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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURTITES EXCHANGE ACT OF 1934
For the quarterly period ended Septemkber 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE EXCHANGE ACT
For the transition period from __________ to __________.
Commission File Number: 0-23411
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Community National Corporation
-----------------------------------
(Exact Name of Small Business Issuer
as Specified in Its Charter)
Tennessee 62-1700975
--------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
19 Natchez Trace Drive, Lexington, Tennessee 38351
-------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (901) 968-6624
--------------
Check whether the issuer: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports),
and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No( )
Indicate the number of shares outstanding of each of the
Issuer's common stock as of the latest practicable date.
Class Outstanding at October 31, 1999
----- -------------------------------
Common Stock, $1.00 par value 712,866 shares
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CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets 1
Consolidated Statement of Income 2
Consolidated Statements of Comprehensive Income 3
Consolidated Statement of Stockholder's Equity 4
Consolidated Statments of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 9-14
PART II OTHER INFORMATION 15
Signatures 16
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 and DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash & cash equivalents:
Non-interest bearing $ 754,183 $ 746,912
Interest bearing 3,384,998 3,400,898
Time deposits 0 1,125,000
Investment securities:
Securities held-to-maturity (estimated market
value of $678,720 (1999) and $668,925 (1998) 657,979 657,770
Securities available-for-sale, at estimated market value 1,952,457 1,575,472
Mortgage-backed and related securities:
Securities held-to-maturity (estimated market
value of $301,419 (1999) and $465,987 (1998) 303,632 380,098
Securities available-for-sale, at estimated market value 1,920,553 2,756,332
Loans receivable, net 29,191,649 26,403,032
Accrued interest receivable 238,053 238,952
Premises and equipment 737,920 797,980
Stock investments:
Stock in Federal Home Loan Bank, at cost 298,300 283,200
Stock in Federal Reserve Bank, at cost 156,100 237,150
Stock in Savings and Loan Data Corporation, at cost 15,000 15,000
Other assets 195,154 70,092
----------- -----------
Total Assets $39,805,978 $38,687,888
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $30,259,566 $28,993,808
Advances from FHLB 526,794 692,848
Advances from borrowers for taxes and insurance 3,550 3,164
Accrued interest payable 182,106 211,261
Income taxes payable:
Current 161,263 70,825
Deferred (104,417) (47,248)
Accrued expenses and other liabilities 172,448 116,405
----------- -----------
Total Liabilities $31,201,310 $30,041,063
----------- -----------
Stockholders' Equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding
Common stock, $1.00 par value; 8,000,000 shares
authorized 712,866 shares issued $ 712,866 $ 712,866
Additional paid-in capital 4,489,512 4,489,512
Retained earnings - substantially restricted 3,508,745 3,442,772
Accumulated other comprehensive income, net of taxes (106,455) 1,675
----------- -----------
Total Stockholders' Equity $ 8,604,668 $ 8,646,825
----------- -----------
Total Liabilities and Stockholders' Equity $39,805,978 $38,687,888
=========== ===========
</TABLE>
1
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30 September 30 September 30
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
First mortgage loans $371,263 $372,371 $1,094,074 $1,090,002
Consumer & other loans 238,350 136,609 666,463 319,858
Interest & dividends on investments:
Taxable 34,952 42,970 90,947 126,200
Tax-exempt 9,235 6,252 27,705 37,287
Dividends 5,435 4,996 22,464 21,683
Interest on deposits with banks 35,183 33,352 107,057 88,200
Interest on mortgage-backed securities 34,523 53,948 115,102 180,508
-------- -------- ---------- ----------
Total interest income $728,941 $650,498 $2,123,812 $1,863,738
-------- -------- ---------- ----------
INTEREST EXPENSE
Interest on deposits $334,068 $313,062 $ 996,158 $ 865,186
Interest on advances from FHLB 10,312 14,147 33,103 45,241
-------- -------- ---------- ----------
Total interest expense $344,380 $327,209 $1,029,261 $ 910,427
-------- -------- ---------- ----------
Net interest income $384,561 $323,289 $1,094,551 $ 953,311
Provision for loan losses 22,500 28,592 67,500 94,581
-------- -------- ---------- ----------
Net interest income after provision
for loan losses $362,061 $294,697 $1,027,051 $ 858,730
-------- -------- ---------- ----------
NON-INTEREST INCOME
Income from real estate held for
investment $ 0 $ 2,025 $ 4,050 $ 7,075
Service charges 46,378 34,966 124,973 97,404
Other operating income 1,809 2,814 14,002 12,762
