<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996, 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) (I.R.S. Employer Identification No.)
101 N. Pine River Street
Ithaca, Michigan 48847
(Address of principal executive offices) (Zip Code)
Registrants 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.
<TABLE>
Class Outstanding at April 1, 1996
-------------- ----------------------------
<S> <C>
Common Stock 822,254
$1.00 Par Value
</TABLE>
Page 1 of 11
<PAGE> 2
COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995 (page 3)
Consolidated Statements of Income for the three months ended March 31,
1996 and 1995 (page 4)
Consolidated Statements of Cash Flows for the three months ended March 31,
1996 and 1995 (page 5)
Notes to consolidated financial statements (page 6)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (pages 7-9)
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Selected financial data
(b) Reports on Form 8-K - - None (page 10)
SIGNATURES (page 11)
</TABLE>
Page 2
<PAGE> 3
COMMERCIAL NATIONAL FINANCIAL CORPORTION
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
<CAPTION>
Consolidated Balance Sheets (unaudited) March 31, 1996 December 31, 1995
-------------- -----------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,230 $ 5,725
Federal funds sold 3,850 2,850
-------- --------
9,080 8,575
Investment securities:
Held-to-maturity (estimated market value
of $32,612 and $29,500) 32,375 29,430
Other (estimated market value of $437,000) 437 437
Loans:
Commercial and agricultural 69,570 68,704
Real estate 24,663 25,535
Consumer and other 15,332 15,040
-------- --------
Total loans 109,565 109,279
Allowance for loan losses (1,742) (1,669)
-------- --------
Net loans 107,823 107,610
Property and equipment, net 3,526 3,328
Accrued interest and other assets 1,978 1,695
-------- --------
TOTAL ASSETS $155,219 $151,075
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non interest bearing demand 13,375 16,002
Interest bearing demand 34,782 33,446
Savings 24,705 24,833
Time 55,452 55,420
-------- --------
Total deposits 128,314 129,701
Securities sold under agreements to repurchase 6,992 5,306
Federal Home Loan Bank borrowings 3,000
Demand notes issued to U.S. Treasury 930 560
Accrued interest and other liabilities 1,078 865
-------- --------
Total liabilities 140,314 136,432
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00, authorized
1,750,000, issued 819,401 and 814,686 shares 819 815
Surplus 11,726 11,625
Retained earnings 2,360 2,203
-------- --------
Total shareholders' equity 14,905 14,643
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $155,219 $151,075
======== ========
</TABLE>
page 3
See accompanying notes to consolidated financial statements
<PAGE> 4
COMMERCIAL NATIONAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Consolidated Statements of Income (unaudited)
(in thousands, except per share data) For the three months
ended March 31,
1996 1995
------- -------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,465 $ 2,324
Interest on investment securities:
Taxable 264 299
Tax exempt 190 136
Interest on federal funds sold 62 63
Other investments 9 -
------- -------
Total interest income 2,990 2,822
INTEREST EXPENSE:
Interest on deposits 1,178 1,026
Interest on short term borrowing 111 62
------- -------
Total interest expense 1,289 1,088
------- -------
NET INTEREST INCOME 1,701 1,734
Provision for loan losses 50 45
------- -------
Net income after provision for loan losses 1,651 1,689
------- -------
OTHER INCOME:
Service charges on deposit accounts 67 60
Other 110 104
------- -------
Total other income 177 164
OTHER EXPENSES:
Salaries and wages 573 495
Employee benefits 152 141
Net occupancy expense 78 69
Furniture and equipment expense 130 77
FDIC assessment 15 72
Printing and supplies 58 48
Other 369 355
------- -------
Total other expenses 1,375 1,257
INCOME BEFORE FEDERAL INCOME TAXES 453 596
Federal income taxes 76 149
------- -------
NET INCOME $ 377 $ 447
======= =======
NET INCOME PER COMMON SHARE $ 0.46 $ 0.59
DIVIDENDS PER COMMON SHARE $ 0.27 $ 0.25
</TABLE>
page 4
See accompanying notes to consolidated financial statements
<PAGE> 5
COMMERCIAL NATIONAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Consolidated Statements of Cashflows (unaudited)
(in thousands of dollars) For the three months
ended March 31,
1996 1995
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 377 $ 447
Adjustments to reconcile net income to
net cash from operating activities:
