1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
--- Securities and Exchange Act of 1934
For the quarterly period ended June 30, 2000, or
Transition Report Pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the Transition Period from to
-------- --------
Commission File No. 0-17000
COMMERCIAL NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2799780
(State of Incorporation) (IRS Employer Identification No.)
101 North Pine River Street, Ithaca, Michigan 48847
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 875-4144
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
Common Stock 3,173,136
No Par Value
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 (Page 3)
Consolidated Statements of Income for the three and six months ended June 30, 2000 (Page 4)
and June 30,1999
Consolidated Statements of Changes in Shareholders' Equity for the periods ended (Page 5)
June 30, 2000 and December 31, 1999
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and (Page 6)
June 30, 1999
Notes to Consolidated Financial Statements (Page 7-11)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Page 12-17)
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
b) Exhibit 27-Financial Data Schedule (Page 20)
c) Reports on Form 8-K (Page 18)
SIGNATURES (Page 19)
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 5,785,361 $ 7,419,093
Federal funds sold 600,000 1,250,000
------------- -------------
Total cash and cash equivalents 6,385,361 8,669,093
Securities available for sale 18,494,900 17,746,753
Securities held to maturity (fair value $8,852,961 -
June 30, 2000; $8,940,714 - December 31, 1999) 8,746,305 8,813,986
Federal Home Loan Bank stock, at cost 1,391,300 1,391,300
Loans receivable, net of allowance for loan losses
$2,973,709 - June 30, 2000; $2,792,293 - December 31, 1999 160,840,721 149,674,589
Premises and equipment, net 2,602,922 2,694,511
Accrued interest receivable and other assets 2,282,678 2,031,782
------------- -------------
Total assets $ 200,744,187 $ 191,022,014
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 19,278,101 $ 18,535,251
Interest-bearing demand 24,420,186 26,639,403
Savings 41,171,980 41,271,920
Time 68,849,608 60,757,458
------------- -------------
Total deposits 153,719,875 147,204,032
Securities sold under agreements to repurchase 7,185,108 4,689,557
Other borrowings 1,430,228 2,190,639
Federal Home Loan Bank advances 17,500,000 16,500,000
Accrued expenses and other liabilities 1,552,671 1,473,253
------------- -------------
Total liabilities 181,387,882 172,057,481
Shareholders' equity
Common stock and paid in capital, no par value: 5,000,000 shares
authorized; shares issued and outstanding
June 30, 2000 - 3,180,779 and December 31,
1999 - 3,189,025 19,795,278 19,946,643
Retained earnings (deficit) (284,909) (830,339)
Accumulated other comprehensive income/(loss), net of tax (154,064) (151,771)
------------- -------------
Total shareholders' equity 19,356,305 18,964,533
------------- -------------
Total liabilities and shareholders' equity $ 200,744,187 $ 191,022,014
============= =============
See accompanying notes
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For Three Months For Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
Interest and dividend income
Loans receivable, including fees $ 3,494,264 $ 2,972,066 $ 6,816,445 $ 5,811,203
Taxable securities 235,412 262,994 463,931 496,282
Nontaxable securities 146,795 162,020 289,945 327,203
Federal funds sold 32,022 22,176 73,963 52,908
Federal Home Loan Bank stock dividends 27,674 27,750 55,348 55,195
Interest on other deposits 10,616 7,963 18,795 14,890
----------- ----------- ----------- ----------
Total interest and dividend income 3,946,783 3,454,969 7,718,427 6,757,681
Interest expense
Deposits 1,330,793 1,096,107 2,569,252 2,192,102
Securities sold under agreements to repurchase 92,589 87,809 161,345 165,424
Federal Home Loan Bank advances 291,926 194,632 528,015 359,328
Other 13,521 8,850 22,346 13,397
----------- ----------- ----------- -----------
Total interest expense 1,728,829 1,387,398 3,280,958 2,730,251
Net interest income 2,217,954 2,067,571 4,437,469 4,027,430
Provision for loan losses 90,000 90,000 180,000 180,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,127,954 1,977,571 4,257,469 3,847,430
Noninterest income
Service charges and fees 110,695 116,586 215,439 226,410
Net gains on loan sales 17,310 41,932 31,421 124,568
Receivable financing fees 81,205 63,051 155,878 129,556
