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 September 30, 2002, 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: (989) 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 October 31, 2002
----- -------------------------------
Common Stock 3,627,692
No Par Value
COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001 (Page 3)
Consolidated Statements of Income and Other Comprehensive
Income (unaudited) for the three and nine months
ended September 30, 2002 and September 30, 2001 (Page 4)
Consolidated Statements of Changes in Shareholders' Equity
(unaudited) for the nine months ended September 30,
2002 and September 30, 2001 (Page 5)
Consolidated Statements of Cash Flows (unaudited) for the nine months ended (Page 6)
September 30, 2002 and September 30, 2001
Notes to Consolidated Financial Statements (unaudited) (Page 7-10)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Page 11-15)
Item 3. Quantitative and Qualitative Disclosures about Market Risk (Page 16-17)
PART II OTHER INFORMATION
Item 1. Legal Proceedings (Page 18)
Item 2. Changes in Securities and Use of Proceeds (Page 18)
Item 3. Defaults Upon Senior Securities (Page 18)
Item 4. Submission of Matter to A Vote of Security Holders (Page 18)
Item 5. Other Information (Page 18)
Item 6. Exhibits and Reports on Form 8-K (Page 18)
SIGNATURES (Page 19)
Item 4. Certifications (Page 20-21)
Exhibit 99.1 (Page 22-24)
2
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 6,399,969 $ 7,282,523
Federal funds sold 4,100,000 5,000,000
Other interest bearing deposits 3,529,810 2,064,802
------------- -------------
Total cash and cash equivalents 14,029,779 14,347,325
Securities available for sale 19,131,536 20,471,202
Securities held to maturity (fair value $5,047,546 -- --
September 30, 2002; $7,730,608 - December 31, 2001) 4,791,544 7,496,656
Federal Home Loan Bank stock, at cost 1,616,200 1,391,300
Gross loans receivable 183,388,219 168,012,689
Allowance for loan losses (3,165,730) (2,586,025)
------------- -------------
Net loans receivable 180,222,489 165,426,664
Bank owned life insurance 3,186,214 3,050,296
Premises and equipment, net 3,258,786 2,599,704
Accrued interest receivable and other assets 2,612,369 3,614,733
------------- -------------
Total assets $ 228,848,917 $ 218,397,880
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 20,215,687 $ 22,199,334
Interest-bearing demand 27,116,932 29,033,317
Savings 57,691,737 50,116,477
Time 56,110,455 61,229,483
------------- -------------
Total deposits 161,134,811 162,578,611
Securities sold under agreements to repurchase 10,072,797 6,237,585
Other short-term borrowings 481,294 136,549
Federal Home Loan Bank advances 31,939,282 26,092,551
Accrued expenses and other liabilities 1,864,072 1,288,306
------------- -------------
Total liabilities 205,492,256 196,333,602
Shareholders' equity
Common stock and paid-in-capital, no par value: 5,000,000 shares
authorized; shares issued and outstanding
September 30, 2002 - 3,609,496 and December 31,
2001 - 3,547,700 22,688,117 22,104,910
Retained earnings (deficit) 158,979 (416,257)
Accumulated other comprehensive income, net of tax 509,565 375,625
------------- -------------
Total shareholders' equity 23,356,661 22,064,278
------------- -------------
Total liabilities and shareholders' equity $ 228,848,917 $ 218,397,880
============= =============
See accompanying notes
3
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (Unaudited)
For Three Months For Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income
Loans, including fees $ 3,203,445 $ 3,514,301 $ 9,506,875 $ 10,967,337
Taxable securities 182,267 227,060 594,735 662,688
Nontaxable securities 112,770 135,531 361,862 411,761
Federal funds sold 27,670 62,202 68,242 173,679
Federal Home Loan Bank stock dividends 24,573 25,424 66,836 79,752
Interest on other deposits 6,369 8,892 14,945 21,079
------------ ------------ ------------ ------------
Total interest and dividend income 3,557,094 3,973,410 10,613,495 12,316,296
Interest expense
Deposits 838,541 1,296,603 2,614,279 4,224,618
Securities sold under agreements to repurchase 42,197 82,600 111,111 268,813
Federal Home Loan Bank advances 431,300 349,656 1,193,315 1,078,991
Other 1,454 4,532 4,761 19,468
------------ ------------ ------------ ------------
Total interest expense 1,313,492 1,733,391 3,923,466 5,591,890
Net interest income 2,243,602 2,240,019 6,690,029 6,724,406
Provision for loan losses 274,000 90,000 561,000 270,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,969,602 2,150,019 6,129,029 6,454,406
Noninterest income
Service charges and fees 132,329 116,476 357,261 339,128
Net gains on loan sales 196,893 93,471 290,765 282,774
Receivable financing fees 39,196 34,256 122,934 191,885
Security gains -- 53,032 27,565 209,915
Other 132,857 84,390 336,620 193,090
------------ ------------ ------------ ------------
Total noninterest income 501,275 381,625 1,135,145 1,216,792
Noninterest expense
Salaries and employee benefits 859,784 797,316 2,485,499 2,391,130
Occupancy and equipment 202,266 258,482 647,981 750,675
FDIC insurance 6,942 7,602 23,355 22,470
Printing, postage and supplies 65,686 57,048 204,523 199,847
Professional and outside services 91,548 73,390 285,909 263,665
Other 252,626 257,559 744,280 715,807
------------ ------------ ------------ ------------
Total noninterest expense 1,478,852 1,451,397 4,391,547 4,343,594
------------ ------------ ------------ ------------
Income before income tax expense 992,025 1,080,247 2,872,627 3,327,604
Income tax expense 249,400 313,500 788,700 988,500
------------ ------------ ------------ ------------
Net income $ 742,625 $ 766,747 $ 2,083,927 $ 2,339,104
============ ============ ============ ============
Net change in unrealized gains on securities available for sale $ 141,005 $ 223,596 $ 230,504 $ 602,645
Reclassification adjustment for (gains) recognized in income -- (53,032) (27,565) (209,915)
Tax effects (47,942) (57,992) (68,999) (133,528)
------------ ------------ ------------ ------------
Total comprehensive income $ 835,688 $ 879,319 $ 2,217,867 $ 2,598,306
============ ============ ============ ============
Per share information
Basic earnings $ 0.21 $ 0.22 $ 0.58 $ 0.66
Diluted earnings $ 0.20 $ 0.22 $ 0.57 $ 0.66
Dividends declared $ 0.14 $ 0.13 $ 0.42 $ 0.40
See accompanying notes
4
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Nine Months ended September 30,
2002 and September 30, 2001 (Unaudited)
Accumulated
Shares Common Other
Issued Stock and Retained Comprehensive Total
and Paid in Earnings Income/(Loss), Shareholders'
Outstanding Capital (Deficit) Net of Tax Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 3,493,586 $ 21,617,080 $ (1,714,089) $ 207,091 $ 20,110,082
Comprehensive income:
Net income 2,339,104 2,339,104
Net change in unrealized gains/(losses) on
securities available for sale 602,645 602,645
Reclassification adjustment for gains
recognized in income (209,915) (209,915)
Tax effects (133,528) (133,528)
------------
Total comprehensive income 2,598,306
Cash dividends declared, $.40 per share (1,408,431) (1,408,431)
Issued under dividend reinvestment program 51,777 483,135 483,135
Issued under stock option plan 450 3,227 3,227
Issued under employee benefit plan 2,519 22,887 22,887
Repurchase and retirement of shares (12,603) (116,194) (116,194)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2001 3,535,729 $ 22,010,135 $ (783,416) $ 466,293 $ 21,693,012
============ ============ ============ ============ ============
=================================================================================================================================
Balance at January 1, 2002 3,547,700 $ 22,104,910 $ (416,257) $ 375,625 $ 22,064,278
Comprehensive income:
Net income 2,083,927 2,083,927
Net change in unrealized gains/(losses) on
securities available for sale 230,504 230,504
Reclassification adjustment for gains
recognized in income (27,565) (27,565)
Tax effects (68,999) (68,999)
------------
Total comprehensive income 2,217,867
Cash dividends declared, $.42 per share (1,508,691) (1,508,691)
Issued under dividend reinvestment program 60,512 611,727 611,727
Issued under stock option plan 6,609 47,691 47,691
Issued under employee benefit plan 4,194 46,576 46,576
Repurchase and retirement of shares (9,519) (122,787) (122,787)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2002 3,609,496 $ 22,688,117 $ 158,979 $ 509,565 $ 23,356,661
============ ============ ============ ============ ============
See accompanying notes
5
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Nine Months Ended