Provision for loan losses 50 45
Provision for depreciation,
amortization and accretion 125 116
Changes in operating assets:
Accrued interest and other assets (294) 67
Accrued interest and other liabilities 213 (768)
---------- ---------
Net cash from operating
activities 471 (93)
---------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities (4,468) (3,714)
Proceeds from maturities of investment securities 1,500 5,000
Net increase in loans (265) (1,957)
Capital expenditures (289) (189)
---------- ---------
Net cash from investing
activities (3,522) (860)
---------- ---------
FINANCING ACTIVITIES:
Net decrease in deposits (1,387) (3,399)
Net increase in short-term borrowings 5,056 611
Proceeds from sale of common stock 106 78
Dividends paid and fractional shares (219) (191)
---------- ---------
Net cash from financing
activities 3,556 (2,901)
---------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 505 (3,854)
CASH AND CASH EQUIVALENTS
at beginning of year 8,575 10,099
CASH AND CASH EQUIVALENTS
---------- ---------
at end of period $ 9,080 $ 6,245
========== =========
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,296 $ 1,062
Federal Income taxes $ 105 $ 1
</TABLE>
page 5
See accompanying notes to consolidated financial statements
<PAGE> 6
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Notes to Consolidated Financial Statements (unaudited)
NOTE 1. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of normal recurring accruals) considered necessary
to present fairly the financial position as of March 31, 1996, and
December 31, 1995, the results of operations for the three
months ended March 31, 1996 and 1995 and cash flows for the
three months ended March 31, 1996 and 1995.
NOTE 2. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results for the full
year.
NOTE 3. Income and dividends per share are based on the average number
of shares outstanding at the end of each period retroactively
adjusted for stock dividends.
page 6
<PAGE> 7
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
At March 31, 1996, total assets of the Corporation stood at $155,219,000,
representing an increase of $4,144,000 from the December 31, 1995, total of
$151,075,000. Total average assets for the first three months of 1996 and 1995
were $153,067,000 and $ 142,999,000 respectively.
The most significant changes in the asset and liability structure of
Commercial National Financial Corporation include increases in securities and
federal funds sold of $2,945,000 and $1,000,000, respectively and commercial
and personal loans of $866,000 and $292,000, respectively. This increased
loan activity is a reflection of the overall increased economic activity in the
market area. These asset increases have been partially offset by a decrease
in cash of $495,000 and a decrease in real estate mortgages of $872,000. The
Bank has also processed and sold to the secondary market $2,149,000 in Freddie
Mac mortgages. In January, Commercial Bank entered into a borrowing
relationship with the Federal Home Loan Bank. At March 31, 1996, the borrowings
were at $3,000,000. This relationship will support future mortgages not sold
into the secondary market and other loan growth. This borrowing has
temporarily increased securities by $2,945,000 to $32,375,000 at March 31, 1996
compared to $29,430,000 at December 31, 1995. Total deposits decreased
$1,387,000 to $128,314,000 at March 31, 1996 from $129,701,000. This decrease
was offset by an increase in agreements to repurchase of $1,686,000. On June 1,
1995, and on January 5, 1996, Commercial Bank opened two new super market
branches, and offered new deposit products to meet the full needs of its
customers and to increase its customer base. As a result, the Bank attracted
a number of new customers and experienced a movement of funds from demand and
savings into higher interest rate instruments. Total average deposits for the
first three months of 1996 and 1995 were $129,573,000 and $124,384,000,
respectively.
Total shareholders' equity increased $262,000, which reflects net income for
three months of $377,000 less dividends declared of approximately $221,000,
plus dividend reinvested of $69,000 and exercised stock options of
approximately $37,000.
Non-performing loans are monitored on a continuing basis by management through
the assessment of the adequacy of the allowance for loan losses. Non-accrual,
past due and restructured loans increased $92,000 to $331,000 at March 31, 1996,
compared to $239,000 at December 31, 1995. