<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 September 30, 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 October 24, 2000
----- -------------------------------
Common Stock 3,331,298
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 September 30, 2000 and December 31, 1999 (Page 3)
Consolidated Statements of Income for the three and nine months ended September 30, (Page 4)
2000 and September 30,1999
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2000 and September 30, 1999 (Page 5)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 (Page 6)
and September 30, 1999
Notes to Consolidated Financial Statements (Page 7-11)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Page 12-17)
PART II OTHER INFORMATION
------- -----------------
Item 6. Exhibits and Reports on Form 8-K
b) Exhibit 27-Financial Data Schedule (Page 20)
c) Reports on Form 8-K (Page 18)
SIGNATURES (Page 19)
</TABLE>
2
<PAGE> 3
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,858,485 $ 7,419,093
Federal funds sold 1,200,000 1,250,000
------------ -------------
Total cash and cash equivalents 7,058,485 8,669,093
Securities available for sale 19,311,362 17,746,753
Securities held to maturity (fair value $ 8,749,518 -
September 30, 2000; $8,940,714 - December 31, 1999) 8,603,402 8,813,986
Federal Home Loan Bank stock, at cost 1,391,300 1,391,300
Loans receivable, net of allowance for loan losses
$2,507,788-September 30, 2000; $2,792,293- December 31, 1999 169,180,370 149,674,589
Premises and equipment, net 2,513,194 2,694,511
Accrued interest receivable and other assets 2,338,437 2,031,782
------------ -------------
Total assets $210,396,550 $ 191,022,014
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 17,946,404 $ 18,535,251
Interest-bearing demand 25,909,929 26,639,403
Savings 41,442,992 41,271,920
Time 72,223,452 60,757,458
------------ -------------
Total deposits 157,522,777 147,204,032
Securities sold under agreements to repurchase 7,389,775 4,689,557
Other borrowings 736,830 2,190,639
Federal Home Loan Bank advances 23,500,000 16,500,000
Accrued expenses and other liabilities 1,684,424 1,473,253
------------ -------------
Total liabilities 190,833,806 172,057,481
Shareholders' equity
Common stock and paid in capital, no par value: 5,000,000 shares
authorized; shares issued and outstanding September 30, 2000 -
3,319,481 and December 31,
1999 - 3,348,476 19,545,786 19,946,643
Retained earnings (deficit) 4,560 (830,339)
Accumulated other comprehensive income/(loss), net of tax 12,398 (151,771)
------------ -------------
Total shareholders' equity 19,562,744 18,964,533
------------ -------------
Total liabilities and shareholders' equity $210,396,550 $ 191,022,014
============ =============
</TABLE>
See accompanying notes
3
<PAGE> 4
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
For Three Months For Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 3,760,498 $ 3,113,208 $ 10,576,943 $ 8,924,411
Taxable securities 237,506 284,665 701,437 780,947
Nontaxable securities 146,952 154,839 436,897 482,042
Federal funds sold 7,489 16,967 81,452 69,876
Federal Home Loan Bank stock dividends 29,727 28,054 85,075 83,249
Interest on other deposits 14,109 9,512 32,904 24,401
----------- ----------- ------------ -----------
Total interest and dividend income 4,196,281 3,607,245 11,914,708 10,364,926
Interest expense
Deposits 1,477,359 1,130,806 4,046,611 3,322,908
Securities sold under agreements to repurchase 114,989 75,516 276,334 240,940
Federal Home Loan Bank advances 335,417 249,518 863,432 608,846
Other 13,302 10,098 35,648 23,495
----------- ----------- ------------ -----------
Total interest expense 1,941,067 1,465,938 5,222,025 4,196,189
Net interest income 2,255,214 2,141,307 6,692,683 6,168,737
Provision for loan losses 90,000 90,000 270,000 270,000
----------- ----------- ------------ -----------
Net interest income after provision for loan losses 2,165,214 2,051,307 6,422,683 5,898,737
Noninterest income
Service charges and fees 114,176 124,460 329,615 350,870
Net gains on loan sales 23,626 47,869 55,047 172,437
Receivable financing fees 37,395 31,117 193,273 160,673
Net gains on sales of securities available for sale - - - 2,134
Other 72,584 54,269 199,436 190,948
----------- ----------- ------------ -----------
Total noninterest income
247,781 257,715 777,371 877,062
Noninterest expenses
Salaries and employee benefits 736,936 687,506 2,191,102 2,046,910
Occupancy and equipment 250,887 278,212 748,454 779,081
FDIC insurance 7,716 5,487 22,764 16,704
Printing, postage and supplies 68,302 61,174 196,643 185,895
Professional and outside services 63,028 74,050 232,287 251,628
Other 256,144 255,137 735,606 727,093
----------- ----------- ------------ -----------
Total noninterest expense 1,383,013 1,361,566 4,126,856 4,007,311
----------- ----------- ------------ -----------
