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 September 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 October 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
SEPTEMBER 30, 1998 and DECEMBER 31, 1997
(Unaudited)
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents:
Non-interest bearing $ 302,792 $ 211,969
Interest bearing 3,435,269 2,529,814
Investment securities:
Securities held-to-maturity (estimated
market value of $691,250 (1998) and
$1,176,788 (1997)) 657,701 1,157,492
Securities available-for-sale, at
estimated market value 2,700,554 2,518,019
Mortgage-backed and related securities:
Securities held-to-maturity (estimated
market value of $421,016 (1998) and
$627,868 (1997)) 418,047 556,783
Securities available-for-sale, at
estimated market value 2,708,713 3,461,579
Loans receivable, net 23,843,495 19,544,222
Accrued interest receivable 206,143 138,047
Real estate held for investment 336
Premises and equipment 820,358 579,148
Stock investments:
Stock in Federal Home Loan Bank, at cost 278,300 263,900
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 17,927 2,243
------------ ------------
Total Assets $ 35,641,449 $ 31,215,702
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 25,936,933 $ 21,416,047
Advances from FHLB 697,710 821,777
Advances from borrowers for taxes
and insurance 3,400 454
Accrued interest payable 184,200 169,954
Income taxes payable:
Current 54,840 83,507
Deferred (14,551) 4,935
Accrued expenses and other liabilities 103,546 151,055
------------ ------------
Total Liabilities $ 26,966,078 $ 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 shares issued 712,866 712,866
Additional paid-in capital 4,489,512 4,489,512
Retained earnings - substantially
restricted 3,471,008 3,371,864
Accumulated other comprehensive income,
net of taxes 1,985 (6,269)
------------ ------------
Total Stockholders' Equity $ 8,675,371 $ 8,567,973
------------ ------------
Total Liabilities & Stockholders'
Equity $ 35,641,449 $ 31,215,702
============ ============
/TABLE
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1998 1997 1998 1997
----------- --------- --------------------
INTEREST INCOME
First mortgage loans $372,371 $361,489 $1,090,002 $1,073,244
Consumer & other loans 136,609 25,676 319,858 44,636
Interest & dividends on investments:
Taxable 42,970 36,280 126,200 119,928
Tax-exempt 6,252 18,265 37,287 54,795
Dividends 4,996 4,653 21,683 13,418
Interest on deposits with banks 33,352 9,974 88,200 39,736
Interest on mortgage-backed securities 53,948 56,747 180,508 166,178
-------- -------- ---------- ----------
Total interest income $650,498 $513,084 $1,863,738 $1,511,935
--------------------- -------- -------- ---------- ----------
INTEREST EXPENSE
Interest on deposits $313,062 $270,400 $ 865,186 $ 778,418
Interest on advances from FHLB 14,147 17,203 45,241 54,019
-------- -------- ---------- ----------
Total interest expense $327,209 $287,603 $ 910,427 $ 832,437
---------------------- -------- -------- ---------- ----------
Net interest income $323,289 $225,481 $ 953,311 $ 679,498
-------------------
Provision for loan losses 28,592 10,901 94,581 20,074
-------- -------- ---------- ----------
Net interest income after provision
-----------------------------------
for loan losses $294,697 $214,580 $ 858,730 $ 659,424
---------------
NON-INTEREST INCOME
Income from real estate held for
investment $ 2,025 $ 2,775 $ 7,075 $ 7,425
Service charges 34,966 26,572 97,404 64,516
Other operating income 2,814 2,756 12,762 2,769
-------- -------- ---------- --------
Total non-interest income $ 39,805 $ 32,103 $ 117,241 $ 74,710
------------------------- -------- -------- ---------- --------
NON-INTEREST EXPENSE
Compensation & benefits $114,758 $ 87,023 $ 335,427 $268,434
Occupancy & equipment 29,080 12,375 115,074 32,756
Federal deposit insurance premiums 2,830 3,598 9,699 11,032
Data processing fees 20,725 13,087 59,545 31,978
Other operating expenses 48,012 31,325 154,382 75,429
-------- -------- ---------- --------
Total non-interest expense $215,405 $147,408 $ 674,127 $419,629
-------------------------- -------- -------- ---------- --------
Income before income taxes $119,097 $ 99,275 $ 301,844 $314,505
Income tax expense 41,725 31,544 95,768 116,872
-------- -------- ---------- --------
Net Income $ 77,372 $ 67,731 $ 206,076 $197,633
---------- ======== ======== ========== ========
Earnings per common share $ 0.11 $ 0.19 $ 0.29 $ 0.55
======== ======== ========== ========
Diluted earnings per share $ 0.11 $ 0.19 $ 0.29 $ 0.55
======== ======== ========== ========
Dividends paid per share $ 0.05 $ 0.20 $ 0.15 $ 0.60
======== ======== ========== ========
2
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
September 30,
-----------------------
1998 1997
----------- -----------
Net income $206,076 $197,633
Other comprehensive income, net of tax:
Unrealized gains on securities held
as available-for-sale, net of
applicable deferred income taxes
of $4,634 (1998) and $18,814 (1997) 8,254 36,521
-------- --------
Other comprehensive income $214,330 $234,154
======== ========
3
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 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 206,076 206,076
Change in unrealized gain
(loss) on securities
available-for-sale, net of
applicable deferred income
taxes of $4,634 8,254 8,254
Dividends paid ($.15 per share) - - - (106,932) - (106,932)
------- -------- ---------- ----------- ------- ----------
Balance at September 30, 1998 712,866 $712,866 $4,489,512 $ 3,471,008 $ 1,985 $8,675,371
======= ======== ========== =========== ======= ==========
4
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
September 30,
----------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 206,076 $ 197,633