-------- -------- ---------- ----------
Total non-interest income $ 48,187 $ 39,805 $ 143,025 $ 117,241
-------- -------- ---------- ----------
NON-INTEREST EXPENSE
Compensation & benefits $124,071 $114,758 $ 359,226 $ 335,427
Occupancy & equipment 37,879 29,080 105,049 115,074
Federal deposit insurance premiums 4,425 2,830 13,325 9,699
Data processing fees 24,183 20,725 64,386 59,545
Other operating expenses 84,321 48,012 199,104 154,382
-------- -------- ---------- ----------
Total non-interest expense $274,879 $215,405 $ 741,090 $ 674,127
-------- -------- ---------- ----------
Income before income taxes $135,369 $119,097 $ 428,986 $ 301,844
Income tax expense 48,800 41,725 149,150 95,768
-------- -------- ---------- ----------
Net Income $ 86,569 $ 77,372 $ 279,836 $ 206,076
======== ======== ========== ==========
Earnings per common share $ 0.12 $ 0.11 $ 0.39 $ 0.29
======== ======== ========== ==========
Dilluted earnings per share $ 0.12 $ 0.11 $ 0.39 $ 0.29
======== ======== ========== ==========
Dividends paid per share $ 0.10 $ 0.05 $ 0.30 $ 0.15
======== ======== ========== ==========
</TABLE>
2
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1999 1998
--------------------
<S> <C> <C>
Net income $ 279,836 $ 206,076
Other comprehensive income, net of tax:
Unrealized gains on securities held as
available-for-sale, net of applicable
deferred income taxes of $27,436 (1999)
and $4,634 (1998) (108,130) 8,254
--------- ---------
Other Comprehensive Income $ 171,706 $ 214,330
========= =========
</TABLE>
3
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
------------ ------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 712,866 $712,866 $4,489,512 $3,442,772 $1,675 $8,646,825
Comprehensive income:
Net income 279,836 279,836
Change in unrealized gain
(loss) on securities
available-for-sale,
net of applicable deferred
income taxes of $27,436 (108,130) (108,130)
0
Dividends paid 0 0 0 (213,863) 0 (213,863)
-------- -------- ---------- ---------- -------- ----------
Balance at September 30, 1999 712,866 712,866 4,489,512 3,508,745 (106,455) $8,604,668
======== ======== ========== ========== ======== ==========
</TABLE>
4
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 September 30
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 279,836 $ 206,076
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 67,500 94,581
Provision for depreciation 76,963 89,667
Amortization of investment securities
premiums and discounts (net) 6,166 10,422
Stock in FHLB received as dividends (15,100) (14,400)
Retirement of stock in Federal Reserve Bank 81,050
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable 899 (68,096)
(Increase) decrease in other assets (125,062) (15,684)
Increase (decrease) in interest payable (29,155) 14,246
Increase (decrease) in income taxes 5,833 (52,787)
Increase (decrease) in other liabilities 56,043 (47,509)
----------- ----------
Net Cash Provided by Operating Activities $ 404,973 $ 216,516
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable $(2,788,617) $(4,299,273)
Net (increase) decrease in time deposits 1,125,000 0
Additions to premises & equipment (16,904) (378,638)
Purchase of mortgage-backed securities 0 (495,000)
Principal payments on mortgage-backed securities 832,140 910,433
Purchase of investment securities (1,497,969) (700,000)
Proceeds from maturities of investment securities 1,046,521 1,449,407
----------- -----------
Net Cash Provided by Investing Activities $(1,299,829) $(3,513,071)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 1,265,758 $ 4,520,886
Repayments of FHLB advances (166,054) (124,067)
Net increase in advances from borrowers for
taxes and insurance 386 2,946
Payment of dividends (213,863) (106,932)
----------- -----------
Net Cash Provided by Financing Activities $ 886,227 $ 4,292,833
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents $ (8,629) $ 996,278
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 4,147,810 $ 2,741,783
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,139,181 $ 3,738,061
=========== ===========
</TABLE>
5
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $1,029,261 $910,427
Income taxes, net of refunds 184,973 128,766
Noncash investing and financing:
Stock dividends received from Federal Home Loan Banks 15,100 14,400
Total net increase (decrease) in unrealized loss on
securities available-for-sale (108,130) 8,254
</TABLE>
6
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COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Community National Corporation and subsidiary have been prepared
in accordance with instructions for Form 10-QSB. To the extent
that information and footnotes required by generally accepted
accounting principles for complete financial statements are
contained in the audited financial statements included in the
Corporation's Annual Report for year ended December 31, 1998,
such information and footnotes have not been duplicated herein.
In the opinion of management, all adjustments, consisting only
of normal recurring accruals, which are necessary for the fair
presentation of the interim financial statements, have been
included. The statements of earnings for the quarter ended
September 30, 1999, are not necessarily indicative of the
results which may be expected for the entire year. The December
31, 1998 consolidated balance sheet has been derived form the
audited consolidated financial statements as of that date.
(2) EARNINGS PER SHARE
Net earnings per share of common stock for the year ended
December 31, 1998 and the nine months ended September 30, 1999
of $0.29 and $0.39 were computed by dividing the net income by
the weighted average number of shares outstanding for the year.
(3) NEW ACCOUNTING STANDARDS
The Company adopted FASB Statement no. 130, Reporting
Comprehensive Income in 1998. All periods presented are in
accordance with SAFS 130. Statement no. 130 requires the
reporting of comprehensive income in addition to net income form
operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain
financial information that historically has not been recognized
in the calculation of net income. This comprehensive income
consists of securities classified as available-for-sale by the
Company.
(4) YEAR 2000 COMPLIANCE
The year 2000 poses many challenges for the banking industry.
Many automated applications may cease to properly function as a
result of how date fields have historically
7
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been programmed. Many programs were designed and developed
without considering the impact of the upcoming change in the
century. Failure to address this issue in a timely manner may
cause banking institutions to experience operational problems
and could cause disruption of financial markets. Many experts
believe that even the most prepared organizations may encounter
some implementation problems. As a result, Community National
Bank has developed a Year 2000 Strategic Plan (the "Plan") to
take the necessary steps to insure that problems and disruptions
are minimized.
The bank's data processing system is outsourced to Intrieve, a
service bureau that services the majority of all thrifts and
savings and loans throughout the nation. All systems including
all bank PC's are integrated with the service bureau
applications. Over $200,000 has been spent on upgrading all
equipment, software and systems. This was done principally to
modernize operations, but a substantial portion of this
investment would have been required for Year 2000 compliance
alone. Final testing for Year 2000 compliance has been
completed with all applications performing with Year 2000 dates.
Successful tests have been completed with all vendors and
correspondents with whom the bank directly interfaces. The bank
is Year 2000 compliant as of November 1, 1999. Additional
testing will be made during 1999 to check and reinforce
compliance readiness. Should any unforeseen glitches arise the
bank has a contingency plan with several alternatives to meet
the worst case scenario.
The bank's customers have been notified and counseled. All
commercial customers with Year 2000 requirements have been
counseled one on one with compliance assured to the bank's
satisfaction.
The cost of addressing the Year 2000 issue has had no material
impact on earnings since the expenditures meeting Year 2000
requirements were required and planned for modernization alone.
With testing reflecting compliance to date, there are no
indications of material impact on earnings or uncertainty of
future operation results or financial condition.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Community National Corporation (the "Company") was
incorporated under the laws of the State of Tennessee for the
purpose of holding all of the capital stock of Lexington First
Federal Savings Bank ("Lexington First Federal") following the
second step conversion of its former mutual holding company (the
"Conversion and Reorganization"), which was completed on
December 11, 1997. The Company's principal business is that of
directing, planning and coordinating the business activities of
the Bank. Immediately following the Conversion and
Reorganization, Lexington First Federal converted to a national
bank with the name Community National Bank of Tennessee (the
"Bank") and remained a wholly-owned subsidiary of the Company
(the "Bank Conversion"). Upon the completion of the Bank
Conversion, the Company became a bank holding company. The
Company has no significant assets other than its investment in
the Bank, four commercial loans totaling $772,000, and certain
cash and cash equivalents. At December 31, 1998, on a
consolidated basis, the Company had total assets of $38.7
million, net loans receivable of $26.4 million, cash and
investment securities of $7.5 million, mortgage-backed
securities of $3.1 million, total deposits of $29 million and
stockholders' equity of $8.6 million.