Other 75,937 46,115 126,852 138,813
----------- ----------- ----------- -----------
Total noninterest income 285,147 267,684 529,590 619,347
Noninterest expenses
Salaries and employee benefits 716,327 686,540 1,454,166 1,359,404
Occupancy and equipment 242,266 251,533 497,567 500,869
FDIC insurance 7,500 5,634 15,048 11,217
Printing, postage and supplies 60,019 54,140 128,341 124,721
Professional and outside services 85,273 96,824 169,259 177,578
Other 232,949 219,091 479,462 471,957
----------- ----------- ----------- -----------
Total noninterest expense 1,344,334 1,313,762 2,743,843 2,645,746
----------- ----------- ----------- -----------
Income before income tax expense 1,068,767 931,493 2,043,216 1,821,031
Income tax expense 317,000 265,494 601,000 513,094
----------- ----------- ----------- -----------
Net income $ 751,767 $ 665,999 $ 1,442,216 $ 1,307,937
=========== =========== =========== ===========
Per share information
Basic earnings $ 0.24 $ 0.21 $ 0.45 $ 0.41
Diluted earnings $ 0.23 $ 0.21 $ 0.45 $ 0.41
Dividends declared $ 0.14 $ 0.14 $ 0.28 $ 0.27
See accompanying notes
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Periods ended June 30, 2000 (Unaudited) and December 31, 1999
Accumulated
Common Other
Stock and Retained Comprehensive Total
Paid in Earnings Income Shareholders'
Capital (deficit) Net of Tax Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 17,525,466 $ (8,483) $ 143,119 $ 17,660,102
Comprehensive income:
Net income 2,730,872 2,730,872
Net change in unrealized gains/(losses) on
securities available for sale (444,669) (444,669)
Reclassification adjustment for gains/(losses)
recognized in income (2,134) (2,134)
Tax effect 151,913 151,913
---------- ------------
Total other comprehensive income (294,890) (294,890)
------------
Total comprehensive income 2,435,982
------------
Cash dividends declared, $.55 per share (1,730,590) (1,730,590)
Payment of 5% stock dividend 1,822,372 (1,822,138) 234
Issued under dividend reinvestment program 686,391 686,391
Issued under stock option plan 159,062 159,062
Issued under employee benefit plan 41,795 41,795
Repurchase and retirement of 22,938 shares (288,443) (288,443)
------------- ----------- ---------- ------------
Balance at December 31, 1999 19,946,643 (830,339) (151,771) 18,964,533
Comprehensive income:
Net income 1,442,216 1,442,216
Net change in unrealized gains/(losses) on
securities available for sale (3,475) (3,475)
Reclassification adjustment for gains/(losses)
recognized in income - -
Tax effect 1,182 1,182
---------- ------------
Total other comprehensive income (2,293) (2,293)
------------
Total comprehensive income 1,439,923
Cash dividends declared, $.14 per share (896,786) (896,786)
Issued under dividend reinvestment program 306,808 306,808
Issued under stock option plan 41,098 41,098
Issued under employee benefit plan 56,040 56,040
Repurchase and retirement of 41,175 shares (555,311) (555,311)
------------- ----------- ---------- ------------
Balance at June 30, 2000 $ 19,795,278 $ (284,909) $ (154,064) $ 19,356,305
============= =========== ========== ============
See accompanying notes
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Six Months Ended
June 30,
2000 1999
---- ----
Cash flows from operating activities
Net income $ 1,442,216 $ 1,307,937
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan loss 180,000 180,000
Net gains on loan sales (31,421) (124,568)
Originations of loans held for sale (1,417,790) (6,059,982)
Proceeds from sales of loans held for sale 1,586,210 6,191,356
Depreciation, amortization and accretion 279,388 363,870
Net change in accrued interest receivable and other assets (249,715) (97,380)
Net change in accrued expenses and other liabilities 79,419 (861,083)
------------- -----------
Net cash from operating activities 1,868,307 900,150
Cash flows from investing activities
Purchases of securities available for sale (3,409,106) (7,285,105)
Proceeds from maturities of securities available for sale 2,715,000 1,998,530
Proceeds from maturities of securities held to maturity - 1,941,600
Purchases of securities held to maturity - -
Net change in loans (11,487,194) (7,308,848)
Purchases of premises and equipment, net (173,572) (430,945)
------------- -----------
Net cash from investing activities (12,354,872) (11,084,768)
Cash flow from financing activities
Net change in deposits 6,515,844 (699,748)
Net change in securities sold under agreements to repurchase 2,495,551 (53,158)