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 94,581 20,074
Provision for depreciation 89,667 12,854
Amortizations of investment securities -
premiums and discounts (net) 10,422 505
Stock in FHLB received as dividends (14,400) (13,300)
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable (68,096) (9,946)
(Increase) decrease in other assets (15,684) (111,494)
Increase (decrease) in interest payable 14,246 6,188
Increase (decrease) in income taxes (52,787) 98,532
Increase (decrease) in other liabilities (47,509) (1,833)
------------ ------------
Net Cash Provided by Operating Activities $ 216,516 $ 199,213
----------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable $ (4,299,273) $ (1,660,004)
Net (increase) decrease in time deposits - 100,000
Additions to premises & equipment (378,638) (166,387)
Purchase of mortgage-backed securities (495,000) (1,000,000)
Proceeds from maturities of mortgage-
backed securities 42,399
Principal payments on mortgage-backed
securities 868,034 624,137
Principal payments on SBA security 54,407
Purchase of investment securities (700,000) (1,000,000)
Proceeds from maturities of investment 1,395,000 1,593,845
------------ ------------
Net Cash Provided by Investing Activities $ (3,513,071) $ (1,508,409)
- ----------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 4,520,886 $ 1,637,502
Repayments of FHLB advances (124,067) (91,832)
Net increase in advances from borrowers
for taxes and insurance 2,946 (1,707)
Payment of dividends (106,932) (52,740)
------------ ------------
Net Cash Provided by Financing Activities $ 4,292,833 $ 1,491,223
- ------------------------------------------ ------------ ------------
Increase (Decrease) in Cash and Cash
Equivalents $ 996,278 $ 182,027
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD $ 2,741,783 $ 542,045
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,738,061 $ 724,072
============ ============
5
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest $ 910,427 $ 832,437
Taxes taxes, net of refunds 128,766 17,016
Non-cash investing and financing:
Stock dividends received from Federal
Home Loan Banks 14,400 13,300
Total net increase (decrease) in unrealized
loss on securities available-for-sale 8,254 36,521
6
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 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
month's 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
form the audited consolidated financial statements as of that
date.
(2) EARNINGS PER SHARE
Net earnings per share of common stock for the nine months ended
September 30, 1997 and the nine month period ended September 30,
1998 of $0.55 and $0.29 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 SAFS 130. Statement no. 130 requires the
reporting of comprehensive income in addition to net income form
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. This comprehensive income
consists of securities classified as available-for-sale by the
Company.
7
(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.
The bank's data processing system is outsourced to Intrieve, a
service bureau that services the majority of all thrifts and
savings and loans throughout the nation. All systems including
all bank PC's are integrated with the service bureau
applications. Over $200,000 has been spent on upgrading all
equipment, software and systems. This was done principally to
modernize operations, but a substantial portion of this
investment would have been required for Year 2000 compliance
alone. Final testing for Year 2000 compliance has been
completed with all applications performing with Year 2000 dates.
Successful tests have been completed with all vendors and
correspondents with which the bank directly interfaces. The
bank is Year 2000 compliant at this point. Additional testing
will be made during 1999 to check and reinforce compliance
readiness. Should any unforeseen glitches arise the bank has a
contingency plan with several alternatives to meet the worst
case scenario.
The bank's customers have been notified and couseled. All
commercial customers with Year 2000 requirements have been
couseled one on one with compliance assured to the bank's
satisfaction.
The cost of addressing the Year 2000 issue has had no material
impact on earnings since the expenditures meeting Year 2000
requirements were required and planned for modernization alone.
With testing reflecting compliance to date, there are no
indications of material impact on earnings or uncertainty of
future operation results or financial condition.
8
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 December
31, 1997, on a consolidated basis, the Company had total assets
of $31.2 million, net loans receivable of $19.5 million, cash
and investment securities of $6.4 million, mortgage-backed
securities of $4.0 million, total deposits of $21.4 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.
9
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.
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 is at 435 West Church Street, and
its phone 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 noninterest 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 $35,641,449 as of
September 30, 1998, compared to $31,215,702 on December 31,
1997, an increase of $4,425,747. This increase was composed of
an increase in net loans receivable of $4,299,273, an increase
in premises and equipment of $241,210, and an increase in cash
of $996,278. These increases were offset by decreases in
mortgage backed securities of $891,602 and in investment
securities of $317,256. The 19% annualized growth rate of
assets for the quarter is in accordance with the Company's
growth objectives. The funds were used to purchase investment
securities, interest bearing deposits and to fund loan growth.
Loans receivable, net increased to $23,843,495 on September 30,
1998 from $19,544,222 on December 31, 1997, an increase of
$4,299,273. Mortgage-backed securities decreased
10
$891,602 to $3,126,670 at September 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 $25,936,933 on September 30, 1998, an increase
of 4,520,886 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.
Stockholders' equity was $8,567,973 on December 31, 1997,
compared to $8,675,371 on September 30, 1998, an increase of
$107,398. The increase was due to reductions in unrealized loss
on available-for-sale securities of $8,254, earnings for the
year of $206,076, off-set by the Company's quarterly cash
dividends of $106,932.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1998 was
$77,372 compared to $67,731 as of September 30, 1997. The
increase of $9,641 was due to a increase in net interest income
of $97,808, offset by an increase in non-interest expense of
$67,997.
Net earnings for the nine months ended September 30, 1998 were
$206,076, an increase of $8,443 compared to $197,633 for the
nine months ended September 30, 1997. The increase was
primarily due to an increase in net interest income of $273,813
offset by an increase in non-interest expense of $254,498.
Earnings per share for the quarter ended September 30, 1998,
were $0.11 per share based on an average of 712,866 shares
outstanding compared to $.19 per share for the comparable
quarter in 1997 based on an average of 362,131 shares
outstanding.
Earnings per share for the nine months ended September 30, 1998,
were $0.29 per share based on an average of 712,866 shares
outstanding compared to $0.55 per share for the comparable nine
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 September 30, 1998 was $294,697 compared to
$214,580 for the quarter ended September 30, 1997, an increase
of $80,117. This increase was a result of interest income
increasing $137,414, from $513,084 in 1997 to $650,498 in 1998,
while interest expense increased $39,606 from $287,603 in 1997
to $327,209 in 1998. The increase in interest income and
interest expense are both due to increases in the average
balance of interest-earning assets and interest-bearing
liabilities.
Net interest income after provision for loan losses for the nine
months ended September 30, 1998 was $858,730 compared to
$659,424 for the nine months ended September 30,
11
1997, an increase of $199,306. This increase was a result of
interest income increasing $351,803, from $1,511,935 in 1997 to
$1,863,738 in 1998, while interest expense increased $77,990
from $832,437 in 1997 to $910,427 in 1998. The increase in
interest income and interest expense are both due to increases
in the average balance of interest-earning assets and interest-
earning liabilities.
Non-interest income increased from $32,103 for the quarter ended
September 30, 1997 to $39,805 for the quarter ended September
30, 1998. The increase of $7,702 was due to higher service
charge income and an increase in other operating income.
Non-interest income increased from $74,710 for the nine months
ended September 30, 1997 to $117,241 for the nine months ended
September 30, 1998. The increase of $42,531 was due to higher
service charge income.
The Company's non-interest expense for the three months ended
September 30, 1998 was $215,405 compared to $147,408 for the
comparable quarter in 1997. The increase of $67,997 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 nine months ended September 30,
1998 was $674,127, an increase of $254,498 compared to $419,629
for the nine months ended for September 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 September 30, 1998 was
$28,592, while the provision for the comparable quarter in 1997
was $10,901. The provision for loan loss for the nine months
ended September 30, 1998 and 1997 are $94,581 and $20,074
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 September 30, 1998, non-performing assets were $632,205
compared to $352,245 on December 31, 1997. At September 30,
1998, the Bank's allowance for loan losses was
12
$281,863 or 45% 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 1.18% of total loans as of
September 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.
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 Provisions
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ---------- -------
As of September 30, 1998
Total Risk-Based Capital
(To Risk-Weighted
Assets) $6,756 37.1% $1,456 8.0% $1,820 10.0%
Tier 1 Capital
(To Risk-Weighted
Assets) $6,528 35.8% $ 728 4.0% $1,092 6.0%
Tier 1 Capital
(To Adjusted Total
Assets) $6,528 18.2% $1,430 4.0% $1,788 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
13
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 $26 million at September 30, 1998.
The Bank's is required to maintain minimum levels of liquid
assets as defined by regulations. The required percentage is
currently five percent of net withdrawable savings deposits and
borrowings payable on demand or in one year or less. The Bank
maintained a liquidity ratio of 22% at September 30, 1998.
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 $3.74 million at September 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 increased from
199,213 for nine months ended September 30, 1997 to 216,516 for
nine months ended September 30, 1998. The increase was due to
the timing of income tax payments.
RECENT ACCOUNTING PRONOUNCEMENTS
This statement establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those at fair value. If certain
conditions are met, a derivative may be specifically designated
a (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation,
and unrecognized firm commitment, an availble-for-sale security,
or a foreign-currency-denominated forecasted transaction.
This statement is not expected to have any significant effect on
the financial position of the bank. In addition no other recent
accounting pronouncements have been issued that are expected to
have any significat effect on the financial position of the bank
that have not alreadu been adopted by the bank.
14
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: November 12, 1998 /s/ Howard Tignor
__________________________
Howard Tignor, President
and Chief Executive Officer
(Duly Authorized Officer)