Income before income tax expense 1,029,982 947,456 3,073,198 2,768,488
Income tax expense 298,000 269,906 899,000 783,000
----------- ----------- ------------ -----------
Net income $ 731,982 $ 677,550 $ 2,174,198 $1,985,488
=========== =========== ============ ===========
Per share information
Basic earnings $ 0.22 $ 0.20 $ 0.65 $ 0.60
Diluted earnings $ 0.22 $ 0.20 $ 0.65 $ 0.60
Dividends declared $ 0.13 $ 0.13 $ 0.40 $ 0.39
</TABLE>
See accompanying notes
4
<PAGE> 5
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Periods ended September 30, 2000 and September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Other
Stock and Retained Comprehensive Total
Paid in Earnings Income (Loss) 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 1,985,488 1,985,488
Net change in unrealized gains/(losses) on
securities available for sale (332,722) (332,722)
Reclassification adjustment for (gains)/losses
recognized in income (2,134) (2,134)
Tax effects 113,851 113,851
--------- ------------
Total other comprehensive income (loss) (221,005) (221,005)
------------
Total comprehensive income 1,764,483
------------
Cash dividends declared, $.39 per share (1,283,339) (1,283,339)
Issued under dividend reinvestment program 505,056 505,056
Issued under stock option plan 87,047 87,047
Issued under employee benefit plan 35,166 35,166
Repurchase and retirement of 16,837 shares (200,150) (200,150)
------------ ----------- --------- ------------
Balance at September 30, 1999 $ 17,952,585 $ 693,666 $ (77,886) $ 18,568,365
============ =========== ========= ============
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 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 other comprehensive income 164,169 164,169
------------
Total comprehensive income 2,338,367
Cash dividends declared, $.40 per share (1,339,299) (1,339,299)
Issued under dividend reinvestment program 437,970 437,970
Issued under stock option plan 41,099 41,099
Issued under employee benefit plan 63,126 63,126
Repurchase and retirement of 75,215 shares (943,052) (943,052)
------------ ----------- --------- ------------
Balance at September 30, 2000 $ 19,545,786 $ 4,560 $ 12,398 $ 19,562,744
============ =========== ========= ============
</TABLE>
See accompanying notes
5
<PAGE> 6
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,174,198 $ 1,985,488
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan loss 270,000 270,000
Net gains on loan sales (55,047) (172,437)
Originations of loans held for sale (2,394,473) (8,260,335)
Proceeds from sales of loans held for sale 2,586,520 8,432,772
Gain on sales of securities available for sale - (2,134)
Depreciation, amortization and accretion 420,943 579,869
Net change in accrued interest receivable and other assets (349,649) (442,102)
Net change in accrued expenses and other liabilities 211,171 (811,561)
----------- -----------
Net cash from operating activities 2,863,663 1,579,560
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (5,071,911) (8,280,410)
Proceeds from maturities of securities available for sale 3,955,000 2,400,000
Proceeds from sales of securities available for sale - 500,664
Proceeds from maturities of securities held to maturity - 2,441,600
Net change in loans (19,961,159) (13,107,294)
Purchases of premises and equipment, net (221,199) (480,690)
----------- -----------
Net cash from investing activities (21,299,269) (16,526,130)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits 10,318,745 4,845,804
Net change in securities sold under agreements to repurchase 2,700,218 (1,831,031)
Net change in U.S. Treasury demand notes (1,453,809) 307,922
Federal Home Loan Bank advances 26,000,000 19,000,000
Federal Home Loan Bank repayments (19,000,000) (13,000,000)
Repurchase of common stock shares (943,052) (200,150)
Dividends paid and fractional shares (1,339,299) (1,283,339)
Proceeds from sale of common stock 542,195 627,269
----------- -----------
Net cash from financing activities 16,824,998 8,466,475
----------- -----------
Net change in cash and cash equivalents (1,610,608) (6,480,095)
Cash and cash equivalents, at beginning of year 8,669,093 12,555,428
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 7,058,485 $ 6,075,333
=========== ===========
Cash paid during the period for
Interest $ 5,118,758 $ 4,233,069
Federal income taxes 771,640 1,121,000
</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 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, 2000 and December 31, 1999, and the
results of its operations for the three and nine months ending September 30,
2000 and September 30, 1999. The results for the three and nine months ended
September 30, 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
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 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 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.
8
<PAGE> 9
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Securities Sold Under Agreements to Repurchase
All of these liabilities represent amounts advanced by various customers and are
secured by securities owned, as they are not covered by general deposit
insurance.
Employee Benefits
A benefit plan with 401(k) features covers substantially all employees. The plan
allows participant compensation deferrals. The amount of any matching
contribution is based solely on the discretion of the board of directors.
Historically, the CNFC 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, including the 5% stock dividend declared September
20, 2000 and payable on November 13, 2000.
Stock Dividends
Dividends issued in stock are reported by transferring the market value of the
stock issued from retained earnings to common stock and additional paid-in
capital. Fractional shares are paid in cash for all stock dividends.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes the change in unrealized
appreciation and depreciation on securities available for sale, net of tax,
which is also recognized as a separate component of shareholders' equity.
Financial Instruments with Off-Balance-Sheet Risk
CNFC, 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. 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
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 138, 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
9
<PAGE> 10
COMMERCIAL NATIONAL FINANCIAL CORPORATION
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 CNFC'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 periods ended is
presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 2,174,198 $ 1,985,488
================================================================================================================
Weighted-average common shares outstanding for
basic earnings per share 3,343,918 3,321,764
================================================================================================================
BASIC EARNINGS PER SHARE $ .65 $ .60
================================================================================================================
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders $ 2,174,198 $ 1,985,488
================================================================================================================
Weighted-average common shares outstanding for basic
earnings per share 3,343,918 3,321,764
Add:
Dilutive effect of assumed exercise of stock options 18,164 13,848
----------------------------------------------------------------------------------------------------------------
Weighted-average common and dilutive additional potential
common shares outstanding 3,362,082 3,335,612
================================================================================================================
DILUTED EARNINGS PER SHARE $ .65 $ .60
================================================================================================================
</TABLE>
Note 3 - Stock Option Plans
SFAS No. 123, Accounting for Stock-Based Compensation requires proforma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. The following proforma information presents
net income and basic and diluted earnings per share had the fair value method
been used to measure compensation cost for stock option plans. The exercise
price of options granted is equivalent to the market value of underlying stock
at the grant date. No compensation cost was actually recognized for stock
options.
10
<PAGE> 11
COMMERCIAL NATIONAL FINANCIAL CORPORATION
The fair value of options granted during 2000 and 1999 is estimated using the
following weighted-average information:
<TABLE>
<CAPTION>
-------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Risk-free Interest Rate Expected Life Expected Dividends Price Volatility
-------------------------- ------------------------ ------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
Granted during 2000 5.6% 3.9 4.67% 11.36%
-------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Granted during 1999 6.2% 5.0 4.00% 10.00%
-------------------------- ------------------------ ------------------------ ------------------------ -----------------------
</TABLE>
The weighted average fair value of options granted during the nine months ended
September 30, 2000 and 1999 was $1.13 and $1.09.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options granted to employees are issued for 7 year
periods, with vesting occurring over a 5 year period. Options granted to
directors are issued for 2 year periods with vesting occurring after 6 months.
At year-end 1999, 133,850 shares were authorized for future grants. At September
30, 2000 92,604 shares were authorized for future grants. The current stock
option plan expires December 31, 2000. Information about option grants follows.
<TABLE>
<CAPTION>
Number Weighted Average
of Options Exercise Price
-----------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of 1998 75,931 $ 8.88
Granted 35,420 11.18
Exercised (16,937) 9.36
----------------------------------------------------------------------
Outstanding, end of 1999 94,414 9.66
Granted 41,246 12.62
Exercised (4,305) 9.54
----------------------------------------------------------------------
Outstanding, September 30, 2000 131,355 $ 10.59
======================================================================
</TABLE>
At year-end 1999, options outstanding had a weighted-average remaining life of
5.2 years and a range of exercise price from $6.21 to $11.18. At September 30,
2000, the weighted-average remaining life was 5.1 years and the range of
exercise prices was from $6.21 to $12.62.
Options exerciseable at end of period are as follows.
<TABLE>
<CAPTION>
Number Weighted Average
of Options Exercise Price
----------------------------------------------------
<S> <C> <C>
December 30,1999 47,847 $ 8.23
September 30, 2000 53,826 $ 8.68
</TABLE>
11
<PAGE> 12
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets at September 30, 2000 increased to $210,397,000 from the
$191,022,000 at December 31, 1999. Total loans were $171,688,000 as of September
30, 2000. This represents an $19,221,000 or 12.6% 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, rather than
sell, an increasing number of residential mortgage loans originated during the
period. However, management has recently identified a weakening of loan demand
in recent months, most likely due to the increases in interest rates. Investment
securities also increased to $29,306,000 at September 30, 2000 compared to
$27,952,000 at December 31, 1999.
Deposits increased $10,319,000 or 7.0% during the period. Total deposits at
September 30, 2000 were $157,523,000 compared to $147,204,000 at December 31,
1999. Deposits, along with other forms of debt are used to fund loans and other
investments. Traditionally, community bank's relied on retail deposit as a
primary, if not sole source of funding for loans. Many community bank's are
struggling to obtain enough retail deposit balances at a reasonable cost to fund
loan growth. Commercial Bank is no exception. Deposit money continues to flow to
mutual funds and other stock and bond investments that offer the potential for
higher returns than traditional bank products offer. Also, the Bank continues to
compete for deposit funding against competitors offering deposit rates in excess
of rates paid on other viable funding sources. These issues do not appear to be
temporary phenomenon. It is for these reasons that the Bank continues to seek
alternatives to retail deposits. We view these non-traditional sources of
funding as permanent.
Included in the deposit total are certificates of deposit obtained through an
online certificate of deposit network. The Bank is accessing this source of
funding more frequently and regularly. The participants in this network are
primarily banks, and credit unions. Rates are posted on an electronic bulletin
board available to participants in the network. Certificate of deposits gathered
through this method are generally in increments of $100,000 or less. Deposits
gathered through this network totaled $11,110,000 at September 30, 2000. This
compares to $3,500,000 at December 31, 1999.
The Bank also continues to fund loan growth with various products offered by the
Federal Home Loan Bank of Indianapolis. At September 30, 2000 the Bank had
$23,500,000 in outstanding balances, compared to $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 an online service. The loan to deposit ratio at September 30, 2000 was
109.0% compared to 103.6% at December 31, 1999. Management believes that the
combination of available FHLB advances, Federal funds lines of credit, the
available for sale investment portfolio, and our ability to sell mortgage loans
and the government guaranteed portion of commercial loans provides adequate
short and medium term sources of liquidity. At a minimum the Bank has the
following available to meet short-term liquidity needs: $10,400,000 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.
12
<PAGE> 13
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Asset Quality and the Allowance for Loan Loss
The allowance for loan losses was 1.46% of total loans at September 30, 2000 and
1.83% at December 31, 1999. At September 30, 2000 $325,000 is classified as
non-accrual compared to $978,000 at September 30, 1999.
Year to date net charge-offs totaled $555,000 compared to net recoveries of
$77,000 during the nine months ended September 30, 1999. At September 30, 2000
the Bank has identified $436,000 of loans as non-performing. This compares to
$989,000 at September 30, 1999. At September 30, 2000 $914,000 or .5% of loans
are currently past due. This compares to 1.7% at September 30, 1999.
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, 1999. During the quarter
CNFC 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.
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>
September 30, December 31, Minimum Required to be
2000 1999 Well Capitalized Under
---- ---- Prompt Corrective Action
Regulations
-----------
<S> <C> <C> <C>
Total capital to risk weighted assets 13.2% 14.3% 10.0%
===== ===== =====
Tier 1 capital to risk weighted assets 11.9% 13.0% 6.0%
===== ===== =====
Tier 1 capital to average assets 9.5% 10.0% 5.0%
===== ===== =====
</TABLE>
Results of Operations
Net income for the quarter ended September 30, 2000 was $732,000, an increase of
$54,000, or 8.0% compared to the same period in 1999. A 5.3% increase in net
interest income generated by strong loan demand is the primary contributing
factor to the increase in net income. In addition CNFC recorded a $10,000 or
3.9% decrease in non-interest income and a modest $21,000 or 1.5% increase in
non-interest expense.
Net income for the nine months ended September 30, 2000 was $2,174,000, an
increase of $189,000 or 9.5%. Strong loan demand generated a $524,000 or 8.5%
increase in net interest income. Offsetting the increase in net interest income
was a $100,000 or 11.4% decrease in non-interest income and a modest $120,000 or
3.0% 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 tax equivalent
net interest income for the three and nine months ending September 30, 2000 and
1999.
13
<PAGE> 14
COMMERCIAL NATIONAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Three Months Ending Sept. 30, Nine Months Ending Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income (tax equivalent) $ 4,326,431 $ 3,731,979 $ 12,382,226 $ 10,817,986
Interest Expense 1,941,067 1,465,938 5,222,025 4,196,189
------------ ------------ ------------ ------------
Net Interest Income $ 2,385,364 $ 2,266,041 $ 7,160,201 $ 6,621,797
============ ============ ============ ============
Average Volume
--------------
Interest earning Assets $198,763,637 $181,559,090 $193,091,714 $176,450,962
Interest bearing Liabilities 165,861,771 149,634,532 160,635,109 145,571,711
------------ ------------ ------------ ------------
Net Differential $ 32,901,866 $ 31,924,558 $ 32,456,605 $ 30,879,251
============ ============ ============ ============
Average Yields/Rates (annualized)
---------------------------------
Yield on Earning Assets 8.64% 8.16% 8.54% 8.20%
Rate Paid on Liabilities 4.64% 3.89% 4.33% 3.85%
----- ----- ----- -----
Interest Spread 4.00% 4.27% 4.21% 4.35%
===== ===== ===== =====
Net Interest Margin 4.76% 4.95% 4.94% 5.02%
===== ===== ===== =====
</TABLE>
The change in tax equivalent net interest income is attributable to the
following:
<TABLE>
<CAPTION>
Three Months Ending Nine months Ending
September 30, 2000 September 30, 2000
Volume Rate Inc/(Dec) Volume Rate Inc/(Dec)
------ ---- --------- ------ ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets $430,506 $ 163,946 $594,452 $1,227,538 $ 336,702 $1,564,240
Interest Bearing Liabilities 242,161 232,968 475,129 596,175 429,661 1,025,836
-------- --------- -------- ---------- --------- ----------
Net Interest Income $188,345 $ (69,022) $119,323 $ 631,363 $ (92,959) $ 538,404
======== ========= ======== ========== ========= ==========
</TABLE>
The increase in net interest income for the nine months ending September 30,
2000 is due to an increase in earning assets which was only partially offset by
a decreasing margin. Net interest margin for the nine months ending September
30, 2000 decreased to 4.94% compared to 5.02% for the nine months ending
September 30, 1999. Average earning assets for the nine months ending September
30, 2000 increased $16,641,000 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 also increased the Fed Funds rate
by 25 basis points twice during the first quarter of 2000, and by 50 basis
points once during May of 2000. This change in prime results in an almost
immediate increase in the Bank's prime lending rate. The interest rate on a
significant portion of the Bank's commercial loan portfolio is tied to the
prime-lending rate. Therefore, the Bank receives an immediate short-term benefit
to the increase in prime. In general, local deposit interest rates do not
respond as quickly to changes in the prime lending rate. However, the cost of
certificates of deposits gathered on the electronic network, and FHLB advances
are more sensitive to general changes in interest rates.
14
<PAGE> 15
COMMERCIAL NATIONAL FINANCIAL CORPORATION
These funding sources have become more expensive and have offset the short-term
benefits gained from the increase in prime. Retail deposit costs have also
increased as more banks compete for a shrinking pool of deposits. Management
believes that net interest margin will continue to decrease as additional
deposit and other borrowing instruments reprice at higher rates.
Non-interest Income
Non-interest income for the nine months ending September 30, 2000 was $777,000.
This represents a $100,000 or 11.4% decrease over the same period in 1999.
Higher interest rates have reduced mortgage refinance activity and reduced the
number of mortgage loans originated. 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. As a result, gains on loan sales have
decreased by $117,000 or 68.0% compared to the nine months ending September 30,
1999. Offsetting this decrease is an increase in receivable financing fees.
Receivable financing fees increased $33,000 or 20.3% over the nine months ending
September 30, 1999.
For the three months ended September 30, 2000 CNFC non-interest income was
$10,000 or 3.9% less than the same period in 1999.
Non-interest Expense
Non-interest expense for the nine months ending September 30, 2000 totaled
$4,127,000. This represents a $120,000 or 3.0% increase over the same period in
1999.
Salary and benefit expense for the nine months ending September 30, 2000 totaled
$2,191,000 compared to $2,047,000 an increase of $144,000 or 7.0%. The increase
reflects normal salary increases, market adjustments and an 8.0% increase in the
cost of medical insurance effective August of 1999 and a 13.0% increase
effective August of 2000. Bank staffing levels have not significantly changed
compared to the same period in 1999. The increase in salary and benefit expense
accounts for 120.6% of the increase in non-interest expenses.
Professional fees for the nine months ended September 30, 2000, decreased
$19,000 or 7.7% compared to the same period in 1999. The Bank has reduced
expenses related to the implementation, support and maintenance of P.C.'s,
networks, and other technology related equipment.
The causes for the increases and decreases in non-interest expense for the three
months ended September 30, 2000 are the same as those described above.
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
15
<PAGE> 16
COMMERCIAL NATIONAL FINANCIAL CORPORATION
its consolidated financial condition, including capital adequacy, earnings,
liquidity, and, where appropriate, asset quality.
The following table provides information about CNFC's financial instruments that
are sensitive to changes in interest rates as of September 30, 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>
(DOLLARS IN THOUSANDS)
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 $1,870 $10,282 $10,691 $ 19,978 $17,181 $ 36,555 $ 96,557 $ 94,911
AVERAGE INTEREST RATE 8.31% 7.57% 8.81% 8.61% 8.32% 8.28% 8.34%
VARIABLE INTEREST RATE LOANS 7,895 16,916 4,132 2,511 3,772 39,905 75,131 75,131
AVERAGE INTEREST RATE 10.19% 10.24% 9.80% 10.28% 10.51% 8.34% 9.21%
FIXED INTEREST RATE SECURITIES 575 5,880 4,835 5,765 5,085 5,565 27,705 27,767
AVERAGE INTEREST RATE 6.06% 5.94% 6.31% 6.24% 6.89% 7.35% 6.53%
EQUITY INVESTMENTS 204 204 294
AVERAGE INTEREST RATE 3.76% 3.76%
FHLB STOCK 1,391 1,391 1,391
AVERAGE INTEREST RATE 8.50% 8.50%
FEDERAL FUNDS SOLD 1,200 1,200 1,200
AVERAGE INTEREST RATE 6.64% 6.64%
RATE SENSITIVE LIABILITIES:
NON INTEREST BEARING DEMAND 17,946 17,946 17,946
INTEREST BEARING DEMAND 25,910 25,910 25,910
AVERAGE INTEREST RATE 1.73% 1.73%
SAVINGS 41,443 41,443 41,443
AVERAGE INTEREST RATE 2.82% 2.82%
TIME DEPOSITS 22,938 35,588 8,273 3,957 969 498 72,223 72,870
AVERAGE INTEREST RATE 5.86% 6.17% 5.99% 6.16% 5.62% 5.57% 6.04%
REPURCHASE AGREEMENTS 7,390 7,390 7,390
AVERAGE INTEREST RATE 5.85% 5.85%
U.S. TREASURY DEMAND NOTES 737 737 737
AVERAGE INTEREST RATE 5.95% 5.95%
FIXED RATE FHLB ADVANCES 1,000 2,000 2,500 1,000 6,000 12,500 12,168
AVERAGE INTEREST RATE 6.03% 6.63% 6.18% 7.01% 7.13% 6.76%
VARIABLE RATE FHLB ADVANCE 6,000 3,000 2,000 11,000 10,960
AVERAGE INTEREST RATE 6.65% 6.65% 7.24% 6.76%
</TABLE>
16
<PAGE> 17
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.
17
<PAGE> 18
COMMERCIAL NATIONAL FINANCIAL CORPORATION
COMMERCIAL NATIONAL FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 6 (a) Exhibit 27 Financial Data
Item 6 (b) Reports on Form 8-K None
18
<PAGE> 19
COMMERCIAL NATIONAL FINANCIAL CORPORATION
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 1, 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
19
<PAGE> 20
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