Net change in U.S. Treasury demand notes (760,411) (153,990)
Federal Home Loan Bank advances 12,000,000 10,000,000
Federal Home Loan Bank repayments (11,000,000) (5,000,000)
Repurchase of common stock shares (555,311) (142,715)
Dividends paid and fractional shares (896,786) (860,284)
Proceeds from sale of common stock 403,946 437,299
------------- -----------
Net cash from financing activities 8,202,833 3,527,404
------------- -----------
Net change in cash and cash equivalents (2,283,732) (6,657,214)
Cash and cash equivalents, at beginning of year 8,669,093 12,555,428
------------- -----------
Cash and cash equivalents, at end of period $ 6,385,361 $ 5,898,214
============= ===========
Cash paid during the period for
Interest $ 3,215,124 $ 2,759,020
Federal income taxes 561,641 839,000
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See accompanying notes
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1-Summary of Significant Accounting Policies
Basic Presentation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with Rule 10-01 of regulation S-X and the instructions
for Form 10-Q and, therefore, do not include all disclosures required by
generally accepted accounting principles for complete presentation of financial
statements. In the opinion of management, the condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial condition of Commercial National
Financial Corporation as of June 30, 2000 and December 31, 1999, and the results
of its operations for the three and six months ending June 30, 2000 and June 30,
1999. The results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results expected for the full year.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of
Commercial National Financial Corporation (CNFC), Commercial Bank (Bank) and
CNFC Financial Services, Inc., a wholly owned subsidiary of the Bank. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations, Industry Segments and Concentrations of Credit Risk
CNFC is a one-bank holding company, which conducts limited business activities.
The Bank performs the majority of business activities.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to individuals
for home mortgages, automobiles and personal expenditures, and loans to business
enterprises for current operations and expansion. The Bank offers a variety of
deposit products, including checking, savings, money market, individual
retirement accounts and certificates of deposit. While CNFC's chief
decision-makers monitor the revenue stream of various products and services,
operations are managed and financial performance is evaluated on a
corporation-wide basis. Accordingly, management considers all of the CNFC's
banking operations to be aggregated into one operating segment.
The principal markets for the Bank's financial services are the Michigan
communities in which the Bank is located and the areas immediately surrounding
these communities. The Bank serves these markets through seven offices located
in Gratiot and Montcalm Counties in Michigan.
Use of Estimates
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses and fair values of securities and other
financial instruments are particularly subject to change.
Cash Flow Reporting
Cash and cash equivalents include cash on hand, demand deposits with other
financial institutions and federal funds sold. Cash flows are reported net for
customer loan and deposit transactions, securities sold under agreements to
repurchase with original maturity of 90 days or less and U.S. Treasury demand
notes.
Securities
Securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to maturity.
Securities are classified as available for sale when they might be sold before
maturity. Securities available for sale are carried at fair value, with net
unrealized holding gains and losses reported separately in other comprehensive
income, net of tax. Trading securities are bought principally for sale in the
near term, and are reported at fair value with unrealized gains and losses
included in earnings. Securities are written down to fair value
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
when a decline in fair value is not temporary. CNFC did not classify securities
for trading at any time during 2000 or 1999.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premiums and discounts, is included in earnings.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value in the
aggregate. Net unrealized losses are recorded in a valuation allowance by
charges to income.
Loans Receivable
Loans receivable are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days, unless the loan is both well secured
and in the process of collection. Payments received on such loans are reported
as principal reductions.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable credit
losses, increased by the provision for loan losses and decreased by charge-offs
less recoveries. Estimating the risk of loss and the amount of loss on any loan
is necessarily subjective. Accordingly, management estimates the allowance
balance required based on past loan loss experience, known and inherent risks in
the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. A problem
loan is charged-off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans and on an individual loan
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using a combination of straight-line and accelerated
methods with useful lives ranging from 10 to 40 years for buildings and
improvements, and 3 to 10 years for furniture and equipment. These assets are
reviewed for impairment when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. Maintenance, repairs and minor
alterations are charged to current operations as expenditures occur. Major
improvements are capitalized.
Servicing Rights
Servicing rights represent both purchased rights and the allocated value of
servicing rights retained on loans sold. Servicing rights are expensed in
proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Excess servicing receivable is reported when a loan sale results in servicing in
excess of normal amounts and is expensed over the life of the servicing on the
interest method.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Other Real Estate Owned
Real estate properties acquired in collection of a loan receivable are recorded
at fair value at acquisition. Any reduction to fair value from the carrying
value of the related loan is accounted for as a loan loss. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in other
expense.
Securities Sold Under Agreements to Repurchase
All of these liabilities represent amounts advanced by various customers and are
secured by securities owned, as they are not covered by general deposit
insurance.
Employee Benefits
A benefit plan with 401(k) features covers substantially all employees. The plan
allows participant compensation deferrals. The amount of any matching
contribution is based solely on the discretion of the board of directors.
Historically, the CNFC has matched up to 6% of such deferrals at 100%.
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date.
Income Taxes
Income tax expense is the sum of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Earnings and Dividends Per Share
Basic earnings per common share is based on net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share shows the diluted effect of any additional potential common
shares. Earnings and dividends per common share are restated for all stock
splits and stock dividends. On July 21, 1999 the board of directors of CNFC
approved a 3 for 1 stock split payable on September 1, 1999 to shareholders of
record on August 8, 1999. All earnings per common share and dividends per common
share have been restated to reflect this stock split.
Stock Dividends
Dividends issued in stock are reported by transferring the market value of the
stock issued from retained earnings to common stock and additional paid-in
capital. Fractional shares are paid in cash for all stock dividends.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes the change in unrealized appreciation and
depreciation on securities available for sale, net of tax, which is also
recognized as a separate component of shareholders' equity.
Financial Instruments with Off-Balance-Sheet Risk
CNFC, in the normal course of business, makes commitments to make loans, which
are not recorded in the financial statements.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on-and
off-balance-sheet financial instruments does not include the value of
anticipated future business or values of assets and liabilities not considered
financial instruments.
Reclassifications
Some items in the prior year financial statements have been reclassified to
conform with the current year presentation.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Recent Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137, requires derivative instruments be carried at fair
value on the balance sheet. The statement continues to allow derivative
instruments to be used to hedge various risks and sets forth specific criteria
to be used to determine when hedge accounting can be used. The statement also
provides for offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in earnings in
the same period; however, any changes in fair value or cash flow that represent
the ineffective portion of a hedge are required to be recognized in earnings
and cannot be deferred. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings.
The adoption of SFAS No. 133 as amended becomes effective beginning January 1,
2001 and is not expected to have a material impact on the CNFC's financial
position or results of operations.
Note 2 - Earnings Per Share
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations for the periods ended is
presented below:
June 30, 2000 June 30, 1999
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income available to common shareholders $ 1,442,216 $ 1,307,937
================================================================================================================
Weighted-average common shares outstanding for
basic earnings per share 3,191,795 3,156,325
================================================================================================================
Basic earnings per share $ .45 $ 0.41
================================================================================================================
Diluted earnings per share:
Net income available to common shareholders $ 1,442,216 $ 1,307,937
================================================================================================================
Weighted-average common shares outstanding for basic
earnings per share 3,191,795 3,156,325
Add:
Dilutive effect of assumed exercise of stock options 20,424 12,471
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common and dilutive additional potential
common shares outstanding 3,212,219 3,168,796
================================================================================================================
Diluted earnings per share $ .45 $ .41
================================================================================================================
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Note 3 - Stock Option Plans SFAS No. 123, Accounting for Stock-Based
Compensation requires proforma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. The
following proforma information presents net income and basic and diluted
earnings per share had the fair value method been used to measure compensation
cost for stock option plans. The exercise price of options granted is equivalent
to the market value of underlying stock at the grant date. No compensation cost
was actually recognized for stock options.
