-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GjlxgGYo4RWk4QFN05k4MbBGZ4WA4lfpD0zye4s/qjAM4qxolLPq1oOpMC0xppgo evdwRJKPDp6LgvWypYxoZw== 0000950124-01-503954.txt : 20020410 0000950124-01-503954.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950124-01-503954 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010903 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL NATIONAL FINANCIAL CORP /MI CENTRAL INDEX KEY: 0000828535 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382799780 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17000 FILM NUMBER: 1784497 BUSINESS ADDRESS: STREET 1: 101 N PINE RIVER ST CITY: ITHACA STATE: MI ZIP: 48847 BUSINESS PHONE: 5178754144 MAIL ADDRESS: STREET 1: P O BOX 280 CITY: ITHACA STATE: MI ZIP: 48847 10-Q 1 k65812e10-q.txt QUARTERLY REPORT FOR THE PERIOD END 9/30/01 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, 2001, 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 30, 2001 ----- ------------------------------- Common Stock 3,383,509 No Par Value
- -------------------------------------------------------------------------------- COMMERCIAL NATIONAL FINANCIAL CORPORATION INDEX
PART I FINANCIAL INFORMATION - ------ --------------------- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000 (Page 3) Consolidated Statements of Income and Other Comprehensive Income (unaudited) for the (Page 4) three and nine months ended September 30, 2001 and September 30, 2000 Consolidated Statements of Changes in Shareholders' Equity (unaudited) for the nine (Page 5) months ended September 30, 2001 and September 30, 2000 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September (Page 6) 30, 2001 and September 30, 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 11-15) Item 3. Quantitative and Qualitative Disclosures about Market Risk (Page 16) PART II OTHER INFORMATION - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K b) Reports on Form 8-K (Page 17) SIGNATURES (Page 18)
2 COMMERCIAL NATIONAL FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 ---- ---- (Unaudited) ASSETS Cash and due from banks $ 6,290,137 $ 7,112,021 Federal funds sold 10,075,000 350,000 ------------- ------------- Total cash and cash equivalents 16,365,137 7,462,021 Securities available for sale 19,962,705 19,406,526 Securities held to maturity (fair value $7,903,303 September 30, 2001; $8,724,848 - December 31, 2000) 7,599,229 8,525,623 Federal Home Loan Bank stock, at cost 1,391,300 1,391,300 Gross loans receivable 172,092,329 176,833,244 Allowance for loan losses (2,865,922) (2,545,363) ------------- ------------- Net loans receivable 169,226,407 174,287,881 Premises and equipment, net 2,236,180 2,465,176 Accrued interest receivable and other assets 5,210,741 2,347,162 ------------- ------------- Total assets $ 221,991,699 $ 215,885,689 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing demand $ 19,725,874 $ 19,786,361 Interest-bearing demand 28,206,452 26,264,930 Savings 47,707,320 39,439,255 Time 68,022,188 72,303,355 ------------- ------------- Total deposits 163,661,834 157,793,901 Securities sold under agreements to repurchase 9,487,067 8,023,767 Other short-term borrowings 1,508,757 1,770,195 Federal Home Loan Bank advances 24,092,551 26,500,000 Accrued expenses and other liabilities 1,548,478 1,687,744 ------------- ------------- Total liabilities 200,298,687 195,775,607 Shareholders' equity Common stock and paid-in-capital, no par value: 5,000,000 shares authorized; shares issued and outstanding September 30, 2001 - 3,367,361 and December 31, 2000 - 3,327,225 22,010,135 21,617,080 Accumulated deficit (783,416) (1,714,089) Accumulated other comprehensive income, net of tax 466,293 207,091 ------------- ------------- Total shareholders' equity 21,693,012 20,110,082 ------------- ------------- Total liabilities and shareholders' equity $ 221,991,699 $ 215,885,689 ============= =============
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, 2001 2000 2001 2000 ---- ---- ---- ---- Interest and dividend income Loans, including fees $ 3,514,301 $ 3,760,498 $ 10,967,337 $ 10,576,943 Taxable securities 227,060 237,506 662,688 701,437 Nontaxable securities 135,531 146,952 411,761 436,897 Federal funds sold 62,202 7,489 173,679 81,452 Federal Home Loan Bank stock dividends 25,424 29,727 79,752 85,075 Interest on other deposits 8,892 14,109 21,079 32,904 ------------ ------------ ------------ ------------ Total interest and dividend income 3,973,410 4,196,281 12,316,296 11,914,708 Interest expense Deposits 1,296,603 1,477,359 4,224,618 4,046,611 Securities sold under agreements to repurchase 82,600 114,989 268,813 276,334 Federal Home Loan Bank advances 349,656 335,417 1,078,991 863,432 Other 4,532 13,302 19,468 35,648 ------------ ------------ ------------ ------------ Total interest expense 1,733,391 1,941,067 5,591,890 5,222,025 Net interest income 2,240,019 2,255,214 6,724,406 6,692,683 Provision for loan losses 90,000 90,000 270,000 270,000 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 2,150,019 2,165,214 6,454,406 6,422,683 Noninterest income Service charges and fees 116,476 114,176 339,128 329,615 Net gains on loan sales 93,471 23,626 282,774 55,047 Receivable financing fees 