September 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,083,927 $ 2,339,104
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan losses 561,000 270,000
Net gains on loan sales (290,765) (282,774)
Originations of loans held for sale (15,080,652) (18,383,350)
Proceeds from sales of loans held for sale 15,371,417 18,666,124
Gain on sales of securities available for sale (27,565) (209,915)
Depreciation, amortization and accretion 363,433 380,617
Net change in accrued interest receivable and other assets 797,448 (38,684)
Net change in accrued expenses and other liabilities 566,704 (139,266)
------------ ------------
Net cash from operating activities 4,344,947 2,601,856
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (4,189,284) (9,216,118)
Proceeds from maturities of securities available for sale 5,675,000 6,670,000
Proceeds from sales of securities available for sale -- 2,523,549
Proceeds from maturities of securities held to maturity 2,723,900 1,010,000
Purchases of Federal Home Loan Bank Stock (224,900) --
Net change in loans (15,359,224) 4,829,900
Purchases of bank owned life insurance -- (3,000,000)
Purchases of premises and equipment, net (954,451) (163,041)
------------ ------------
Net cash used in investing activities (12,328,959) 2,654,290
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits (1,443,800) 5,867,933
Net change in securities sold under agreements to repurchase 3,835,212 1,463,300
Net change in U.S. Treasury demand notes 344,745 (261,438)
Proceeds from Federal Home Loan Bank advances 13,000,000 15,000,000
Repayment of Federal Home Loan Bank advances (7,153,269) (17,407,449)
Repurchase and retirement of shares of common stock (122,787) (116,194)
Dividends paid and fractional shares (1,499,629) (1,408,431)
Proceeds from sale of common stock 705,994 509,249
------------ ------------
Net cash from financing activities 7,666,466 3,646,970
------------ ------------
Net change in cash and cash equivalents (317,546) 8,903,116
Cash and cash equivalents, at beginning of period 14,347,325 7,462,021
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 14,029,779 $ 16,365,137
============ ============
Cash paid during the period for
Interest $ 4,001,622 $ 5,746,710
Federal income taxes 1,010,000 1,203,081
See accompanying notes
6
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
accounting principles generally accepted in the United States of America 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 September 30, 2002
and December 31, 2001 and the results of its operations for the three and nine
months ending September 30, 2002 and September 30, 2001. The results for the
three and nine months ended September 30, 2002 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 accounting principles
generally accepted in the United States of America, 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. 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 any securities for trading
at any time during 2002 or 2001.
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.
7
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
prepayment characteristics. Any impairment of a grouping is reported as a
valuation allowance.
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.
8
COMMERCIAL NATIONAL FINANCIAL CORPORATION
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, 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.
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, to the extent of available
retained earnings. Any excess of fair value over available retained earnings is
considered a return of capital and thus is transferred from 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
Effective January 1, 2002, CNFC adopted a new standard issued by the FASB on
impairment and disposal of long-lived assets. The effect of this on the
financial position and results of operations of the CNFC was not material.
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The CNFC does not believe this standard will have a material affect on
its financial position or results of operations.
9
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. Stock options representing 154,703 and 45,763 shares of common
stock were not considered in computing diluted earnings per share for the three
and nine month periods in 2001 and 2002 because they were antidilutive.
For three months ended For nine months ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 742,625 $ 766,747 $2,083,927 $2,339,104
Weighted-average common shares outstanding for
basic earnings per share 3,595,822 3,524,707 3,595,822 3,524,707
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ .21 $ .22 $ .58 $ .66
=================================================================================================================================
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders $ 742,625 $ 766,747 $2,083,927 $2,339,104
Weighted-average common shares outstanding for basic
earnings per share 3,595,822 3,524,707 3,595,822 3,524,707
Add:
Dilutive effect of assumed exercise of stock options 36,806 9,384 36,806 9,384
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted-average common and dilutive additional potential
common shares outstanding 3,632,628 3,534,091 3,632,628 3,534,091
=================================================================================================================================
DILUTED EARNINGS PER SHARE $ .20 $ .22 $ .57 $ .66
=================================================================================================================================
10
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Summary
Total assets at September 30, 2002 increased to $228,849,000 from $218,398,000
at December 31, 2001. Loan totals increased $15,376,000 or 9.2% compared to
December 31, 2001. The increase in loans is a result of increases in residential
real estate and commercial loan balances. Funding for the loan growth came
primarily from three sources: a $7,575,000 increase in savings balances, a
$3,835,000 increase in repurchase agreements and a $5,847,000 increase in
Federal Home Loan Bank (FHLB) borrowings. Offsetting the increase in funding was
a $5,119,000 decrease in time deposits. One million of repossessed assets
included in other assets were sold at book value during the first quarter of
2002.
The Bank continues to experience a shift of certificate of deposit money into
short-term savings products. The Bank offers an above market rate money market
account that has been popular with customers seeking safety and liquidity. It
continues to be difficult to attract long-term certificate of deposits without
offering interest rates higher than comparable FHLB advance rates. Also because
of funding obtained from FHLB and through repurchase agreements, the Bank has
offered below market rates on jumbo certificates of deposit. This has
contributed to the decrease in certificates of deposits.
The increase in repurchase agreements relates to balances obtained from two
existing customers. Both have indicated that acceptable investment alternatives
are not readily available. Management believes that the increase in repurchase
agreement balances is temporary.
The increase in FHLB borrowings is part of management's process of managing
interest rate risk. Interest rates, in general, are at or near 40 year lows.
Loan customers, recognizing this, are requesting long term fixed rate loans.
Through the Federal Home Loan Bank, the Bank is able to fund these long term
fixed rate loans with long term amortizing advances. Management believes that
this strategy will help the Bank to maintain margin in a rising interest rate
environment.
The Bank is constructing a new office located in Greenville Michigan. As a
result, premises and equipment will continue to increase. Management anticipates
that this office will be fully operational early in the fourth quarter of 2002.
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, with minimal losses.
The loan to deposit ratio at September 30, 2002 was 113.8% compared to 103.3% at
December 31, 2001. 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 provides adequate short and
medium term sources of liquidity. At a minimum the Bank has the following
available to meet short-term liquidity needs: $5,400,000 in available FHLB
advances and $9,000,000 in short term federal 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's $1,500,000 line of credit with a correspondent
institution expires October of 2002. CNFC is in process of negotiating a
replacement line of credit.
11
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Asset Quality
At September 30, 2002 CNFC has identified $7,046,000 of loans as non-performing.
This compares to $462,000 at December 31, 2001. The $6,463,000 in non-accrual
loans represents three business relationships and their related entities. All
non-accrual loans are considered impaired and the allowance for loan loss
allocated to these loans is $2,099,000.
September 30, 2002 December 31, 2001
Total loans $ 183,388,219 $ 168,012,689
Non-accrual loans $ 6,462,515 $ 387,822
Accruing loans past due 90 days or more 583,633 74,664
- -------------------------------------------------------------------------------------------------
Total non-performing loans 7,046,148 462,486
Repossessed assets and other real estate - 1,000,000
- -------------------------------------------------------------------------------------------------
Total non-performing assets $ 7,046,148 $ 1,462,486
=================================================================================================
Total non-performing loans as a
percentage of total loans 3.84% .28%
================================================================================================
Allowance for loan loss as a percentage of
non-performing loans 44.93% 559.16%
================================================================================================
Total non-performing assets as a percentage of
total assets 3.08% .67%
================================================================================================
Allowance for Loan Loss
Nine Months Ended Year Ended Nine Months Ended
September 30, 2002 December 31, 2001 September 30, 2001
- -------------------------------------------------------------------------------------------------
Beginning balance $ 2,586,025 $ 2,545,363 $ 2,545,363
Loan charge-offs (27,219) (415,904) (19,084)
Loan recoveries 45,924 81,566 69,643
- ----------------------------------------------------------------------------------------------
Net loan recoveries/(charge-offs) 18,705 (334,338) 50,559
Provision for loan losses 561,000 375,000 270,000
- ----------------------------------------------------------------------------------------------
Ending balance $ 3,165,730 $ 2,586,025 $ 2,865,922
==============================================================================================
Average loan balance $ 177,935,000 $ 172,714,000 $ 173,198,000
Percentage of net charge-offs
as a percentage of average loans .01% (.19)% .03%
The allowance for loan losses was 1.73% of total loans at September 30, 2002 and
1.54% at December 31, 2001. Year to date net recoveries totaled $19,000 compared
to 2001 net charge-offs of $334,000. Approximately $390,000 related to one
business loan relationship. Excluding this charge-off, CNFC recorded net
recoveries of $56,000 during 2001.