The fair value of options granted during 2000 and 1999 is estimated using the
following weighted-average information: risk-free interest rate of 6.20%;
expected life of 5.0 years; expected dividends of 4.0% per year, and nominal
expected stock price volatility.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options granted to employees are issued for 7 year
periods, with vesting occurring over a 5 year period. Options granted to
directors are issued for 2 year periods with vesting occurring after 6 months.
At year-end 1999, 127,476 shares were authorized for future grants. Information
about option grants follows. At June 30, 2000 88,194 shares were authorized for
future grants. The current stock option plan expires December 31, 2000.
Number Weighted Average
of Options Exercise Price
- ----------------------------------------------------------------------
Outstanding, beginning of 1998 72,315 $ 9.32
Granted 33,733 11.74
Exercised (16,130) 9.83
- ----------------------------------------------------------------------
Outstanding, end of 1999 89,918 10.14
Granted 39,282 13.25
Exercised (4,100) 10.02
- ----------------------------------------------------------------------
Outstanding, June 30, 2000 125,100 $ 11.12
======================================================================
The weighted-average fair value of options granted in 2000 and 1999 was $0 and
$1.00. At year-end 1999, options outstanding had a weighted-average remaining
life of 5.2 years and a range of exercise price from $6.52 to $11.74. At June
30, 2000 the weighted-average remaining life was 5.4 years and a range of
exercise prices from $6.52 to $13.25.
Options exerciseable at year-end are as follows.
Number Weighted Average
of Options Exercise Price
- --------------------------------------------------
December 30,1999 45,569 8.64
June 30, 2000 51,263 9.11
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
Total assets at June 30, 2000 increased to $200,744,000 from the $191,022,000 at
December 31, 1999. Total loans were $163,814,000 as of June 30, 2000. This
represents an $11,347,000 or 7.4% increase from December 31, 1999 balance of
$152,467,000. The increase in loans was primarily a result of demand for
business loans and management's decision to portfolio, rather than sell, an
increasing number of residential mortgage loans originated during the period.
Investment securities also increased to $28,633,000 at June 30, 2000 compared to
$27,952,000 at December 31, 1999.
Deposits increased $6,516,000 or 4.4% during the period. Total deposits at June
30, 2000 were $153,720,000 compared to $147,204,000 at December 31, 1999.
Included in the deposit total are certificates of deposit obtained through an
online certificate of deposit network. The Bank is accessing this source of
funding more frequently and regularly. The participants in this network are
primarily banks, and credit unions. Rates are posted on an electronic bulletin
board available to participants in the network. Certificate of deposits gathered
through this method are generally in increments of $100,000 or less. Deposits
gathered through this network totaled $10,000,000 at June 30, 2000. This
compares to $3,500,000 at December 31, 1999.
Liquidity
Management defines liquidity as the ability to fund appropriate levels of credit
worthy loans, meet the immediate cash withdrawal requirements of depositors, and
maintain access to sufficient resources to meet unexpected contingencies at a
reasonable cost and or with minimum losses.
While loan growth continues, the Bank's retail deposit base has not increased at
the same rate. As discussed above, the Bank continues to attract deposits
through an online service. The loan to deposit ratio calculated on June 30, 2000
ending balances was 106.6% compared to 103.6% at December 31, 1999. Management
believes that the combination of available FHLB advances, Federal funds lines of
credit, the available for sale investment portfolio, and our ability to sell
mortgage loans and the government guaranteed portion of commercial loans
provides adequate short and medium term sources of liquidity. At a minimum the
Bank has the following available to meet short-term liquidity needs: $8,500,000
in available FHLB advances and $9,000,000 in short term lines of credit with
correspondent banks.
CNFC also needs cash to pay dividends to its shareholders. The primary source of
cash is the dividends paid to CNFC by the Bank. Management believes that cash
from operations is sufficient to supply the cash needed to continue paying a
reasonable dividend. CNFC also has a $1,500,000 line of credit with a
correspondent institution.
