<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended March 31, 2000, or
__ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ________ to _________
Commission File No. 0-17000
COMMERCIAL NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2799780
(State of Incorporation) (IRS Employer Identification No.)
101 North Pine River Street, Ithaca, Michigan 48847
(address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (517) 875-4144
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _____X______ NO ______________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 28, 2000
Common Stock 3,206,718
No Par Value
<PAGE> 2
COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 (Page 3)
Consolidated Statements of Income for the three months ended March 31, 2000 and March (Page 4)
31, 1999
Consolidated Statements of Changes in Shareholders' Equity for the periods ended (Page 5)
March 31, 2000 and March 31, 1999
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and (Page 6)
March 31, 1999
Notes to Consolidated Financial Statements (Page 7-10)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Page 11-15)
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 23-Consent of Independent Accountants (Page 18)
Exhibit 27-Financial Data Schedule (Page 19)
b) Reports on Form 8-K (Page 16)
SIGNATURES (Page 17)
</TABLE>
2
<PAGE> 3
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,574,499 $ 7,419,093
Federal funds sold 2,800,000 1,250,000
------------- -------------
Total cash and cash equivalents 10,374,499 8,669,093
Securities available for sale 18,452,707 17,746,753
Securities held to maturity (fair value $8,898,948 -
March 31, 2000; $8,940,714 - December 31, 1999) 8,811,750 8,813,986
Federal Home Loan Bank stock, at cost 1,391,300 1,391,300
Loans receivable, net of allowance for loan losses
$2,880,962-March 31, 2000; $2,792,293 - December 31, 1999 154,644,516 149,674,589
Premises and equipment, net 2,638,903 2,694,511
Accrued interest receivable and other assets 2,071,716 2,031,782
------------- -------------
Total assets $ 198,385,391 $ 191,022,014
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 18,130,952 $ 18,535,251
Interest-bearing demand 25,748,916 26,639,403
Savings 44,694,542 41,271,920
Time 64,212,839 60,757,458
------------- -------------
Total deposits 152,787,249 147,204,032
Securities sold under agreements to repurchase 5,741,031 4,689,557
Other borrowings 455,915 2,190,639
Federal Home Loan Bank advances 18,500,000 16,500,000
Accrued expenses and other liabilities 1,597,356 1,473,253
------------- -------------
Total liabilities 179,081,551 172,057,481
Shareholders' equity
Common stock and paid in capital, no par value: 5,000,000 shares
authorized; shares issued and outstanding
March 31, 2000 - 3,201,329 and December 31,
1999 - 3,189,025 20,080,279 19,946,643
Retained earnings (deficit) (588,590) (830,339)
Accumulated other comprehensive income/(loss), net of tax (187,849) (151,771)
------------- -------------
Total shareholders' equity 19,303,840 18,964,533
------------- -------------
Total liabilities and shareholders' equity $ 198,385,391 $ 191,022,014
============= =============
</TABLE>
See accompanying notes
3
<PAGE> 4
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
For Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Interest and dividend income
Loans receivable, including fees $3,322,181 $2,839,137
Taxable securities 228,519 233,288
Nontaxable securities 143,150 165,183
Federal funds sold 41,941 30,732
Federal Home Loan Bank stock dividends 27,674 27,445
Interest on other deposits 8,179 6,927
---------- ----------
Total interest and dividend income 3,771,644 3,302,712
Interest expense
Deposits 1,238,459 1,095,995
Securities sold under agreements to repurchase 68,756 77,615
Federal Home Loan Bank advances 236,089 164,696
Other 8,825 4,547
---------- ----------
Total interest expense 1,552,129 1,342,853
Net interest income 2,219,515 1,959,859
Provision for loan losses 90,000 90,000
---------- ----------
Net interest income after provision for loan losses 2,129,515 1,869,859
Noninterest income
Service charges and fees 104,744 109,824
Net gains on loan sales 14,111 82,636
Receivable financing fees 74,673 66,505
Other 50,915 68,535
---------- ----------
Total noninterest income 244,443 327,500
Noninterest expenses
Salaries and employee benefits 737,839 672,864
Occupancy and equipment 255,301 249,336
FDIC insurance 7,548 5,583
Printing, postage and supplies 68,322 70,581
Professional and outside services 83,986 80,754
Other 246,513 228,703
---------- ----------
Total noninterest expense 1,399,509 1,307,821
---------- ----------
Income before income tax expense 974,449 889,538
Income tax expense 284,000 247,600
---------- ----------
Net income $ 690,449 $ 641,938
========== ==========
Per share information
Basic earnings $ 0.22 $ 0.20
Diluted earnings $ 0.21 $ 0.20
Dividends declared $ 0.14 $ 0.14
</TABLE>
See accompanying notes
4
<PAGE> 5
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Periods ended March 31, 2000 (Unaudited) and December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Common Other
Stock and Retained Comprehensive Total
Paid in Earnings Income Shareholders'
Capital (deficit) Net of Tax Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 17,525,466 $ (8,483) $ 143,119 $ 17,660,102
Comprehensive income:
Net income 2,730,872 2,730,872
Net change in unrealized gains/(losses) on
securities available for sale (444,669) (444,669)
Reclassification adjustment for gains/(losses)
recognized in income (2,134) (2,134)
Tax effect 151,913 151,913
--------- ------------
Total other comprehensive income (294,890) (294,890)
------------
Total comprehensive income 2,435,982
------------
Cash dividends declared, $.55 per share (1,730,590) (1,730,590)
Payment of 5% stock dividend 1,822,372 (1,822,138) 234
Issued under dividend reinvestment program 686,391 686,391
Issued under stock option plan 159,062 159,062
Issued under employee benefit plan 41,795 41,795
Repurchase and retirement of 22,938 shares (288,443) (288,443)
------------- ---------- --------- ------------
Balance at December 31, 1999 19,946,643 (830,339) (151,771) 18,964,533
Comprehensive income:
Net income 690,449 690,449
Net change in unrealized gains/(losses) on
securities available for sale (54,663) (54,663)
Reclassification adjustment for gains/(losses)
recognized in income - -
Tax effect 18,585 18,585
--------- ------------
Total other comprehensive income (36,078) (36,078)
------------
Total comprehensive income 654,371
Cash dividends declared, $.14 per share (448,700) (448,700)
Issued under dividend reinvestment program 173,247 173,247
Issued under stock option plan 13,655 13,655
Issued under employee benefit plan 38,953 38,953
Repurchase and retirement of 6,793 shares (92,219) (92,219)
------------ ---------- --------- ------------
Balance at March 31, 2000 $ 20,080,279 $ (588,590) $(187,849) $ 19,303,840
============ ========== ========= ============
</TABLE>
See accompanying notes
5
<PAGE> 6
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 690,449 $ 641,938
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan loss 90,000 90,000
Net gains on loan sales (14,111) (82,636)
Originations of loans held for sale (427,509) (3,967,938)
Proceeds from sales of loans held for sale 578,620 4,019,351
Depreciation, amortization and accretion 141,731 180,133
Net change in accrued interest receivable and other assets (6,563) (205,088)
Net change in accrued expenses and other liabilities 124,103 (647,520)
------------ ------------
Net cash from operating activities 1,176,720 28,240
Cash flows from investing activities
Purchases of securities available for sale (1,840,718) (2,515,863)
Proceeds from maturities of securities available for sale 1,075,000 --
Proceeds from maturities of securities held to maturity -- 1,716,600
Purchases of securities held to maturity -- --
Net change in loans (5,213,953) (2,258,644)
Purchases of premises and equipment, net (76,546) (147,578)
------------ ------------
Net cash from investing activities (6,056,217) (3,205,485)
Cash flow from financing activities
Net change in deposits 5,583,217 (2,025,387)
Net change in securities sold under agreements to repurchase 1,051,474 774,032
Net change in U.S. Treasury demand notes (1,734,724) (1,195,368)
Federal Home Loan Bank advances 8,000,000 --
Federal Home Loan Bank repayments (6,000,000) (1,000,000)
Repurchase of common stock shares (92,219) (83,700)
Dividends paid and fractional shares (448,700) (428,813)
Proceeds from sale of common stock 225,855 198,971
------------ ------------
Net cash from financing activities 6,584,903 (3,760,265)
------------ ------------
Net change in cash and cash equivalents 1,705,406 (6,937,510)
Cash and cash equivalents, at beginning of year 8,669,093 12,555,428
------------ ------------
Cash and cash equivalents, at end of period $ 10,374,499 $ 5,617,918
============ ============
Cash paid during the period for
Interest $ 1,545,931 $ 1,379,642
Federal income taxes 100,000 333,000
</TABLE>
See accompanying notes
6
<PAGE> 7
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1-Summary of Significant Accounting Policies
Basic Presentation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with Rule 10-01 of regulation S-X and the instructions
for Form 10-Q and, therefore, do not include all disclosures required by
generally accepted accounting principles for complete presentation of financial
statements. In the opinion of management, the condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial condition of Commercial National
Financial Corporation as of March 31, 2000 and December 31, 1999, and the
results of its operations for the three months ending March 31, 2000 and March
31, 1999. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results expected for the full year.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of
Commercial National Financial Corporation (CNFC), Commercial Bank (Bank) and
CNFC Financial Services, Inc., a wholly owned subsidiary of the Bank. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations, Industry Segments and Concentrations of Credit Risk
The Corporation 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 the Corporation's chief
decision-makers monitor the revenue stream of various Corporate products and
services, operations are managed and financial performance is evaluated on a
Corporation-wide basis. Accordingly, all of the Corporation's banking operations
are considered by management to be aggregated into one operating segment.
The principal markets for the Bank's financial services are the Michigan
communities in which the Bank is located and the areas immediately surrounding
these communities. The Bank serves these markets through seven offices located
in Gratiot and Montcalm Counties in Michigan.
Use of Estimates
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses and fair values of securities and other
financial instruments are particularly subject to change.
Cash Flow Reporting
Cash and cash equivalents include cash on hand, demand deposits with other
financial institutions and federal funds sold. Cash flows are reported net for
customer loan and deposit transactions, securities sold under agreements to
repurchase with original maturity of 90 days or less and U.S. Treasury demand
notes.
Securities
Securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to maturity.
Securities are classified as available for sale when they might be sold before
maturity. Securities available for sale are carried at fair value, with net
unrealized holding gains and losses reported separately in other comprehensive
income, net of tax. Trading securities are bought principally for sale in the
near term, and are reported at fair value with unrealized gains and losses
included in earnings. Securities are written down to fair value when a decline
in fair value is not temporary. CNFC did not classify securities for trading at
any time during 2000 or 1999.
7
<PAGE> 8
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premiums and discounts, is included in earnings.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value in the
aggregate. Net unrealized losses are recorded in a valuation allowance by
charges to income.
Loans Receivable
Loans receivable are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days, unless the loan is both well secured
and in the process of collection. Payments received on such loans are reported
as principal reductions.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable credit
losses, increased by the provision for loan losses and decreased by charge-offs
less recoveries. Estimating the risk of loss and the amount of loss on any loan
is necessarily subjective. Accordingly, management estimates the allowance
balance required based on past loan loss experience, known and inherent risks in
the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. A problem
loan is charged-off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans and on an individual loan
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using a combination of straight-line and accelerated
methods with useful lives ranging from 10 to 40 years for buildings and
improvements, and 3 to 10 years for furniture and equipment. These assets are
reviewed for impairment when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. Maintenance, repairs and minor
alterations are charged to current operations as expenditures occur. Major
improvements are capitalized.
Servicing Rights
Servicing rights represent both purchased rights and the allocated value of
servicing rights retained on loans sold. Servicing rights are expensed in
proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Excess servicing receivable is reported when a loan sale results in servicing in
excess of normal amounts and is expensed over the life of the servicing on the
interest method.
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
<PAGE> 9
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Goodwill and Identified Intangibles
Goodwill is the excess of purchase price over identified net assets in business
acquisitions. Goodwill is expensed on the straight-line method over no more than
25 years. Identified intangibles represent the value of depositor relationships
purchased and are expensed on accelerated methods over 10 years. Goodwill and
identified intangibles are assessed for impairment based on estimated
undiscounted cash flows, and written down if necessary.
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 cover substantially all employees. The plan
allows participant compensation deferrals. The amount of any Corporation
matching contribution is based solely on the discretion of the board of
directors. Historically, the Corporation has matched up to 6% of such deferrals
at 100%.
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date.
Income Taxes
Income tax expense is the sum of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Earnings and Dividends Per Share
Basic earnings per common share is based on net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share shows the diluted effect of any additional potential common
shares. Earnings and dividends per common share are restated for all stock
splits and stock dividends. On July 21, 1999 the board of directors of the
Corporation approved a 3 for 1 stock split payable on September 1, 1999 to
shareholders of record on August 8, 1999. All earnings per common share and
dividends per common share have been restated to reflect this stock split.
Stock Dividends
Dividends issued in stock are reported by transferring the market value of the
stock issued from retained earnings to common stock and additional paid-in
capital. Fractional shares are paid in cash for all stock dividends.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes the change in unrealized appreciation and
depreciation on securities available for sale, net of tax, which is also
recognized as a separate component of shareholders' equity.
Financial Instruments with Off-Balance-Sheet Risk
The Corporation, in the normal course of business, makes commitments to make
loans, which are not recorded in the financial statements.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on-and off-balance-sheet financial
instruments does not include the value of anticipated future business or values
of assets and liabilities not considered financial instruments.
Reclassifications
Some items in the prior year financial statements have been reclassified to
conform with the current year presentation.
9
<PAGE> 10
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Recent Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137, requires derivative instruments be carried at fair
value on the balance sheet. The statement continues to allow derivative
instruments to be used to hedge various risks and sets forth specific criteria
to be used to determine when hedge accounting can be used. The statement also
provides for offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in earnings in the
same period; however, any changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings.
The adoption of SFAS No. 133 as amended becomes effective beginning January 1,
2001 and is not expected to have a material impact on the Company's financial
position or results of operations.
Note 2 - Earnings Per Share
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations for the years ended is
presented below:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 690,449 $ 641,938
================================================================================================================
Weighted-average common shares outstanding for
basic earnings per share 3,201,674 3,143,041
================================================================================================================
BASIC EARNINGS PER SHARE $ .22 $ 0.20
================================================================================================================
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders $ 690,449 $ 641,938
================================================================================================================
Weighted-average common shares outstanding for basic
earnings per share 3,201,674 3,143,041
Add:
Dilutive effect of assumed exercise of stock options 20,568 14,903
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common and dilutive additional potential
common shares outstanding 3,222,242 3,157,944
================================================================================================================
DILUTED EARNINGS PER SHARE $ .21 $ .20
================================================================================================================
</TABLE>
10
<PAGE> 11
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
Total assets at March 31, 2000 increased to $198,385,000 from the $191,022,000
at December 31, 1999. Total loans were $157,525,000 as of March 31, 2000. This
represents a $5,058,000 or 3.3% increase from December 31, 1999 balance of
$152,467,000. The increase in loans was primarily a result of demand for
business loans and management's decision to portfolio an increasing number of
residential mortgage loans. Investment securities also increased to $28,656,000
at March 31, 2000 compared to $27,952,000 at December 31, 1999.
Deposits increased $5,583,000 or 3.8% during the period. Total deposits at March
31, 2000 were $152,787,000 compared to $147,204,000 at December 31, 1999.
Included in the deposit total are certificates of deposit obtained through an
online certificate of deposit network. The Bank is accessing this source of
funding more frequently and regularly. The participants in this network are
primarily banks, credit unions, and savings and loans. Rates are posted on an
electronic bulletin board available to participants in the network. Certificate
of deposits gathered through this method are generally less than 1 year in term
and are in increments of $100,000 or less.
Federal Home Loan Bank (FHLB) advances increased to $18,500,000 from $16,500,000
at December 31, 1999.
Liquidity
Management defines liquidity as the ability to fund appropriate levels of credit
worthy loans, meet the immediate cash withdrawal requirements of depositors, and
maintain access to sufficient resources to meet unexpected contingencies at a
reasonable cost and or with minimum losses.
