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 March 31, 2001, or
Transition Report Pursuant to Section 13 or 15(d) of the
-- Securities Exchange Act of 1934
For the Transition Period from to
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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 May 2, 2001
----- --------------------------
Common Stock 3,353,438
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 March 31, 2001 (unaudited) and December 31, 2000 (Page 3)
Consolidated Statements of Income (unaudited) for the three months ended March 31, (Page 4)
2001 and March 31, 2000
Consolidated Statements of Changes in Shareholders' Equity (Page 5)
(unaudited) for the three months ended March 31,
2001 and March 31, 2000
Consolidated Statements of Cash Flows (unaudited) for the (Page 6)
three months ended March 31, 2001 and March 31,
2000
Notes to Consolidated Financial Statements (unaudited) (Page 7-10)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Page 11-14)
Item 3. Quantitative and Qualitative Disclosures about Market Risk (Page 15)
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
b) Reports on Form 8-K (Page 16)
SIGNATURES (Page 17)
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 8,640,853 $ 7,112,021
Federal funds sold 4,790,000 350,000
------------- -------------
Total cash and cash equivalents 13,430,853 7,462,021
Securities available for sale 17,548,197 19,406,526
Securities held to maturity (fair value $ 8,815,620 -
March 31, 2001; $8,724,848 - December 31, 2000) 8,522,648 8,525,623
Federal Home Loan Bank stock, at cost 1,391,300 1,391,300
Gross loans receivable 177,746,002 176,833,244
Allowance for loan losses (2,642,072) (2,545,363)
------------- -------------
Net loans receivable 175,103,930 174,287,881
Premises and equipment, net 2,389,326 2,465,176
Accrued interest receivable and other assets 2,084,937 2,347,162
------------- -------------
Total assets $ 220,471,191 $ 215,885,689
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 18,665,970 $ 19,786,361
Interest-bearing demand 26,421,799 26,264,930
Savings 44,770,084 39,439,255
Time 74,747,396 72,303,355
------------- -------------
Total deposits 164,605,249 157,793,901
Securities sold under agreements to repurchase 8,320,669 8,023,767
Other short-term borrowings 181,405 1,770,195
Federal Home Loan Bank advances 25,009,476 26,500,000
Accrued expenses and other liabilities 1,687,711 1,687,744
------------- -------------
Total liabilities 199,804,510 195,775,607
Shareholders' equity
Common stock and paid-in-capital, no par value: 5,000,000 shares
authorized; shares issued and outstanding
March 31, 2001 - 3,338,392 and December 31,
2000 - 3,327,225 21,747,724 21,617,080
Accumulated deficit (1,419,236) (1,714,089)
Accumulated other comprehensive income, net of tax 338,193 207,091
------------- -------------
Total shareholders' equity 20,666,681 20,110,082
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Total liabilities and shareholders' equity $ 220,471,191 $ 215,885,689
============= =============
See accompanying notes
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
See accompanying notes
For Three Months
Ended March 31,
2001 2000
---- ----
Interest and dividend income
Loans, including fees $3,780,202 $3,322,181
Taxable securities 223,794 228,519
Nontaxable securities 139,901 143,150
Federal funds sold 51,999 41,941
Federal Home Loan Bank stock dividends 27,445 27,674
Interest on other deposits 6,215 8,179
---------- ----------
Total interest and dividend income 4,229,556 3,771,644
Interest expense
Deposits 1,510,239 1,238,459
Securities sold under agreements to repurchase 103,029 68,756
Federal Home Loan Bank advances 386,474 236,089
Other 9,703 8,825
---------- ----------
Total interest expense 2,009,445 1,552,129
Net interest income 2,220,111 2,219,515
Provision for loan losses 90,000 90,000
---------- ----------
Net interest income after provision for loan losses 2,130,111 2,129,515
Noninterest income
Service charges and fees 109,140 104,744
Net gains on loan sales 73,786 14,111
Receivable financing fees 86,679 74,673
Security gains 94,484 --
Other 46,755 50,915
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Total noninterest income 410,844 244,443
Noninterest expense
Salaries and employee benefits 806,395 737,839
Occupancy and equipment 249,960 255,301
FDIC insurance 7,554 7,548
Printing, postage and supplies 74,692 68,322
Professional and outside services 98,403 83,986
Other 218,919 246,513
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Total noninterest expense 1,455,923 1,399,509
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Income before income tax expense 1,085,032 974,449