Asset Quality and the Allowance for Loan Loss
The allowance for loan losses was 1.82% of total loans at June 30, 2000 and
1.83% at December 31, 1999. At June 30, 2000 approximately $879,000 is
classified as non-accrual. This balance relates to a single business
relationship. The loan customer has subsequently defaulted on the most recent
restructuring plan and management is again evaluating this relationship for
potential loss exposure. Management has specifically identified a portion of the
allowance for loan losses in the event that a portion of the loan is charged
off. Management anticipates that a portion of the loan will be charged off in
the third quarter.
Year to date net recoveries totaled $1,000 compared to net recoveries of $86,000
during the six months ended June 30, 1999. Year to date, CNFC expensed a
provision of $180,000, which was the same as the amount expensed for the six
months ended June 30, 1999. During the quarter CNFC expensed a provision of
$90,000 to the allowance compared to $90,000 during the same period in 1999.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Management continues to systematically evaluate the adequacy of the allowance
such that the balance is commensurate with the performance of the loan
portfolio, loan growth, general market conditions and other relevant factors.
Capital Resources
CNFC's capital ratios continue to exceed regulatory guidelines for a "well
capitalized" institution. A summary of CNFC's capital ratios follows:
Minimum Required to be Well
June 30, December 31, Capitalized Under Prompt
2000 1999 Corrective Action Regulations
------------------------ -----------------------------
Total capital to risk weighted assets 13.7% 14.3% 10.0%
==== ==== ====
Tier 1 capital to risk weighted assets 12.4% 13.0% 6.0%
==== ==== ====
Tier 1 capital to average assets 9.8% 10.0% 5.0%
==== ==== ====
Results of Operations
Net income for the quarter ended June 30, 2000 was $752,000, an increase of
$86,000, or 12.9% compared to the same period in 1999. A 7.3% increase in net
interest income generated by strong loan demand is the primary contributing
factor to the increase in net income. In addition CNFC recorded a 6.5% increase
in non-interest income and a modest 2.3% increase in non-interest expense.
Net income for the six months ended June 30, 2000 was $1,442,000, an increase of
$134,000 or 10.2%. Strong loan demand generated a $410,000 or 10.2% increase in
net interest income. Offsetting the increase in net interest income was a
$89,000 or 14.4% decrease in non-interest income and a modest 3.7% increase in
non-interest expense. The detail factors affecting these changes are discussed
in the following paragraphs.
Net Interest Income
The following table illustrates the effect that changes in rates and volumes of
interest-earning assets and interest-bearing liabilities had on net interest
income for the three and six months ending June 30, 2000 and 1999.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Three Months Ending June 30, Six Months Ending June 30,
2000 1999 2000 1999
---- ---- ---- ----
Interest Income (tax equivalent) $ 4,119,444 $ 3,616,582 $ 8,055,794 $ 7,086,009
Interest Expense 1,728,829 1,387,398 3,280,958 2,730,251
------------- ------------- ------------ -------------
Net Interest Income $ 2,390,615 $ 2,229,184 $ 4,774,836 $ 4,355,758
Average Volume
Interest-earning Assets $ 193,545,051 $ 176,746,836 $190,224,588 $ 173,854,563
Interest-bearing Liabilities 161,128,626 146,148,029 157,993,058 143,506,631
------------- ------------- ------------ -------------
Net Differential $ 32,416,425 $ 30,598,807 $ 32,231,530 $ 30,347,932
============= ============= ============ =============
Average Yields/Rates
Yield on Earning Assets 8.54% 8.21% 8.49% 8.22%
Rate Paid on Liabilities 4.30% 3.81% 4.16% 3.84%
----- ----- ----- -----
Interest Spread 4.24% 4.40% 4.33% 4.38%
===== ===== ===== =====
Net Interest Margin 4.95% 5.06% 5.03% 5.05%
===== ===== ===== =====
The change in net interest income is attributable to the following:
Three Months Ending Six months Ending
June 30, 2000 June 30, 2000
Volume Rate Inc/(Dec) Volume Rate Inc/(Dec)
------ ---- --------- ------ ---- ---------
Interest Earning Assets $ 396,950 $ 105,912 $ 502,862 $ 795,031 $ 174,754 $ 969,785
Interest Bearing Liabilities 190,797 150,634 341,431 355,841 194,866 550,707
---------- --------- ---------- --------- --------- ---------
Net Interest Income $ 206,153 $ (44,722) $ 161,431 $ 439,190 $ (20,112) $ 419,078
========== ========= ========== ========= ========== =========
The increase in net interest income for the six months ending June 30, 2000 is
due to an increase in earning assets offset by a slight decrease in margin. Net
interest margin for the six months ending June 30, 2000 decreased to 5.03%
compared to 5.05% for the six months ending June 30, 1999. Average earning
assets for the six months ending June 30, 2000 increased $16,370,000 compared to
the same period in 1999. During 1999, the Federal Reserve increased the Fed
Funds rate three times, each time by 25 basis points. The Federal Reserve also
increased the Fed Funds rate by 25 basis points twice during the first quarter
of 2000, and by 50 basis points once during May of 2000.