34,256 37,395 191,885 193,273 Security gains 53,032 -- 209,915 -- Other 84,390 72,584 193,090 199,436 ------------ ------------ ------------ ------------ Total noninterest income 381,625 247,781 1,216,792 777,371 Noninterest expense Salaries and employee benefits 797,316 736,936 2,391,130 2,191,102 Occupancy and equipment 258,482 250,887 750,675 748,454 FDIC insurance 7,602 7,716 22,470 22,764 Printing, postage and supplies 57,048 68,302 199,847 196,643 Professional and outside services 73,390 63,028 263,665 232,287 Other 257,559 256,144 715,807 735,606 ------------ ------------ ------------ ------------ Total noninterest expense 1,451,397 1,383,013 4,343,594 4,126,856 ------------ ------------ ------------ ------------ Income before income tax expense 1,080,247 1,029,982 3,327,604 3,073,198 Income tax expense 313,500 298,000 988,500 899,000 ------------ ------------ ------------ ------------ Net income $ 766,747 $ 731,982 $ 2,339,104 $ 2,174,198 ============ ============ ============ ============ Net change in unrealized gains/(losses) on securities available for sale $ 223,596 $ 252,216 $ 602,645 $ 248,741 Reclassification adjustment for (gains) recognized in income (53,032) -- (209,915) -- Tax effects (57,992) (85,754) (133,528) (84,572) ------------ ------------ ------------ ------------ Total Other Comprehensive Income $ 879,319 $ 898,444 $ 2,598,306 $ 2,338,367 ============ ============ ============ ============ Per share information Basic earnings $ 0.23 $ 0.21 $ 0.70 $ 0.62 Diluted earnings $ 0.23 $ 0.21 $ 0.69 $ 0.62 Dividends declared $ 0.14 $ 0.12 $ 0.42 $ 0.38
See accompanying notes 4 COMMERCIAL NATIONAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine Months ended September 30, 2001 and September 30, 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 2,174,198 2,174,198 Net change in unrealized gains/(losses) on securities available for sale 248,741 248,741 Tax effects (84,572) (84,572) ----------- Total comprehensive income 2,338,367 Cash dividends declared, $.38 per share (1,339,299) (1,339,299) Issued under dividend reinvestment program 34,190 437,970 437,970 Issued under stock option plan 4,100 41,099 41,099 Issued under employee benefit plan 4,775 63,126 63,126 Repurchase and retirement of shares (71,633) (943,052) (943,052) ---------- ----------- ----------- --------- ----------- Balance at September 30, 2000 3,319,908 $19,545,786 $ 4,560 $ 12,398 $19,562,744 ========== =========== =========== ========= =========== - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 3,327,225 $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, $.42 per share (1,408,431) (1,408,431) Issued under dividend reinvestment program 49,311 483,135 483,135 Issued under stock option plan 429 3,227 3,227 Issued under employee benefit plan 2,399 22,887 22,887 Repurchase and retirement of shares (12,003) (116,194) (116,194) ---------- ----------- ----------- --------- ----------- Balance at September 30, 2001 3,367,361 $22,010,135 $ (783,416) $ 466,293 $21,693,012 ========== =========== =========== ========= ===========
See accompanying notes 5 COMMERCIAL NATIONAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Nine Months Ended September 30, 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,339,104 $ 2,174,198 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 270,000 270,000 Net gains on loan sales (282,774) (55,047) Originations of loans held for sale (18,383,350) (2,394,473) Proceeds from sales of loans held for sale 18,666,124 2,586,520 Gain on sales of securities available for sale (209,915) - Depreciation, amortization and accretion 380,617 420,943 Net change in accrued interest receivable and other assets (38,684) (349,649) Net change in accrued expenses and other liabilities (139,266) 211,171 ------------ ------------ Net cash from operating activities 2,601,856 2,863,663 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale (9,216,118) (5,071,911) Proceeds from maturities of securities available for sale 6,670,000 3,955,000 Proceeds from sales of securities available for sale 2,523,549 - Proceeds from maturities of securities held to maturity 1,010,000 - Net change in loans 4,829,900 (19,961,159) Purchases of bank owned life insurance (3,000,000) Purchases of premises and equipment, net (163,041) (221,199) ------------ ------------ Net cash from investing activities 2,654,290 (21,299,269) CASH FLOW FROM FINANCING ACTIVITIES Net change in deposits 5,867,933 10,318,745 Net change in securities sold under agreements to repurchase 1,463,300 2,700,218 Net change in U.S. Treasury demand notes (261,438) (1,453,809) Federal Home Loan Bank advances 15,000,000 26,000,000 Proceeds from Repayment of Federal Home Loan Bank (17,407,449) (19,000,000) Repurchase of common stock shares (116,194) (943,052) Dividends paid (1,408,431) (1,339,299) Proceeds from sale of common stock 509,249 542,195 ------------ ------------ Net cash from financing activities 3,646,970 16,824,998 ------------ ------------ Net change in cash and cash equivalents 8,903,116 (1,610,608) Cash and cash equivalents, at beginning of year 7,462,021 8,669,093 ------------ ------------ CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 16,365,137 $ 7,058,485 ============ ============ Cash paid during the period for Interest $ 5,746,710 $ 5,118,758 Federal income taxes 1,203,081 771,640
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 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 September 30, 2001 and December 31, 2000 and the results of its operations for the three and nine months ending September 30, 2001 and September 30, 2000. The results for the three and nine months ended September 30, 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. 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 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. 8 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. 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 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. 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:
For three months ended For nine months ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE: Net income available to common shareholders $ 766,747 $ 731,982 $2,339,104 $2,174,198 =========================================================================================================================== Weighted-average common shares outstanding for basic earnings per share 3,356,864 3,511,114 3,356,864 3,511,114 =========================================================================================================================== BASIC EARNINGS PER SHARE $ .23 $ .21 $ .70 $ .62 =========================================================================================================================== DILUTED EARNINGS PER SHARE: Net income available to common shareholders $ 766,747 $ 731,982 $2,339,104 $2,174,198 =========================================================================================================================== Weighted-average common shares outstanding for basic earnings per share 3,356,864 3,511,114 3,356,864 3,511,114 Add: Dilutive effect of assumed exercise of stock options 8,937 19,072 8,937 19,072 - --------------------------------------------------------------------------------------------------------------------------- Weighted-average common and dilutive additional potential common shares outstanding 3,365,801 3,530,186 3,365,801 3,530,186 =========================================================================================================================== DILUTED EARNINGS PER SHARE $ .23 $ .21 $ .69 $ .62 ===========================================================================================================================
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, 2001 increased to $221,992,000 from the $215,886,000 at December 31, 2000. Federal funds sold increased $9,725,000 and gross loans decreased $4,741,000 compared to December 31, 2000. Loan demand continues to remain weak. The events of September 11, 2001 and the subsequent decreases in interest rates, has reduced the array of viable investment options available to the Bank. In the short-term, we have elected to "shrink" the balance sheet where possible. This, however, has been difficult, as the events of September 11, 2001 appear to have caused investors to temporarily shift assets to safety. We have experienced an $8,268,000 increase in savings account balances since December 31, 2000. Commercial loan payoffs resulted in the majority of the decrease in total loans. As a result, September 30, 2001 loan totals decreased $4,741,000 compared to December 31, 2000. Total loans were $172,092,000 as of September 30, 2001. In response to the loan payoffs, management has the following practical alternatives: reinvest funds into loans, invest excess funds in short to medium term securities until suitable loan opportunities can be identified, or "shrink" the balance sheet by paying off various deposit and other borrowings. Management elected to offer below market rates on rate sensitive deposits, in effect encouraging certain depositors to leave the Bank. Management has also repayed, without penalty, short-term variable rate FHLB advances. The Bank also continues to use various products offered by the Federal Home Loan Bank of Indianapolis. At September 30, 2001 the Bank had $24,092,000 in outstanding balances, compared to $26,500,000 at December 31, 2000. Other assets increased $2,864,000. During the third quarter, management invested $3,000,000 in Bank Owned Life Insurance commonly known as BOLI. This investment is recorded in accrued interest receivable and other assets category of the balance sheet. 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, 2001 was 105.2% 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 provides adequate short and medium term sources of liquidity. At a minimum the Bank has the following available to meet short-term liquidity needs: $10,000,000 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 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. 11 COMMERCIAL NATIONAL FINANCIAL CORPORATION Asset Quality At September 30, 2001 CNFC has identified $391,000 of loans as non-performing. This compares to $354,000 at December 31, 2000. In addition, management has identified $11,312,000 of loans at September 30, 2001 where the borrower is experiencing some financial difficulty.