The Bank is a national bank operating through its office in
Lexington, Tennessee, serving Henderson County in southwestern
Tennessee. The Bank is the successor to Lexington First
Federal. Therefore, all references to the Bank also include its
predecessor, Lexington First Federal. Until February 1997, the
Bank's primary business, as conducted through its office located
in Lexington, Tennessee, was the origination and holding of
mortgage loans secured by single-family residential real estate
located primarily in Henderson County, Tennessee, with funds
obtained primarily through the attraction of savings deposits,
certificate accounts with terms of 18 months or less, and
Federal Home Loan Bank ("FHLB") advances. The Bank also made
some construction loans on single-family residences, savings
account loans, and second mortgage consumer loans. The Bank
purchased mortgage-backed securities, and invested in other
liquid investment securities.
Beginning in February 1997, the Bank's emphasis shifted to full
service banking, diversification of the loan portfolio, the
origination of long term fixed rate mortgage loans solely for
sale in the secondary market, and the offering of a greater
variety of transaction accounts. Current Bank policy restricts
fixed rate loans to five years with limited exceptions. The
reduction and control of interest rate risk, and the origination
of variable rate loans, short term loans and balloon loans of
one, two, three and five years are emphasized. The Bank's
emphasis is the diversification in the portfolio with quality
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consumer and commercial loans in order to both reduce and
control interest rate risk, and to increase the interest rate
spread.
As a bank holding company, the Company is registered with and
subject to regulation and examination by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board").
The Bank is subject to comprehensive examination, supervision,
and regulation by the Office of the Comptroller of the Currency
("OCC"). Because the Bank was formerly chartered as a savings
association, the Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC") up to the applicable limits for
each depositor.
The Company's principal executive office is located at the home
office of the Bank at 19 Natchez Trace Drive, Lexington,
Tennessee 38351, and its telephone number is (901) 968-6624.
The branch building is located is at 435 West Church Street, and
its phone number is (901) 968-9599.
The Bank is primarily engaged in attracting deposits from the
general public and using those and other available sources of
funds to originate loans secured by single-family residences
located in Henderson County and surrounding counties in West
Tennessee. To a lesser extent, Lexington also originates
construction loans, land loans and consumer loans. It also has
a significant amount of investments in mortgage-backed
securities, United States Government and federal agency
obligations, and tax exempt securities.
The profitability of the Bank depends primarily on its net
interest income, which is the difference between interest and
dividend income on interest-earning assets, principally loans,
mortgage-backed securities and investment securities, and
interest expense on interest-bearing deposits and borrowings.
The Bank's net income also is dependent, to a lesser extent, on
the level of its noninterest income and its non-interest
expenses, such as compensation and benefits, occupancy and
equipment, insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
FINANCIAL CONDITION
Consolidated assets of Community National were $39,805,978 as of
September 30, 1999, compared to $38,687,888 on December 31,
1998, an increase of $1,118,090. This increase was composed of
an increase in net loans receivable of $2,788,617 and an
increase in investment securities of $377,194. These increases
were offset by decreases in mortgage backed securities of
$912,245, a decrease in time deposits of $1,125,000, a decrease
in premises and equipment of $60,060, and a decrease in cash of
$8,629.
Loans receivable, net, increased to $29,191,649 on September 30,
1999 from $26,403,032 on December 31, 1998, an increase of
$2,788,617. Mortgage-backed securities decreased $912,245 to
$2,224,185 at September 30, 1999 from $3,136,430 on December 31,
1998. The increase in loans is attributable to increased
advertising and more competitive loan
10
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products. The decrease in mortgage backed securities is
primarily caused by principal payments.
Deposits totaled $30,259,566 on September 30, 1999, an increase
of $1,265,758 from $28,993,808 on December 31, 1998. The
increase in deposits is primarily due to increased advertising
and was primarily used to fund the increase in loans receivable.