This change in prime results in an almost immediate increase in the Bank's prime
lending rate. The interest rate on a significant portion of the Bank's
commercial loan portfolio is tied to the prime-lending rate. Therefore, the Bank
receives an immediate short-term benefit to the increase in prime. In general,
local deposit interest rates do not respond as quickly to changes in the prime
lending rate. However, the cost of certificates of deposits gathered on the
electronic network, and FHLB advances are more sensitive to general changes in
interest rates.
These funding sources have become more expensive and are beginning to offset
some of the short-term benefits in the increase in prime. The margin for the
three months ended June 30, 2000 decreased from
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
5.06% to 4.95%. Management believes that margin will continue to decrease over
the next several months as additional deposit and other borrowing instruments
reprice at higher rates.
Non-interest Income
Non-interest income for the six months ending June 30, 2000 was $530,000. This
represents a $89,000 or 14.5% decrease over the same period in 1999. Rising
interest rates has all but eliminated the mortgage refinance activity. This has
significantly reduced the number of mortgage loans originated and, as a result,
has also reduced the gain on sale of mortgage loans. Also, management has
elected to portfolio a larger number of residential real estate mortgage loans
that previously would have been sold to the secondary market. As a result, gains
on loan sales have decreased by $94,000 comparing the six months ending June
30th. Offsetting this decrease is an increase in receivable financing fees.
Receivable financing fees increased $26,000 over the six months ending June
30th.
For the three months ended June 30th, CNFC non-interest income was $18,000 or
6.7% more than the same period in 1999. Receivable financing fees and other
income contributed to this increase.
Non-interest Expense
Non-interest expense for the six months ending June 30, 2000 totaled $2,744,000.
This represents a $98,000 or 3.7% increase over the same period in 1999.
Salary and benefit expense for the six months ending June 30, 2000 totaled
$1,454,000 compared to $1,359,000 an increase of $95,000 or 7.0%. The increase
reflects normal base salary increases, market adjustments and an 8.0% increase
in the cost of medical insurance. The increase in medical cost reflects normal
increases effective August of 1999. Management anticipates a significantly
larger increase in medical insurance costs during the third quarter of 2000. The
Bank is experiencing wage pressure as the area unemployment rate remains low.
The Bank is competing for staff with a large area casino and newly opened
prisons. These organizations have increased the base pay scale for entry level
employees. The increase in salary and benefit expense accounts for 96.6% of the
increase in non-interest expenses.
Professional fees for the six months ended June 30, 2000, decreased $8,000 or
4.7% compared to the same period in 1999. The Bank has reduced expenses related
to the implementation, support and maintenance of P.C.'s, networks, and other
technology related equipment.
The causes for the increases and decreases in non-interest expense for the three
months ended June 30, 2000 are the same as those described above.
Quantitative and Qualitative Disclosures about Market Risk
CNFC's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. All of the CNFC's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. CNFC has a limited exposure
to commodity prices related to agricultural loans. Any impacts that changes in
foreign exchange rate and commodity prices would have on interest rates are
assumed to be insignificant.
Interest rate risk ("IRR") is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value, however, excessive
levels of IRR could pose a significant threat to the Corporation's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the CNFC's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, management seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the management to assess the
existing and potential future effects of changes in interest rates on
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
its consolidated financial condition, including capital adequacy, earnings,
liquidity, and, where appropriate, asset quality.