While loan growth continues, the Bank's retail deposit base has not increased at
the same rate. As discussed above, the Bank continues to attract deposits
through the online service discussed above. The loan to deposit ratio calculated
on March 31, 2000 ending balances was 103.1% compared to 103.6% at December 31,
1999. Management is confident that the combination of available FHLB advances,
Federal funds lines of credit, the available for sale investment portfolio, and
our ability to sell mortgage loans and the government guaranteed portion of
commercial loans provides adequate short and medium term sources of liquidity.
At a minimum the Bank has the following available to meet short-term liquidity
needs: $6,500,000 in available FHLB advances and $9,000,000 in short term lines
of credit with correspondent banks.
CNFC also needs cash to pay dividends to its shareholders. The primary source of
cash is the dividends paid to CNFC by the Bank. Management believes that cash
from operations is sufficient to supply the cash needed to continue paying a
reasonable dividend. CNFC also has a $1,500,000 line of credit with a
correspondent institution, which is renewed annually.
Asset Quality and the Allowance for Loan Loss
The allowance for loan losses was 1.83% of total loans at March 31, 2000 the
same as December 31, 1999. At March 31, 2000 approximately $932,000 is
classified as non-accrual. This balance relates to a single business
relationship. Management is evaluating this relationship for potential loss
exposure, and is in the process of restructuring the affected loans. Management
has specifically identified a portion of the allowance for loan losses in the
event that a portion of the loan is charged off.
Year to date recoveries totaled $11,000 compared to charge-offs of $12,000.
During the quarter the Bank expensed a provision of $90,000 to the allowance
compared to $90,000 during the same period in 1999. 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.
11
<PAGE> 12
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Capital Resources
CNFC's capital ratios continue to exceed regulatory guidelines for a "well
capitalized" institution. A summary of CNFC's capital ratios follows:
<TABLE>
<CAPTION>
March 31, December 31, Minimum Required to be Well
2000 1999 Capitalized Under Prompt
--------- ------------ Corrective Action Regulations
-----------------------------
<S> <C> <C> <C>
Total capital to risk weighted assets 14.0% 14.3% 10.0%
==== ==== ====
Tier 1 capital to risk weighted assets 12.8% 13.0% 6.0%
==== ==== ====
Tier 1 capital to average assets 10.0% 10.0% 5.0%
==== ==== ====
</TABLE>
Results of Operations
Net income for the quarter ended March 31, 2000 was $690,000, an increase of
$48,000, or 7.5% compared to the same period in 1999. A 13.2% increase in net
interest income generated by strong loan demand is the primary contributing
factor to the increase in net income. Offsetting the increase in net interest
income is a 25.3% decrease in non-interest income and a 7.0% increase in
non-interest expense. The factors affecting these changes are discussed in the
following paragraphs.
Net Interest Income
The following table illustrates the effect that changes in rates and volumes of
interest-earning assets and interest-bearing liabilities had on net interest
income for the three months ending March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ending March 31,
2000 1999
---- ----
<S> <C> <C>
Interest Income (tax equivalent) $ 3,928,470 $ 3,469,424
Interest Expense 1,552,129 1,342,853
------------ ------------
Net Interest Income $ 2,376,341 $ 2,126,571
Average Volume
Interest-earning Assets $186,819,659 $170,930,157
Interest-bearing Liabilities 154,857,490 140,835,882
------------ ------------
Net Differential $ 31,962,169 $ 30,094,275
============ ============
Average Yields/Rates
Yield on Earning Assets 8.43% 8.23%
Rate Paid on Liabilities 4.02% 3.87%
---- ----
Interest Spread 4.41% 4.36%
==== ====
Net Interest Margin 5.10% 5.05%
==== ====
</TABLE>
12
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
The change in net interest income is attributable to the following:
<TABLE>
<CAPTION>
Three Months Ending
March 31, 2000
Volume Rate Inc/(Dec)
------ ---- ---------
<S> <C> <C> <C>
Interest Earning Assets $ 398,360 $ 60,685 $459,045
Interest Bearing Liabilities 165,130 44,145 209,275
--------- -------- ---------
Net Interest Income $ 233,230 $ 16,540 $249,770
========= ======== ========
</TABLE>
The increase in net interest income for the three months ending March 31, 2000
is due to an increase in earning assets and an increase in margin. Net interest
margin for the three months ending March 31, 2000 increased to 5.10% compared to
5.05% for the three months ending March 31, 1999. Average earning assets for the
three months ending March 31, 2000 increased $15,890,000 compared to the same
period in 1999. During 1999, the Federal Reserve increased the Fed Funds rate
three times, each time by 25 basis points. The Federal Reserve has increased the
Fed Funds rate twice during the first quarter of 2000. This results in an almost
immediate increase in the Bank's prime lending rate. The interest rate on a
significant portion of the Bank's commercial loan portfolio is tied to the
prime-lending rate. Therefore, the Bank receives an immediate short-term benefit
to the increase in prime. In general, local deposit interest rates do not
respond as quickly to changes in the prime lending rate. However, the cost of
certificates of deposits gathered on the electronic network, and FHLB advances
are more sensitive to general changes in interest rates. These funding sources
have become more expensive and over time will offset some of the short-term
increase in net interest income.
Non-interest Income
Non-interest income for the three months ending March 31, 2000 was $244,000.
This represents a $83,000 or 25.4% decrease over the same period in 1999. Rising
interest rates has all but eliminated the mortgage refinance activity. This has
significantly reduced the number of mortgage loans originated and, as a result,
has also reduced the gain on sale of mortgage loans. Also, management has
elected to portfolio a larger number of residential real estate mortgage loans
that previously would have been sold to the secondary market.
Non-interest Expense
Non-interest expense for the three months ending March 31, 2000 totaled
$1,400,000. This represents a $92,000 or 7.0% increase over the same period in
1999.
Salary and benefit expense for the three months ending March 31, 2000 totaled
$738,000 compared to $673,000 an increase of $65,000 or 9.7%. The increase
reflects normal base salary increases, market adjustments and an 8.0% increase
in the cost of medical insurance. The increase in medical cost reflects normal
increases effective August of 1999. Management anticipates a similar increase
during 2000. The Bank is experiencing wage pressure as the area unemployment
rate remains low. The Bank is competing for staff with a large area casino and
newly opened prisons. These organizations have increased the base pay scale for
entry level employees. The increase in salary and benefit expense accounts for
70.1% of the increase in non-interest expenses.
Quantitative and Qualitative Disclosures about Market Risk
Commercial's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. All of the Corporation's transactions are denominated in
U.S. dollars with no specific foreign exchange exposure. The Corporation 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
13
<PAGE> 14
COMMERCIAL NATIONAL FINANCIAL CORPORATION
stockholder value, however, excessive levels of IRR could pose a significant
threat to the Corporation's earnings and capital base. Accordingly, effective
risk management that maintains IRR at prudent levels is essential to the
Corporation'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, the Corporation 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 Corporation 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.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of March 31,
2000. The Corporation had no derivative financial instruments, or trading
portfolio, as of that date. The expected maturity date values for loans
receivable, mortgage-backed securities, and investment securities were
calculated without adjusting the instrument's contractual maturity date for
expectations of prepayments. Expected maturity date values for interest-bearing
core deposits were not based upon estimates of the period over which the
deposits would be outstanding, but rather the opportunity for repricing.
Principal/Notional Amount Maturing in:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Fixed interest rate loans $7,710 $9,609 $11,725 $ 18,835 $16,392 $ 26,408 $ 90,679 $ 88,811
Average interest rate 6.97% 8.23% 8.76% 8.44% 8.29% 7.84% 8.13%
Variable interest rate loans 14,788 8,308 4,400 2,246 5,259 31,846 66,847 66,847
Average interest rate 9.66% 9.73% 9.47% 9.77% 9.99% 8.15% 8.97%
Fixed interest rate securities 3,455 5,810 4,760 5,690 4,510 3,100 27,325 27,130
Average interest rate 6.39% 5.93% 6.25% 6.24% 6.92% 7.51% 6.45%
FHLB stock 1,391 1,391 1,391
Average interest rate 8.00% 8.00%
Federal funds sold 2,800 2,800 2,800
Average interest rate 6.25% 6.25%
Rate Sensitive Liabilities:
Non interest bearing demand 18,131 18,131 18,131
Interest bearing demand 25,749 25,749 25,749
Average interest rate 1.70% 1.70%
Savings 44,695 44,695 44,695
Average interest rate 2.70% 2.70%
Time deposits 40,525 16,784 3,778 1,988 837 301 64,213 64,520
Average interest rate 4.90% 4.91% 4.56% 4.93% 5.02% 4.99% 4.88%
Repurchase agreements 5,741 5,741 5,741
Average interest rate 5.84% 5.84%
U.S. treasury demand notes 456 456 456
Average interest rate 5.84% 5.84%
Fixed rate FHLB advances 6,000 2,000 - 2,500 - 3,000 13,500 13,037
Average interest rate 6.17% 6.63% 6.18% 6.61% 6.33%
Variable rate FHLB advance 3,000 - - - - 2,000 5,000 4,884
Average interest rate 6.32% 7.34% 6.73%
</TABLE>
14
<PAGE> 15
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Forward Looking Statements
This discussion and analysis of financial condition and results of operations,
and other sections of this report contain forward looking statements that are
based on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Corporation itself. Words such as "anticipates", "believes", "estimates",
"expects" "forecasts" "intends", "is likely", "plans", "product", "projects",
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such forward
looking statements. Furthermore, CNFC undertakes no obligation to update, amend
or clarify forward-looking statements, whether as a result of new information,
future events, or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulations and
tax laws; changes in prices, levies, and assessments; the impact of technology,
governmental and regulatory policy changes; the outcome of pending and future
litigation and contingencies; trends in customer behavior including their
ability to repay loans; and vicissitudes of the national and local economies.
These are representative of the Future Factors that could cause a difference
between an actual outcome and a forward-looking statement.
15
<PAGE> 16
COMMERCIAL NATIONAL FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 6 (a) Exhibit 23 Consent of Independent Accountants
Exhibit 27 Financial Data
Item 6 (b) Reports on Form 8-K None
16
<PAGE> 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: May 3, 2000
/S/ Jeffrey S. Barker
Jeffrey S. Barker
President and Chief Executive Officer
/s/ Patrick G. Duffy
Patrick G. Duffy
Executive Vice President and Chief Financial
Officer
17
<PAGE> 18
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
23 Consent of Independent Accountants
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 23
[CROWE CHIZEK LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Commercial National Financial Corporation
Ithaca, Michigan
We have reviewed the consolidated balance sheet of Commercial National
Financial Corporation as of March 31, 2000, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
quarters ended March 31, 2000 and 1999. These financial statements are the
responsibility of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
April 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 7574
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19843
<INVESTMENTS-CARRYING> 8812
<INVESTMENTS-MARKET> 8899
<LOANS> 157525
<ALLOWANCE> 2881
<TOTAL-ASSETS> 198385
<DEPOSITS> 152787
<SHORT-TERM> 6197
<LIABILITIES-OTHER> 1597
<LONG-TERM> 18500
0
0
<COMMON> 20080
<OTHER-SE> (776)
<TOTAL-LIABILITIES-AND-EQUITY> 198385
<INTEREST-LOAN> 3322
<INTEREST-INVEST> 400
<INTEREST-OTHER> 50
<INTEREST-TOTAL> 3772
<INTEREST-DEPOSIT> 1238
<INTEREST-EXPENSE> 1552
<INTEREST-INCOME-NET> 2220
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1400
<INCOME-PRETAX> 974
<INCOME-PRE-EXTRAORDINARY> 974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690
<EPS-BASIC> .22
<EPS-DILUTED> .21
<YIELD-ACTUAL> 4.98
<LOANS-NON> 932
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 932
<ALLOWANCE-OPEN> 2792
<CHARGE-OFFS> 12
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 2881
<ALLOWANCE-DOMESTIC> 1773
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1108
</TABLE>