Stockholders' equity was $8,646,825 on December 31, 1998,
compared to $8,604,668 on September 30, 1999, a decrease of
$42,157. This decrease was due to earnings for the year of
$279,836, offset by the Company's quarterly cash dividends of
$213,863 and an increase in unrealized loss on
available-for-sale securities of $108,130.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1999 was
$86,569 compared to $77,372 as of September 30, 1998. The
increase of $9,197 was due to an increase in net interest income
of $61,272, offset by an increase in non-interest expense of
$59,474.
Net income for the nine months ended September 30, 1999 was
$279,836, an increase of $73,760 compared to $206,076 for the
nine months ended September 30, 1998. The increase was
primarily due to an increase in net interest income of $141,240
offset by an increase in non-interest expense of $66,963.
Earnings per share for the quarter ended September 30, 1999,
were $0.12 per share based on an average of 712,866 shares
outstanding compared to $.11 per share for the comparable
quarter in 1998 based on an average of 712,866 shares
outstanding.
Earnings per share for the nine months ended September 30, 1999,
were $0.39 per share based on an average of 712,866 shares
outstanding compared to $0.29 per share for the comparable nine
months ended in 1998 based on an average of 712,866 shares
outstanding.
Net interest income after provision for loan losses for the
quarter ended September 30, 1999, was $362,061 compared to
$294,697 for the quarter ended September 30, 1998, an increase
of $67,364. This increase was a result of interest income
increasing $78,443, from $650,498 for the 1998 quarter to
$728,941 for the 1999 quarter, while interest expense increased
$17,171 from $327,209 for the 1998 quarter to $344,380 for the
1999 quarter. The increases in interest income and interest
expense are both due to increases in the average balance of
interest-earning assets and interest-bearing liabilities.
Net interest income after provision for loan losses for the nine
months ended September 30, 1999 was $1,027,051 compared to
$858,730 for the nine months ended September 30, 1998, an
increase of $168,321. This increase was a result of interest
income increasing
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$260,074, from $1,863,738 for the 1998 nine-month period to
$2,123,812 for the 1999 nine-month period, while interest
expense increased $118,834 from $910,427 in 1998 to $1,029,261
in 1999. The increases in interest income and interest expense
are both due to increases in the average balance of
interest-earning assets and interest-earning liabilities.
Non-interest income increased from $39,805 for the quarter ended
September 30, 1998 to $48,187 for the quarter ended September
30, 1999. The increase of $8,382 was due to higher service
charge income and an increase in other operating income.
Non-interest income increased from $117,241 for the nine months
ended September 30, 1998 to $143,025 for the nine months ended
September 30, 1999. The increase of $25,784 was due to higher
service charge income.
The Company's non-interest expense for the three months ended
September 30, 1999 was $274,879 compared to $215,405 for the
comparable quarter in 1998. The increase of $59,474 was due to
higher compensation and benefits expense and higher other
operating expenses, which were caused by additional personnel
hired, and an increase in data processing expense.
Non-interest expense for the nine months ended September 30,
1999 was $741,090, an increase of $66,963 compared to $674,127
for the nine months ended for September 30, 1998. The increase
was due to higher compensation and benefits expense and higher
other operating expenses, which were caused by additional
personnel hired, and an increase in data processing expense.
PROVISIONS FOR LOAN LOSSES
The provision for loan losses is based on the periodic analysis
of the loan portfolio by management. In establishing the
provision, management considers numerous factors including
general economic conditions, loan portfolio condition, prior
loss experience and independent analysis. The provision for
loan losses for the three months ended September 30, 1999 was
$22,500, while the provision for the comparable quarter in 1998
was $28,592. The provision for loan loss for the nine months
ended September 30, 1999 and 1998 are $67,500 and $94,581
respectively. Based upon the analysis of the addition to
established allowances and the composition of the loan
portfolio, management concluded that the allowance is adequate.
While current economic conditions in the Bank's market are
stable, future conditions will dictate the level of future
allowances for losses on loans.
NON-PERFORMING ASSETS
On September 30, 1999, non-performing assets were $186,073
compared to $430,000 on December 31, 1998. At September 30,
1999, the Bank's allowance for loan losses was $435,999 compared
to $368,375 at December 31, 1998.
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Loans are considered non-performing when the collection of
principal and/or interest is not expected, or in the event,
payments are more than 90 days delinquent.
The allowance for loan losses was 1.49% of total loans as of
September 30, 1999, compared to 1.40% at December 31, 1998.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative
measures if the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios on total risk-based capital and Tier 1 capital to
risk-weighted assets (as defined in the regulations) and Tier 1
capital to adjusted total assets (as defined).
<TABLE>
<CAPTION>
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999
Total Risk-Based Capital
(To Risk-Weighted Assets) $7,108 30.5% $1,864 8.0% $2,330 10.0%
Tier 1 Capital
(To Risk-Weighted Assets) $6,815 29.3% $ 932 4.0% $1,398 6.0%
Tier 1 Capital
(To Adjusted Total Assets) $6,815 17.5% $1,556 4.0% $1,944 5.0%
</TABLE>
LIQUIDITY
The Bank's principal sources of funds for investments and
operations are net earnings, deposits from its primary market
area, principal and interest payments on loans and
13
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<PAGE>
mortgage-backed securities and proceeds from maturing investment
securities. Its principal funding commitments are for the
origination or purchase of loans and the payment of maturing
deposits. Deposits are considered a primary source of funds
supporting the Bank's lending and investment activities.
Deposits were $30.3 million at September 30, 1999.
The Bank's is required to maintain minimum levels of liquid
assets as defined by regulations. The required percentage is
currently five percent of net withdrawable savings deposits and
borrowings payable on demand or in one year or less. The Bank
maintained a liquidity ratio of 20.31% at September 30, 1999.
The bank's most liquid assets are cash and cash equivalents,
which are cash on hand, amount due from financial institutions,
federal funds sold, certificates of deposit with other financial
institutions that have an original maturity of three months or
less and money market mutual funds. The levels of such assets
are dependent on the Bank's operating, financing and investment
activities at any given time. The Bank's cash and cash
equivalents totaled $4.14 million at September 30, 1999. The
variations in levels of cash and cash equivalents are influenced
by deposit flows and anticipated future deposit flows.
Net cash provided by operating activities increased from 216,516
for nine months ended September 30, 1998 to 404,973 for nine
months ended September 30, 1999. The increase was due to the
retirement of Federal Reserve Bank stock of $80,050 and
adjustments to accrued income and expense items.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 1998, the FASB issued SFAS No. 133. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires
that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures
those at fair value. If certain conditions are met, a
derivative may be specifically designated a (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, or (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, and unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency- denominated forecasted transaction.
This statement is not expected to have any significant effect on
the financial position of the bank. In addition no other recent
accounting pronouncements have been issued that are expected to
have any significant effect on the financial position of the
bank that have not already been adopted by the bank.
14
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
27 - Financial Data Schedule
Reports on Form 8-K:
None.
15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COMMUNITY NATIONAL CORPORATION
Registrant
Date: October 29, 1999 /s/ Howard W. Tignor
-------------------------------------
Howard W. Tignor, President and Chief
Executive Officer (Duly Authorized
Officer)
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 754
<INT-BEARING-DEPOSITS> 3,385
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,873
<INVESTMENTS-CARRYING> 962
<INVESTMENTS-MARKET> 980
<LOANS> 29,628
<ALLOWANCE> 436
<TOTAL-ASSETS> 39,806
<DEPOSITS> 30,260
<SHORT-TERM> 17
<LIABILITIES-OTHER> 172
<LONG-TERM> 510
<COMMON> 713
0
0
<OTHER-SE> 7,892
<TOTAL-LIABILITIES-AND-EQUITY> 39,806
<INTEREST-LOAN> 1,761
<INTEREST-INVEST> 141
<INTEREST-OTHER> 222
<INTEREST-TOTAL> 2,124
<INTEREST-DEPOSIT> 996
<INTEREST-EXPENSE> 1,029
<INTEREST-INCOME-NET> 1,095
<LOAN-LOSSES> 68
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 741
<INCOME-PRETAX> 429
<INCOME-PRE-EXTRAORDINARY> 429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 280
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 2.89
<LOANS-NON> 28
<LOANS-PAST> 158
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 410
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 436
<ALLOWANCE-DOMESTIC> 386
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50
</TABLE>