The following table provides information about CNFC's financial instruments that
are sensitive to changes in interest rates as of June 30, 2000. The Corporation
had no derivative financial instruments, or trading portfolio, as of that date.
The expected maturity date values for loans receivable, mortgage-backed
securities, and investment securities were calculated without adjusting the
instrument's contractual maturity date for expectations of prepayments. Expected
maturity date values for interest-bearing core deposits were not based upon
estimates of the period over which the deposits would be outstanding, but rather
the opportunity for repricing.
Principal/National Amount Maturing in:
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
RATE SENSITIVE ASSETS:
FIXED INTEREST RATE LOANS $4,632 $9,045 $11,165 $ 19,768 $17,271 $ 32,857 $ 94,738 $ 90,160
AVERAGE INTEREST RATE 5.85% 8.07% 8.78% 8.55% 8.29% 8.11% 8.20%
VARIABLE INTEREST RATE LOANS 9,935 12,499 4,295 2,359 4,312 35,676 69,076 69,076
AVERAGE INTEREST RATE 10.21% 10.15% 9.80% 10.33% 10.50% 8.24% 9.18%
FIXED INTEREST RATE SECURITIES 1,816 5,810 4,760 5,690 4,510 4,655 27,241 27,117
AVERAGE INTEREST RATE 6.22% 5.93% 6.28% 6.24% 6.92% 7.40% 6.49%
FHLB STOCK 1,391 1,391 1,391
AVERAGE INTEREST RATE 8.00% 8.00%
FEDERAL FUNDS SOLD 600 600 600
AVERAGE INTEREST RATE 6.75% 6.75%
RATE SENSITIVE LIABILITIES:
NON INTEREST BEARING DEMAND 19,278 19,278 19,278
INTEREST BEARING DEMAND 24,420 24,420 24,420
AVERAGE INTEREST RATE 1.69% 1.69%
SAVINGS 41,172 41,172 41,172
AVERAGE INTEREST RATE 2.72% 2.72%
TIME DEPOSITS 35,012 24,189 5,483 2,792 936 438 68,850 69,989
AVERAGE INTEREST RATE 5.76% 6.00% 5.82% 5.92% 5.47% 5.50% 5.85%
REPURCHASE AGREEMENTS 7,185 7,185 7,185
AVERAGE INTEREST RATE 5.71% 5.71%
U.S. TREASURY DEMAND NOTES 1,430 1,430 1,430
AVERAGE INTEREST RATE 5.82% 5.82%
FIXED RATE FHLB ADVANCES 4,000 2,000 - 2,500 - 4,000 12,500 12,212
AVERAGE INTEREST RATE 6.11% 6.63% 6.18% 7.07% 6.33%
VARIABLE RATE FHLB ADVANCE 3,000 - - - - 2,000 5,000 4,903
AVERAGE INTEREST RATE 6.90% 7.24% 6.73%
16
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Forward Looking Statements
This discussion and analysis of financial condition and results of operations,
and other sections of this report contain forward looking statements that are
based on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Corporation itself. Words such as "anticipates", "believes", "estimates",
"expects" "forecasts" "intends", "is likely", "plans", "product", "projects",
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such forward
looking statements. Furthermore, CNFC undertakes no obligation to update, amend
or clarify forward-looking statements, whether as a result of new information,
future events, or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulations and
tax laws; changes in prices, levies, and assessments; the impact of technology,
governmental and regulatory policy changes; the outcome of pending and future
litigation and contingencies; trends in customer behavior including their
ability to repay loans; and vicissitudes of the national and local economies.
These are representative of the Future Factors that could cause a difference
between an actual outcome and a forward-looking statement.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 6 (a) Exhibit 27 Financial Data
Item 6 (b) Reports on Form 8-K None
18
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Commercial National Financial Corporation
(Registrant)
Date: August 11, 2000
/s/ Jeffrey S. Barker
------------------------------------------
Jeffrey S. Barker
President and Chief Executive Officer
/s/ Patrick G. Duffy
--------------------------------------------
Patrick G. Duffy
Executive Vice President and Chief Financial
Officer
19
20
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule