 1,205 (1,072)
Payment of dividends (71,288) (35,134)
------------ ------------
Net Cash Provided by Financing Activities $ 2,507,647 $ 954,735
- ------------------------------------------ ------------ ------------
Increase in Cash and Cash equivalents $ 219,886 $ 473,392
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD $ 2,741,783 $ 542,045
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,961,669 $ 1,015,437
============ ============
/TABLE
6
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
JUNE 30,
----------------------------
1998 1997
------------ ------------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest paid $ 276,542 $ 533,126
Taxes paid 75,373 13,216
Non-cash investing:
Stock dividends received from Federal
Home Loan Banks 9,600 8,700
Total net increase (decrease) in unrealized
loss on securities available-for-sale (6,552) 18,458
/TABLE
7
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Community National Corporation and subsidiary have been prepared
in accordance with instructions for Form 10-QSB. To the extent
that information and footnotes required by generally accepted
accounting principles for complete financial statements are
contained in the audited financial statements included in the
Corporation's Annual Report for the year ended December 31,
1997, such information and footnotes have not been duplicated
herein. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, which are
necessary for the fair presentation of the interim financial
statements have been included. The statements of earnings for
the quarter and six months ended June 30, 1998 are not
necessarily indicative of the results, which may be expected for
the entire year. The December 31, 1997 consolidated balance
sheet has been derived from the audited consolidated financial
statements as of that date.
(2) EARNINGS PER SHARE
Net earnings per share of common stock for the six months ended
June 30, 1998 and the three month period ended March 31, 1998 of
$0.36 and $0.19, respectively, were computed by dividing the net
income by the weighted average number of shares outstanding for
the year. All per share amounts prior to December 11, 1997, the
date of reorganization, have been adjusted for the exchange rate
of 2.581243. Diluted earnings per share has not been presented
because the Company has a simple capital structure.
(3) NEW ACCOUNTING STANDARDS
The Company adopted FASB Statement no. 130, Reporting Comprehensive
Income in 1998. All periods presented are in accordance with SFAS
130. Statement no. 130 requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that
historically has not been recognized in the calculation of net
income. The comprehensive income consists of unrealized gains and
losses on securities classified as available-for-sale by the
Company.
(4) YEAR 2000 COMPLIANCE
The year 2000 poses many challenges for the banking industry. Many
automated applications may cease to properly function as a result
of how date fields have historically been programmed. Many
programs were designed and developed without considering the impact
of the upcoming change in the century. Failure to address this
issue in a timely manner may cause banking institutions to
experience operational problems and could cause disruption of
financial markets. Many experts believe that even the most prepared
organizations may encounter some implementation problems. As a
result, Community National Bank has developed a Year 2000 Strategic
Plan (the "Plan") to take the necessary steps to insure that
problems and disruptions are minimized.
8
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(UNAUDITED)
The Bank's primary data processing systems are outsourced to
service bureaus, which are addressing their Year 2000 program
changes. The Bank's Plan includes independent verification of Year
2000 compliance with its data processing service bureau, vendors,
suppliers, customers and others as may be identified. The plan
also includes analyzing, testing and documenting that its personal
computers and equipment the Bank owns are Year 2000 compliant. The
Bank believes the cost of addressing the Year 2000 issue will have
no material impact on earnings or uncertainty that would cause
reported financial information not to be necessarily indicative of
future operating results or financial condition.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Community National Corporation (the "Company") was incorporated
under the laws of the State of Tennessee for the purpose of
holding all of the capital stock of Lexington First Federal
Savings Bank ("Lexington First Federal") following the second
step conversion of its former mutual holding company (the
"Conversion and Reorganization"), which was completed on December
11, 1997. The Company's principal business is that of
directing, planning and coordinating the business activities of
the Bank. Immediately following the Conversion and
Reorganization, Lexington First Federal converted to a national
bank with the name Community National Bank of Tennessee (the
"Bank") and remained a wholly-owned subsidiary of the Company
(the "Bank Conversion"). Upon the completion of the Bank
Conversion, the Company became a bank holding company. The
Company has no significant assets other than its investment in
the Bank, and certain cash and cash equivalents. At June 30,
1998, on a consolidated basis, the Company had total assets of
$33.8 million, net loans receivable of $21.9 million, cash and
investment securities of $7.0 million, mortgage-backed
securities of $3.4 million, total deposits of $24.0 million and
stockholders' equity of $8.6 million.
The Bank is a national bank operating through its office
in Lexington, Tennessee, serving Henderson County in
southwestern Tennessee. The Bank is the successor to Lexington
First Federal. Therefore, all references to the Bank also
include its predecessor, Lexington First Federal. Until
February 1997, the Bank's primary business, as conducted through
its office located in Lexington, Tennessee, was the origination
and holding of mortgage loans secured by single-family
residential real estate located primarily in Henderson County,
Tennessee, with funds obtained primarily through the attraction
of savings deposits, certificate accounts with terms of 18
months or less, and Federal Home Loan Bank ("FHLB") advances.
The Bank also made some construction loans on single-family
residences, savings account loans, and second mortgage consumer
loans. The Bank purchased mortgage-backed securities, and
invested in other liquid investment securities.
Beginning in February 1997, the Bank's emphasis shifted to
full service banking, diversification of the loan portfolio, the
origination of long term fixed rate mortgage loans solely for
sale in the secondary market, and the offering of a greater
variety of transaction accounts. Current Bank policy restricts
fixed rate loans to five years with limited exceptions. The
reduction and control of interest rate risk, and the origination
of variable rate loans, short term loans and balloon loans of
one, two, three and five years are emphasized. The Bank's
emphasis is the diversification in the portfolio with quality
consumer and commercial loans in order to both reduce and
control interest rate risk, and to increase the interest rate
spread.
As a bank holding company, the Company is registered with
and subject to regulation and examination by the Board of
Governors of the Federal Reserve System (the "Federal Reserve
Board"). The Bank is subject to comprehensive examination,
supervision, and regulation by the Office of the Comptroller of
the Currency ("OCC"). Because the Bank was formerly chartered as
a savings association, the Bank's deposits are insured by the
Savings
10
Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC") up to the applicable limits for
each depositor.
The Company's principal executive office is located at the
home office of the Bank at 19 Natchez Trace Drive, Lexington,
Tennessee 38351, and its telephone number is (901) 968-6624.
The branch building is located at 435 West Church Street, and
its telephone number is (901) 968-9599
The Bank is primarily engaged in attracting deposits from
the general public and using those and other available sources
of funds to originate loans secured by single-family residences
located in Henderson County and surrounding counties in West
Tennessee. To a lesser extent, Lexington also originates
construction loans, land loans and consumer loans. It also has
a significant amount of investments in mortgage-backed
securities, United States Government and federal agency
obligations, and tax exempt securities.
The profitability of the Bank depends primarily on its net
interest income, which is the difference between interest and
dividend income on interest-earning assets, principally loans,
mortgage-backed securities and investment securities, and
interest expense on interest-bearing deposits and borrowings.
The Bank's net income also is dependent, to a lesser extent, on
the level of its non-interest income and its non-interest
expenses, such as compensation and benefits, occupancy and
equipment, insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
FINANCIAL CONDITION
-------------------
Consolidated assets of Community National were $33,822,252
as of June 30, 1998, compared to $31,215,702 on December 31, 1997,
an increase of $2,606,550. This increase was composed of an
increase in net loans receivable of $2,343,422, an increase in
investments of $344,445, an increase in premises and equipment of
$190,448, and an increase in cash of $219,866. These increases were
offset by a decrease in mortgage backed securities of $626,691. The
16.70% annualized growth rate of assets for the six month period
is in accordance with the Company's growth objectives.
Loans receivable, net increased to $21,887,644 on June 30,
1998 from $19,544,222 on December 31, 1997, an increase of
$2,343,422. Mortgage-backed securities decreased $626,691 to
$3,391,671 at June 30, 1998 from $4,018,362 on December 31, 1997.
The increase in loans is attributable to increased advertising and
more competitive loan products. The decrease in mortgage backed
securities is primarily caused by principal payments.
Deposits totaled $24,036,899 on June 30, 1998, an increase
of $2,620,852 from $21,416,047 on December 31, 1997. The increase
in deposits is primarily due to increased advertising and was
primarily used to fund the increase in loans receivable.
11
Stockholders' equity was $8,567,973 on December 31, 1997,
compared to $8,637,381 on June 30, 1998, an increase of $69,408.
The increase was due to reductions in unrealized loss in available-
for-sale securities of $8,753, earnings for the quarter of
$131,943, offset by the Company's cash dividends of $71,288.
RESULTS OF OPERATIONS
---------------------
Net income for the three months ended June 30, 1998, was
$64,894 compared to $74,267 as of June 30, 1997. The decrease of
$9,373 was due to an increase in non-interest expense of $97,900
and an increase in the provision for loan losses of $31,503, offset
by an increase in net interest income of $93,328 and an increase
in non-interest income of $11,328.
Net earnings for the six months ended June 30, 1998 were
$131,943, an increase of $669 compared to $131,274 for the six
months ended June 30, 1997. The increase was primarily due to an
increase in net interest income of $176,318 offset by an increase
in non-interest expense of $173,891.
Earnings per share for the quarter ended June 30, 1998, were
$0.09 per share based on an average of 712,866 shares outstanding
compared to $.21 per share for the comparable quarter in 1997 based
on an average of 362,131 shares outstanding.
Earnings per share for the six months ended June 30, 1998,
were $0.19 per share based on an average of 712,866 shares
outstanding compared to $0.37 per share for the comparable six
months ended in 1997 based on an average of 362,131 shares
outstanding.
Net interest income after provision for loan losses for the
quarter ended June 30, 1998 was $285,002 compared to $223,177 for
the quarter ended June 30, 1997, an increase of $61,825. This
increase was a result of interest income increasing $130,055, from
$499,604 in 1997 to $629,659 in 1998, while interest expense
increased $36,727 from $273,482 in 1997 to $310,209 in 1998. The
increase in interest income and interest expense is both due to
increases in the average balance of interest-earnings assets and
interest-bearing liabilities.
Net interest income after provision for loan losses for the
six months ended June 30, 1998 was $564,032 compared to $444,529
for the six months ended June 30, 1997, an increase of $119,503.
This increase was a result of interest income increasing $214,700,
from $998,539 in 1997 to $1,213,239 in 1998, while interest expense
increased $38,382 from $544,836 in 1997 to $583,218 in 1998. The
increase in interest income and interest expense is both due to
increases in the average balance of interest-earning assets and
interest-earning liabilities.
Non-interest income increased from $27,973 for the quarter
ended June 30, 1997 to $39,271 for the quarter ended June 30, 1998.
The increase of $11,298 was due to higher service charge income and
an increase in other operating income.
Non-interest income increased from $42,610 for the six months
ended June 30, 1997 to $77,436 for the six months ended June 30,
1998. The increase of $34,826 was due to higher service charge
income and an increase in other operating income.
12
The Company's non-interest expense for the three months ended
June 30, 1998 was $236,765, compared to $138,866 for the comparable
quarter in 1997. The increase of $97,899 was due to higher
compensation and benefits expense, higher occupancy and equipment
expense and higher other operating expenses, which were caused by
additional personnel hired, and computer system upgrades in
hardware and software.
Non-interest expense for the six months ended June 30, 1998
was $455,482, an increase of $173,891 compared to $281,591 for the
six months ended June 30, 1997. The increase was due to higher
compensation and benefits expense, higher occupancy and equipment
expense and higher other operating expenses which were caused by
additional personnel hired, and computer system upgrades in
hardware and software.
PROVISIONS FOR LOAN LOSSES
--------------------------
The provision for loan losses is based on the periodic
analysis of the loan portfolio by management. In establishing the
provision, management considers numerous factors including general
economic conditions, loan portfolio condition, prior loss
experience and independent analysis. The provision for loan losses
for the three months ended June 30, 1998 was $34,448, while the
provision for the comparable quarter in 1997 was $2,945. The
provision for loan loss for the six months ended June 30, 1998 and
1997 are $65,989 and $9,174, respectively. Based upon the analysis
of the addition to established allowances and the composition of
the loan portfolio, management concluded that the allowance is
adequate. While current economic conditions in the Bank's market
are stable, future conditions will dictate the level of future
allowances for losses on loans.
NON-PERFORMING ASSETS
---------------------
On June 30, 1998, non-performing assets were $360,575
compared to $352,245 on December 31, 1997. At June 30, 1998, the
Bank's allowance for loan losses was $253,271 or 70% of non-
performing assets compared to $195,239 or 55% at December 31, 1997.
Loans are considered non-performing when the collection of
principal and/or interest is not expected, or in the event,
payments are more than 90 days delinquent.
The allowance for loan losses was 1.15% of total loans as of
June 30, 1998, compared to .99% at December 31, 1997.
REGULATORY CAPITAL
------------------
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 Bank's
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
if the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk
weightings, and other factors.
13
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios on total risk-based capital and Tier 1 capital to risk-
weighted assets (as defined in the regulations) and Tier 1 capital
to adjusted total assets (as defined).
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ---------- -------
As of June 30, 1998
Total Risk-Based Capital
(To Risk-Weighted
Assets) $6,677 39.9% $1,337 8.0% $1,672 10.0%
Tier 1 Capital
(To Risk-Weighted
Assets) $6,467 38.7% $ 688 4.0% $1,003 6.0%
Tier 1 Capital
(To Adjusted Total
Assets) $6,467 19.3% $1,343 4.0% $1,678 5.0%
LIQUIDITY
- ---------
The Bank's principal sources of funds for investments and
operations are net earnings, deposits from its primary market
area, principal and interest payments on loans and
mortgage-backed securities and proceeds from maturing investment
securities. Its principal funding commitments are for the
origination or purchase of loans and the payment of maturing
deposits. Deposits are considered a primary source of funds
supporting the Bank's lending and investment activities.
Deposits were $24 million at June 30, 1998.
As a national bank, it has no specific requirements
concerning minimum levels of liquid assets. The Bank maintained
a liquidity ratio of 23% at June 30, 1998 of net withdrawable
savings deposits and borrowings payable on demand or in one year
or less.
The bank's most liquid assets are cash and cash
equivalents, which are cash on hand, amount due from financial
institutions, federal funds sold, certificates of deposit with
other financial institutions that have an original maturity of
three months or less and money market mutual funds. The levels
of such assets are dependent on the Bank's operating, financing
and investment activities at any given time. The Bank's cash
and cash equivalents totaled $2.97 million at June 30, 1998.
The variations in levels of cash and cash equivalents are
influenced by deposit flows and anticipated future deposit
flows.
Net cash provided by operating activities decreased from
$199,899 for six months ended June 30, 1997 to $81,483 for six
months ended June 30, 1998. The decrease was due to the timing
of income tax payments.
14
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
No recent accounting pronouncements have been issued that are
expected to have any significant effect on the financial
position of the Company that have not already been adopted by
the Company
15
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
-----------------
None.
ITEM 2: Changes in Securities
---------------------
None.
ITEM 3: Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4: Submission of Maters to a Vote of Security Holders
--------------------------------------------------
None.
ITEM 5: Other Information
-----------------
None
ITEM 6: Exhibits and Reports on Form 8-K.
--------------------------------
Exhibits:
27 - Financial Data Schedule
Reports on Form 8-K:
None
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COMMUNITY NATIONAL CORPORATION
Registrant
Date: August 11, 1998 /s/ Howard Tignor
__________________________
Howard Tignor, President
and Chief Executive Officer
(Duly Authorized Officer)