Income tax expense 322,500 284,000
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Net income $ 762,532 $ 690,449
========== ==========
Per share information
Basic earnings $ 0.23 $ 0.21
Diluted earnings $ 0.23 $ 0.20
Dividends declared $ 0.14 $ 0.13
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Periods ended March 31, 2001 and March 31, 2000 (Unaudited)
Accumulated
Shares Common Other
Issued Stock and Comprehensive Total
and Paid in Accumulated Income/(Loss), Shareholders'
Outstanding Capital Deficit Net of Tax Equity
- ----------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 3,348,476 $ 19,946,643 $ (830,339) $ (151,771) $18,964,533
Comprehensive income:
Net income 690,449 690,449
Net change in unrealized gains/(losses) on
securities available for sale (54,663) (54,663)
Tax effects 18,585 18,585
---------- -----------
Total comprehensive income 654,371
Cash dividends declared, $.13 per share (448,700) (448,700)
Issued under dividend reinvestment program 13,630 173,247 173,247
Issued under stock option plan 1,730 13,655 13,655
Issued under employee benefit plan 2,898 38,953 38,953
Repurchase and retirement of shares (6,793) (92,219) (92,219)
--------- ------------ ----------- ---------- -----------
Balance at March 31, 2000 3,359,941 $ 20,080,279 $ (588,590) $ (187,849) $19,303,840
========= ============ =========== ========== ===========
================================================================================================================
Balance at January 1, 2001 3,327,225 $ 21,617,080 $(1,714,089) $ 207,091 $20,110,082
Comprehensive income:
Net income 762,532 762,532
Net change in unrealized gains/(losses) on
securities available for sale 293,123 293,123
Reclassification adjustment for (gains)
recognized in income (94,484) (94,484)
Tax effects (67,537) (67,537)
---------- -----------
Total comprehensive income 893,634
Cash dividends declared, $.14 per share (467,679) (467,679)
Issued under dividend reinvestment program 12,344 140,722 140,722
Issued under stock option plan - - -
Issued under employee benefit plan 1,642 16,876 16,876
Repurchase and retirement of shares (2,819) (26,954) (26,954)
--------- ------------ ------------ ---------- -----------
Balance at March 31, 2001 3,338,392 $ 21,747,724 $ (1,419,236) $ 338,193 $20,666,681
========= ============ ============ ========== ===========
See accompanying notes
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Three Months Ended
March 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 762,532 $ 690,449
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan losses 90,000 90,000
Net gains on loan sales (73,786) (14,111)
Originations of loans held for sale (4,000,298) (427,509)
Proceeds from sales of loans held for sale 4,074,084 578,620
Gain on sales of securities available for sale (94,484) --
Depreciation, amortization and accretion 128,742 141,731
Net change in accrued interest receivable and other assets 153,110 (6,563)
Net change in accrued expenses and other liabilities (1,908) 124,103
------------ ------------
Net cash from operating activities 1,037,992 1,176,720
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (2,767,962) (1,840,718)
Proceeds from maturities of securities available for sale 3,600,000 1,075,000
Proceeds from sales of securities available for sale 1,324,633 --
Net change in loans (865,560) (5,213,953)
Purchases of premises and equipment, net (54,047) (76,546)
------------ ------------
Net cash from investing activities 1,237,064 (6,056,217)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits 6,811,348 5,583,217
Net change in securities sold under agreements to repurchase 296,902 1,051,474
Net change in U.S. Treasury demand notes (1,588,790) (1,734,724)
Federal Home Loan Bank advances 9,000,000 8,000,000
Proceeds from Repayment of Federal Home Loan Bank (10,490,524) (6,000,000)
Repurchase of common stock shares (26,954) (92,219)
Dividends paid (465,804) (448,700)
Proceeds from sale of common stock 157,598 225,855
------------ ------------
Net cash from financing activities 3,693,776 6,584,903
------------ ------------
Net change in cash and cash equivalents 5,968,832 1,705,406
Cash and cash equivalents, at beginning of year 7,462,021 8,669,093
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 13,430,853 $ 10,374,499
============ ============
Cash paid during the period for
Interest $ 2,065,567 $ 1,545,931
Federal income taxes 50,000 100,000
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 management's opinion, 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 March 31, 2001 and December 31, 2000 and the results
of its operations for the three months ending March 31, 2001 and March 31, 2000.
The results for the three months ended March 31, 2001 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. and CNFC Mortgage Corporation, both wholly owned
subsidiaries 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 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. 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 (loss), 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 when a decline
in fair value is not temporary. CNFC did not classify securities for trading at
any time during 2001 or 2000.
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.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
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
Loans that management has the intent and the ability to hold for the foreseeable
future or until maturity or payoff 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 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
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 individually 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.
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.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
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, CNFC has matched up to 6% of such deferrals at 100%.
Stock Compensation
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date. Proforma disclosures of
net income and earnings per share are provided as if the option's fair value had
been recorded using an option pricing model.
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.
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
(loss). Other comprehensive income (loss) 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
Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and standby letters of credit issued to meet customer
needs. The face amount for these items represents the exposure to loss before
considering customer collateral or ability to repay. Such financial instruments
are recorded when they are funded.
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 do 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.
Recent Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard requires all derivatives to
be recorded at fair value. Unless designated as hedges, changes in these fair
value are recorded in the income statement. Fair value changes involving hedges
are generally recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded.
The adoption of this standard on January 1, 2001 did not have a material effect
on CNFC's financial position or results of operations.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
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:
MARCH 31, 2001 MARCH 31, 2000
- ----------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 762,532 $ 690,449
================================================================================================================
Weighted-average common shares outstanding for
basic earnings per share 3,338,662 3,361,758
================================================================================================================
BASIC EARNINGS PER SHARE $ .23 $ .21
================================================================================================================
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders $ 762,532 $ 690,449
================================================================================================================
Weighted-average common shares outstanding for basic
earnings per share 3,338,662 3,361,758
Add:
Dilutive effect of assumed exercise of stock options 9,207 21,596
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common and dilutive additional potential
common shares outstanding 3,347,869 3,383,354
================================================================================================================
DILUTED EARNINGS PER SHARE $ .23 $ .20
================================================================================================================
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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 March 31, 2001 increased to $220,471,000 from the $215,886,000
at December 31, 2000. Federal funds sold increased $4,440,000 compared to
December 31, 2000. A $5,331,000 increase in savings account balances was the
primary source of the increased federal funds. Management believes that the
increase in the savings account balances is temporary and primarily relates to
additional balances being maintained by large corporate and public institutions.
The recent decrease in interest rates during the first quarter of 2001 has
spurred significant residential real estate refinancing activity. The majority
of these loans are 15 and 30 year fixed rate loans which management has elected
to sell to the secondary market. Though residential real estate refinancing
activity has increased significantly, other loan categories continue to exhibit
signs of weakness. As a result, March 31, 2001 loan totals increased by only
$913,000 compared to December 31, 2000. Total loans were $177,746,000 as of
March 31, 2001.
Deposits, along with other forms of debt are used to fund loans and other
investments. Traditionally, community banks relied on retail deposit as a
primary, if not sole source of funding for loans. Many community banks are
struggling to obtain enough retail deposit balances at a reasonable cost to fund
loan growth. Commercial Bank is no exception. In general, deposit money
continues to flow to mutual funds and other stock and bond investments that
offer the potential for higher returns than traditional bank products offer.
Also, the Bank continues to compete for deposit funding against competitors
offering deposit rates in excess of rates paid on other viable funding sources.
These issues do not appear to be temporary phenomenon. It is for these reasons
that the Bank continues to seek reasonably priced alternatives to retail
deposits. We view these non-traditional sources of funding as permanent.
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 $14,355,000 at March 31, 2001. This
compares to $10,525,000 at December 31, 2000.
The Bank also continues to use various products offered by the Federal Home Loan
Bank of Indianapolis. At March 31, 2001 the Bank had $25,009,000 in outstanding
balances, compared to $26,500,000 at December 31, 2000. Management has the
option of prepaying without penalty, approximately $4,000,000 in short-term
variable rate advances. If loan demand continues to remain weak, management may
elect to repay short-term variable rate advances rather than continue to invest
excess liquidity in federal funds or other short-term investments.
During the first quarter of 2001, the Bank formed CNFC Mortgage Corporation.
CNFC Mortgage Corporation will allow the Corporation to pursue mortgage related
lending opportunities in markets not as easily served using the community bank
business model.
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 at March 31, 2001 was
108.0% compared to 112.1% at December 31, 2000. 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
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
provides adequate short and medium term sources of liquidity. At a minimum the
Bank has the following available to meet short-term liquidity needs: $14,000,000
in available FHLB advances and $9,000,000 in short term fed funds 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. At December 31, 2000, CNFC had an outstanding balance
of $700,000. This balance has subsequently been paid off.
Asset Quality
At March 31, 2001 CNFC has identified $2,348,000 of loans as non-performing.
This compares to $354,000 at December 31, 2000. The increase in non-performing
loans is primarily related to one business relationship. Management believes
that there is minimal risk of loss of principal.
March 31, 2001 December 31, 2000
Non-accrual loans $ 2,348,317 $ 354,214
Accruing loans past due 90 days or more - -
Restructured loans - -
- -------------------------------------------------------------------------------------------------
Total non-performing loans $ 2,348,317 $ 354,214
=================================================================================================
Total non-performing loans as a
percentage of total loans 1.32% .20%
==================================================================================================
Allowance for Loan Loss
The allowance for loan losses was 1.49% of total loans at March 31, 2001 and
1.44% at December 31, 2000. Year to date net recoveries totaled $7,000. Year
2000 net charge-offs totaled $607,000. Approximately $649,000 relates to one
business loan relationship. Excluding this charge-off, CNFC recorded net
recoveries of $42,000 during 2000.
Year to date, CNFC expensed a provision of $90,000, which was the same as the
amount expensed for the three months ended March 31, 2000. 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.
Three Months Ended Year Ended Three Months Ended
March 31, 2001 December 31, 2000 March 31, 2000
Beginning balance $ 2,545,363 $ 2,792,293 $ 2,792,293
Loan charge-offs (5,701) (689,892) (12,386)
Loan recoveries 12,410 82,962 11,115
- ----------------------------------------------------------------------------------------------
Net loan recoveries/(charge-offs) 6,709 (606,930) (1,271)
Provision for loan losses 90,000 360,000 90,000
- ----------------------------------------------------------------------------------------------
Ending balance $ 2,642,072 $ 2,545,363 $ 2,881,022
==============================================================================================
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
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
Capitalized Under Prompt
March 31, December 31, Corrective Action
2001 2000 Regulations
---- ---- -----------
Total capital to risk weighted assets 13.3% 13.1% 10.0%
===== ===== =====
Tier 1 capital to risk weighted assets 12.0% 11.9% 6.0%
===== ===== ====
Tier 1 capital to average assets 9.4% 9.4% 5.0%
==== ==== ====
Results of Operations
Net income for the quarter ended March 31, 2001 was $763,000, an increase of
$73,000, or 10.6% compared to the same period in 2000. A 68.4% increase in
noninterest income, generated by gains on sales of residential mortgage loans,
receivable financing and security gains, is the primary contributing factor to
the increase in net income.