Management systematically evaluates the adequacy of the allowance such that the
balance is commensurate with the performance of the loan portfolio, loan growth,
and general market conditions. Each of these factors is discussed in the
following paragraphs.
For purposes of evaluating the adequacy of the allowance, the performance of the
loan portfolio is divided into three categories of loans: residential mortgages,
consumer and business loans. A general provision is determined for each of these
categories using the historical loss experience of each category over the last
five years. The residential real estate loan portfolio has experienced net
recoveries during the last five calendar years of $79,000. Management exited the
indirect automobile market approximately 5 years ago and focused consumer
lending efforts at our existing customer base. As a result, the consumer loan
portfolio has experienced net recoveries in two of the last three calendar
years. The Bank's consumer loan portfolio has recorded net recoveries for the
last three calendar years of $4,000. Despite a slowing economy, the consumer and
residential real estate portfolios continue to perform at levels consistent with
prior years.
12
COMMERCIAL NATIONAL FINANCIAL CORPORATION
The business loan portfolio is not performing as well compared to historical
trends. In accordance with FASB's 114 and 118, management identifies specific
loans that are experiencing financial difficulty, evaluates each loan for
impairment and attempts to identify a specific allowance for each loan. The
dollar amount of loans identified as impaired has increased from $462,000 at
December 31, 2001 to $7,046,000 at September 30, 2002. Of the $7,046,000
management has placed $6,463,000 on non-accrual. Though this trend is negative
and does warrant an increase in the allowance for loan loss, there are
mitigating circumstances which management believes limits the need to increase
the allowance above current levels: Commercial Bank is receiving regular
payments on all loans placed on non-accrual, management believes the loss
exposure related to $3,008,000 of non-accrual loans is zero based on an
assessment of collateral and the current operating condition of the businesses,
a third party is providing a cash infusion into one business relationship
representing $3,093,000 of non-accrual loans. Though no assurance can be
provided that the financial condition of these customers will continue to
improve, there are indications that the financial condition of the non-accrual
loan customers is stable with positive short term outlooks.
The loan portfolio has increased $15,376,000 or 9.2% year to date primarily
caused by an increase in business and residential real estate lending.
The deterioration in the quality of the business portfolio and the increase in
total loans lead management to increase the quarterly provision to $274,000,
which was $184,000 more than the amount expensed for the three months ended
September 30, 2001. Year to date management has increased the provision from
$270,000 in 2001 to $561,000.
Capital Resources
CNFC's capital ratios continue to exceed regulatory guidelines for a "well
capitalized" institution. It is management's intent to maintain capital ratios
in excess of the minimum required to be well capitalized. A summary of CNFC's
capital ratios follows:
Minimum Required to be
Well Capitalized Under Minimum Required
September 30, December 31, Prompt Corrective Action for Capital
2002 2001 Regulations Adequacy Purposes
- --------------------------------------------------------------------------------------------------------------
Total capital to
risk weighted assets 14.2% 14.4% 10.0% 8.0%
Tier 1 capital to
risk weighted assets 13.0% 13.1% 6.0% 4.0%
Tier 1 capital to
average assets 10.0% 9.7% 5.0% 4.0%
RESULTS OF OPERATIONS
Summary
Net income for the quarter ended September 30, 2002 was $743,000, a decrease of
$24,000, or 3.2% compared to the same period in 2001. Management increased the
provision for loan losses by $184,000 compared to the same period in 2001. A
$119,000 or 31.2% increase in non-interest income offset the decrease in net
interest income. CNFC's net interest income remained virtually unchanged despite
a $10,923,000 increase in average earning balances. Non-interest expense for the
quarter increased $28,000 or 1.9% compared to the same period in 2001. Return on
average equity decreased from 14.0% to 12.9%.
Net income for the nine months ending September 30, 2002 was $2,084,000 compared
to $2,339,000 for the same period in 2001. The causes of the decreased net
income are similar to those described for the three months ending September 30,
2002. As a result of lower net income and an increased equity base, return on
average equity decreased from 14.8% to 12.2%.
Net Interest Income
The following table illustrates the effect that changes in rates and balances of
interest-earning assets and interest-bearing liabilities had on tax-equivalent
net interest income for the three and nine months ending September 30, 2002 and
2001.
Three Months Ending September 30, Nine Months Ending September 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest Income (tax equivalent) $ 3,677,941 $ 4,094,321 $ 10,994,572 $ 12,776,059
Interest Expense 1,313,492 1,733,391 3,923,466 5,591,890
------------ ------------ ------------ ------------
Net Interest Income $ 2,364,449 $ 2,360,930 $ 7,071,106 $ 7,184,169
============ ============ ============ ============
Average Balances
Interest-earning Assets $217,821,819 $206,898,615 $211,932,197 $207,529,703
Interest-bearing Liabilities 184,969,598 171,685,068 179,952,391 172,622,694
------------ ------------ ------------ ------------
Net Differential $ 32,852,221 $ 35,213,547 $ 31,979,806 $ 34,907,009
============ ============ ============ ============
Average Yields/Rates (annualized)
Yield on Earning Assets 6.70% 7.85% 6.94% 8.23%
Rate Paid on Liabilities 2.82% 4.01% 2.92% 4.33%
------- ------- ------- --------
Interest Spread 3.88% 3.84% 4.02% 3.90%
======= ======= ======= =======
Net Interest Margin 4.31% 4.53% 4.46% 4.63%
======= ======= ======= =======
13
COMMERCIAL NATIONAL FINANCIAL CORPORATION
The change in tax equivalent net interest income is attributable to the
following:
Three Months Ending Nine Months Ending
September 30, 2002 September 30, 2002
Balance Rate Inc/(Dec) Balance Rate Inc/(Dec)
------- ---- --------- ------- ---- ---------
Interest Earning Assets $ 192,035 $ (608,415) $ (416,380) $ 215,790 $(1,997,277) $(1,781,487)
Interest Bearing Liabilities 90,693 (510,592) (419,899) 32,225 (1,700,649) (1,668,424)
----------- ----------- ----------- ----------- ----------- -----------
Net Interest Income $ 101,342 $ (97,823) $ 3,519 $ 183,565 $ (296,628) $ (113,063)
=========== =========== =========== =========== =========== ===========
The $4,000 increase in tax-equivalent net interest income for the three months
ending September 30, 2002 resulted from a 22 basis point decrease in margin
offset by an increase in average earning assets.
In response to the September 11th attacks and a slowing national economy, the
Federal Reserve Open Market Committee lowered the discount rate 475 basis points
during 2001. These decreases in the discount rate resulted in an almost
immediate decrease 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. As the Bank adjusts its prime
lending rate, the Bank experiences an almost immediate decrease in net interest
income. In response, management lowered retail deposit rates, however, it is
been unable to lower the cost of retail deposits as quickly and to the same
extent as the Federal Reserve has lowered the federal funds target rate.
Interest rates in general continued to decrease during 2002. As a result, the
Bank experienced significant refinancing of residential real estate loans, the
majority of which were sold on the secondary market. However, those loans held
in portfolio have repriced at lower interest rates. Also impacting the margin is
the effect of the loans placed on non-accrual.
Management has retained in the Bank's residential real estate loans some fixed
rate residential loans. Management funded a portion of these loans with FHLB
amortizing advances, ranging in term of 5 to 7 years. Using longer term advances
is more expensive in the short run than funding long term assets with short term
advances, however, the amortizing advances allow the Bank to offset future
interest rate risk in a rising rate environment. The process of placing loans on
non-accrual also has a negative impact on margin. The year to date interest
income that would have been recorded on loans placed on non-accrual totaled
$276,000. The effect of these various items has resulted in a decrease in margin
from 4.53% for the three months ended September 30, 2001 to 4.31% for the same
period in 2002.
Margin for the nine months ending September 30, 2002 decreased 17 basis points
for similar reasons as discussed above.
Noninterest Income
Noninterest income for the three months ending September 30, 2002 was $501,000.
This represents a $119,000 or 31.2% increase over the same period in 2001.
Net gain on loan sales increased from $93,000 to $197,000. Residential real
estate interest rates were at a 40 year low during the third quarter of 2002. As
a result, the Bank experienced significant refinancing activity. For the nine
months ending September 30, 2002, the Bank originated and sold $15,080,000 in
residential real estate loans. This compares to $18,383,000 for the nine months
ended September 30, 2001.
In 2001, CNFC liquidated several investments held as available for sale by the
holding company. This resulted in $53,000 in securities gains during the third
quarter of 2001.
14
COMMERCIAL NATIONAL FINANCIAL CORPORATION
The majority of the $49,000 increase in other income reflects the income
recorded on the Bank's investment in bank owned life insurance (BOLI).
Non-interest income for the nine months ending September 30, 2002 decreased
$82,000 or 6.7%. In 2001, CNFC liquidated several investments held as available
for sale by the holding company. This resulted in $210,000 in securities gains
for the nine months ending September 30, 2001. This gain is non-recurring. The
reasons for the increase in net gain on loan sales and the increase in other
income are the same as those described above.
Noninterest Expense
Noninterest expense for the three months ending September 30, 2002 totaled
$1,479,000. This represents a $27,000 or 1.9% increase over the same period in
2001. Management has focused on controlling expense during the first nine months
of 2002. However, during the next three months, management anticipates that
various expense categories will increase as the new Greenville office is
completed and becomes operational.
Salary and benefit expense for the three months ending September 30, 2002
totaled $860,000 compared to $797,000 for the same period in 2001, an increase
of $62,000 or 7.8%. Bank staffing levels have begun to increase in preparation
for our Greenville expansion. During the third quarter of 2002, medical
insurance policies renewed which resulted in an increase in medical insurance
costs.
Printing and postage cost increased $8,638 or 15.1% for the three months ending
September 30, 2002. The increase reflects the ordering of supplies for the
Greenville expansion.
Non-interest expense for the nine months ending September 30, 2002 totaled
$4,392,000, a $48,000 or 1.1% increase compared to the nine months ending
September 30, 2001. Factors affecting the increase are similar to those
discussed above.
15
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset liability management involves developing, implementing and monitoring
strategies to maintain sufficient liquidity, maximize net interest income and
minimize the impact that significant fluctuations in market interest rates would
have on earnings. Commercial's Asset/Liability Committee (ALCO) is responsible
for managing this process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commercial's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. Commercial's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Also, Commercial 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 earnings and capital.
Accordingly, effective risk management that maintains IRR at prudent levels is
essential to Commercial's safety and soundness.
Evaluating exposure to changes in interest rates includes assessing both the
adequacy of management's process used to control IRR and the organization's
quantitative level of exposure. When assessing the IRR management process,
Commercial 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 assessment of 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.
Commercial derives the majority of income from the excess of interest collected
over interest paid. The rates of interest earned on its assets and owed on its
liabilities generally are established contractually for a period of time. Since
market interest rates change over time, Commercial is exposed to lower profit
margins (or losses) if it cannot adapt to interest rate changes.
For example, assume that an institution's assets carry long-term fixed rates and
that those assets are funded with short-term liabilities. If market interest
rates rise by the time the short-term liabilities must be refinanced, the
increase in the institution's interest expense may exceed the interest earned on
its long-term assets. Accordingly, an institution's profits could decrease.
Commercial is also subject to repayment risk when interest rates fall. For
example, mortgage loans and other financial assets may be prepaid by a debtor so
that the debtor may refinance their obligations at new, lower rates. Prepayments
of assets carrying higher rates reduces interest income and overall asset
yields.
Several ways an institution can manage IRR include: selling existing assets or
repaying certain liabilities; matching repricing periods for new assets and
liabilities, for example, by shortening terms of new loans or investments and
hedging existing assets, liabilities, or anticipated transactions. An
institution might also invest in more complex financial instruments intended to
hedge or otherwise change IRR. Interest rate swaps, futures contracts, options
on futures, and other such derivative financial instruments are often used for
this purpose. Because these instruments are sensitive to interest rate changes,
they require management's expertise to be effective. Commercial has not
purchased derivative financial instruments in the past and does not presently
intend to purchase such instruments.
ALCO uses various techniques to monitor IRR. Commercial's primary tool in
measuring interest rate risk is to perform a simulation analysis. This analysis
forecasts the effect of various interest rate changes on the balance sheet,
economic value of equity, net interest income and net income.
16
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ALCO monitors the effect on the balance sheet and income statement of various
interest rate scenarios. One common scenario performed by ALCO is to "shock" the
balance sheet by assuming that Commercial has just experienced an immediate and
parallel shift in the yield curve up or down 200 basis points. These results are
recorded and compared to previous results. Management performs this calculation
quarterly.
The results of this calculation combined with a review of market interest rates,
economic conditions, loan demand, local deposit interest rates and other
factors, allows ALCO to structure the balance sheet with the goal of maximizing
net interest income and minimizing interest rate risk. ALCO applies the
percentage change anticipated in net interest income to the net interest income
actually earned to determine if the change is within acceptable limits. ALCO has
concluded from these results that Commercial has an acceptable level of interest
rate risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures-Jeffrey S. Barker, the
Corporation's Principal Executive Officer, and Patrick G. Duffy, the
Corporation's Principal Financial Officer, have reviewed and evaluated the
effectiveness of the Corporation's disclosure controls and procedures (as
defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act)) as of a date within ninety days before the
filing date of this quarterly report. Based on their evaluation, they have
concluded that the Corporation's disclosure controls and procedures are
effective, providing them with material information relating to the
Corporation as required to be disclosed in the reports the Corporation
files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls-There were no significant changes in the
Corporation's internal controls or in other factors that could
significantly affect the Corporation's disclosure controls and procedures
subsequent to the date of the evaluation, nor were there any significant
deficiencies or material weaknesses in the Corporation's internal controls.
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.
17
COMMERCIAL NATIONAL FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS - Commercial National Financial Corporation
is involved in two lawsuits arising in the normal course of
business. Both are expected to be settled prior to December
31, 2002. Anticipated loss related to one of the lawsuits,
which initially occurred during 2001, was fully accrued for at
December 31, 2001. The second lawsuit occurred during the
third quarter of 2002 and is not expected to result in a
material impact to the financial statements.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS - None
ITEM 5 OTHER INFORMATION - None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer and
Chief Financial Officer
(b) Report on Form 8-K
None filed during the quarter ending
September 30, 2002
18
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: November 13, 2002 /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
COMMERCIAL NATIONAL FINANCIAL CORPORATION
I, Jeffrey S. Barker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial National
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: NOVEMBER 13, 2002
/s/ Jeffrey S. Barker
--------------------------
Jeffrey S. Barker
President and Chief Executive Officer
20
COMMERCIAL NATIONAL FINANCIAL CORPORATION
I, Patrick G. Duffy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial National
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: NOVEMBER 13, 2002
/s/ Patrick G. Duffy
--------------------------
Patrick G. Duffy
Executive Vice President and Chief
Financial Officer
21
COMMERCIAL NATIONAL FINANCIAL CORPORATION
EXHIBIT INDEX
Exhibit Number Description
EXHIBIT 99.1 Certification of Quarterly Report on Form 10-Q of
Commercial National Financial Corporation
22