September 30, 2001 December 31, 2000 Total loans $ 172,092,329 $ 176,833,244 Non-accrual loans $ 344,562 $ 354,214 Accruing loans past due 90 days or more 46,000 - Restructured loans - - - ------------------------------------------------------------------------------------------------- Total non-performing loans $ 390,562 $ 354,214 ================================================================================================= Other real estate - - - ------------------------------------------------------------------------------------------------- Total non-performing assets $ 390,562 $ 354,214 ================================================================================================= Total non-performing loans as a percentage of total loans .23% .20% ================================================================================================= Allowance for loan loss as a percentage of non-performing loans 733.79% 718.59% =================================================================================================
Allowance for Loan Loss The allowance for loan losses was 1.67% of total loans at September 30, 2001 and 1.44% at December 31, 2000. Year to date net recoveries totaled $51,000. 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 $270,000, which was the same as the amount expensed for the nine months ended September 30, 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. Included in the calculation of the appropriate level for the allowance for loan loss is the risk associated with approximately $11,312,000 of loans that management has identified as experiencing some financial difficulty.
Nine Months Ended Year Ended Nine Months Ended September 30, 2001 December 31, 2000 September 30, 2000 Beginning balance $ 2,545,363 $ 2,792,293 $ 2,792,293 Loan charge-offs (19,084) (689,892) (593,230) Loan recoveries 69,643 82,962 38,725 - ---------------------------------------------------------------------------------------------- Net loan recoveries/(charge-offs) 50,559 (606,930) (554,505) Provision for loan losses 270,000 360,000 270,000 - ---------------------------------------------------------------------------------------------- Ending balance $ 2,865,922 $ 2,545,363 $ 2,507,788 ==============================================================================================
12 COMMERCIAL NATIONAL FINANCIAL CORPORATION 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 Prompt September 30, December 31, Corrective Action 2001 2000 Regulations ---- ---- ----------- Total capital to risk weighted assets 14.4% 13.1% 10.0% ==== ==== ==== Tier 1 capital to risk weighted assets 13.2% 11.9% 6.0% ==== ==== ==== Tier 1 capital to average assets 9.9% 9.4% 5.0% ==== ==== ====
RESULTS OF OPERATIONS Summary Net income for the quarter ended September 30, 2001 was $767,000, an increase of $35,000, or 4.8% compared to the same period in 2000. A $134,000 or 54.0% increase in noninterest income, generated by gains on sales of residential mortgage loans and security sales, is the primary contributing factor to the increase in net income. CNFC's net interest income decreased by $15,000, primarily as a result of a decrease in margin during the quarter. Non-interest expense for the quarter increased $68,000 or 4.9% compared to the same period in 2000. Increased salary and benefit costs account for $60,000 or 88.2% of the overall increase in non-interest expense. Year to date net income totaled $2,339,000, a $165,000 or 7.6% increase compared to the same period in 2000. The major items affecting the third quarter of 2001 also impacted year to date income. 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, 2001 and 2000.
Three Months Ending September 30, Nine Months Ending September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Interest Income (tax equivalent) $ 4,094,321 $ 4,326,405 $ 12,776,059 $ 12,382,186 Interest Expense 1,733,391 1,941,067 5,591,890 5,222,025 ------------ ------------ ------------ ------------ Net Interest Income $ 2,360,930 $ 2,385,338 $ 7,184,169 $ 7,160,161 ============ ============ ============ ============ Average Balances - ---------------- Interest-earning Assets $206,898,615 $198,763,637 $207,529,703 $193,091,714 Interest-bearing Liabilities 171,685,068 165,861,771 172,622,694 160,635,109 ------------ ------------ ------------ ------------ Net Differential $ 35,213,547 $ 32,901,866 $ 34,907,009 $ 32,456,605 ============ ============ ============ ============ Average Yields/Rates (annualized) - --------------------------------- Yield on Earning Assets 7.85% 8.64% 8.23% 8.54% Rate Paid on Liabilities 4.01% 4.64% 4.33% 4.33% ------------ ------------ ------------ ------------ Interest Spread 3.84% 4.00% 3.90% 4.21% ============ ============ ============ ============ Net Interest Margin 4.53% 4.76% 4.63% 4.94% ============ ============ ============ ============
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, 2001 September 30, 2001 Balance Rate Inc/(Dec) Balance Rate Inc/(Dec) ------- ---- --------- ------- ---- --------- Interest Earning Assets $ 77,407 $(309,491) $(232,084) $ 791,261 $(397,388) $ 393,873 Interest Bearing Liabilities 42,305 (249,981) (207,676) 484,558 (114,693) 369,865 --------- --------- --------- --------- --------- --------- Net Interest Income $ 35,102 $ (59,510) $ (24,408) $ 306,703 $(282,695) $ 24,008 ========= ========= ========= ========= ========= =========
The $24,000 decrease in tax-equivalent net interest income for the three months ending September 30, 2001 resulted from a decrease in margin offset by a $2,312,000 in net earning assets. Net interest margin for the three months ending September 30, 2001 decreased to 4.53% compared to 4.76% for the three months ending September 30, 2000. The Federal Reserve lowered the federal funds rate by 150 basis points in the first quarter, 125 basis points in the second quarter and 75 basis points in the third quarter of 2001. In response to the September 11, 2001 terrorist attacks, the Federal Reserve decreased the federal funds rate by an additional 50 basis points during October 2001. These changes in prime result in an almost immediate decrease in the Bank's prime lending rate. In addition to lowering the target federal funds rate, the Federal Reserve also provided additional liquidity to the market place. During the week following the September 11, 2001 attack, Commercial Bank earned between .375% and 1.0% on overnight federal funds sales. 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 it's prime lending rate accordingly, the Bank experiences an almost immediate decrease in net interest income. In response, management has lowered retail deposit rates, however, it is 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. In addition, many customers are refinancing higher yielding, fixed rate, long-term loans at lower rates. Noninterest Income Noninterest income for the three months ending September 30, 2001 was $382,000. This represents a $134,000 or 54.0% increase over the same period in 2000. The general decrease in interest rates during 2001 has spurred residential real estate refinancing activity. Year to date, the Bank has originated $18,383,000 of residential mortgages subsequently sold to the secondary market. This compares to $2,394,000 for the same period in 2000. Management has elected to sell most 15 and 30 year fixed rate residential real estate mortgage loans originated during the period. As a result, gains on loan sales have increased by $228,000 or 414.5% compared to the three months ending September 30, 2000. Also, CNFC elected to liquidate an equity investment held as available for sale by the holding company. This resulted in $210,000 in securities gains. Noninterest income for the nine months ending September 30, 2001 was $1,217,000, a $440,000 or 56.6% increase. Factors affecting this increase were similar to those described in the paragraphs above. Noninterest Expense Noninterest expense for the three months ending September 30, 2001 totaled $1,451,000. This represents a $68,000 or 4.9% increase over the same period in 2000. 14 COMMERCIAL NATIONAL FINANCIAL CORPORATION Salary and benefit expense for the three months ending September 30, 2001 totaled $797,000 compared to $737,000 for the same period in 2000, an increase of $60,000 or 8.1%. The increase reflects normal salary increases, combined with an approximately 16% increase in the cost of medical insurance. Bank staffing levels have not significantly changed compared to the same period in 2000. Professional fees for the three months ended September 30, 2001 increased $10,000 or 15.8% compared to the same period in 2000. Increased accounting and legal fees related to the formation of a mortgage subsidiary was the primary reason for increased professional fees. Noninterest expense for the six months ending September 30, 2001 totaled $4,344,000. This represents a $217,000 or 5.3% increase over the same period in 2000. The primary factors affecting this increase are similar to those discussed in the paragraphs above. 15 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. 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. 16 COMMERCIAL NATIONAL FINANCIAL CORPORATION PART II. OTHER INFORMATION Item 6 (b) Reports on Form 8-K NONE 17 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, 2001 Jeffrey S. Barker President and Chief Executive Officer Patrick G. Duffy Executive Vice President and Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----