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 tax-equivalent
net interest income for the three months ending March 31, 2001 and 2000.
Three Months Ending March 31,
2001 2000
---- ----
Interest Income (tax equivalent) $ 4,408,525 $ 3,936,347
Interest Expense 2,009,445 1,552,128
------------ ------------
Net Interest Income $ 2,399,080 $ 2,384,219
============ ============
Average Volume
- --------------
Interest-earning Assets $209,374,136 $186,904,127
Interest-bearing Liabilities 177,649,442 154,857,490
------------ ------------
Net Differential $ 31,724,694 $ 32,046,637
============ ============
Average Yields/Rates (annualized)
- ---------------------------------
Yield on Earning Assets 8.54% 8.45%
Rate Paid on Liabilities 4.59% 4.02%
---- ----
Interest Spread 3.95% 4.43%
==== ====
Net Interest Margin 4.65% 5.12%
==== ====
The change in tax equivalent net interest income is attributable to the
following:
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Three Months Ending
March 31, 2001
Volume Rate Inc/(Dec)
------ ---- ---------
Interest Earning
Assets $ 457,498 $ 14,680 $ 472,178
Interest Bearing
Liabilities 338,185 119,132 457,317
--------- --------- ---------
Net Interest
Income $ 119,313 $(104,452) $ 14,861
========= ========= =========
The $15,000 increase in net interest income for the three months ending March
31,2001 is due to an increase in earning assets which was offset by a decreasing
margin. Net interest margin for the three months ending March 31, 2001 decreased
to 4.65% compared to 5.12% for the three months ending March 31, 2000. Average
earning assets for the three months ending March 31, 2001 increased $22,470,000
compared to the same period in 2000.
The Federal Reserve 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. In the first quarter of 2001, the Federal Reserve lowered the
Fed Funds rate by 150 basis points. As the Bank adjusts it's prime lending rate
accordingly, the Bank experiences an almost immediate decrease in net interest
income and the related margin.
Noninterest Income
Noninterest income for the three months ending March 31, 2001 was $411,000. This
represents a $167,000 or 68.4% increase over the same period in 2000. Lower
interest rates have significantly increased mortgage refinance activity.
Management has elected to sell most 15 and 30 year fixed rate residential real
estate mortgage loans. As a result, gains on loan sales have increased by
$60,000 or 428.6% compared to the three months ending March 31, 2000. Receivable
financing fees increased $12,000 or 16.0% over the three months ending March 31,
2000.
Also, CNFC elected to liquidate several municipal bonds and an additional
investment held as available for sale by the holding company. This resulted in
$94,000 in securities gains.
Noninterest Expense
Noninterest expense for the three months ending March 31, 2001 totaled
$1,456,000. This represents a $56,000 or 4.0% increase over the same period in
2000.
Salary and benefit expense for the three months ending March 31, 2001 totaled
$806,000 compared to $738,000 for the same period in 2000, an increase of
$68,000 or 9.2%. The increase reflects normal salary increases, market
adjustments and a 13.0% increase in the cost of medical insurance effective
August 2000. Bank staffing levels have not significantly changed compared to the
same period in 2000.
Professional fees for the three months ended March 31, 2001 increased $14,000 or
16.7% compared to the same period in 2000. Increased accounting and legal fees
related to the creation of a mortgage subsidiary was the primary reason for
increased professional fees. Other expenses decreased $28,000 or 11.3% as a
result of a general effort on the part of management to control expenses.
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 3: 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 CNFC'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 its
consolidated financial condition, including capital adequacy, earnings,
liquidity, and, where appropriate, asset quality.
CNFC has not experienced a material change in its financial instruments that are
sensitive to changes in interest rates since December 31, 2000, which
information can be located in the Form 10K for the year end December 31, 2000.
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 (b) Reports on Form 8-K
A Form 8-K was filed on March 21, 2001 indicating that Commercial Bank had
formed a wholly owned subsidiary called CNFC Mortgage Corporation.
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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: May 14, 2001
/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
17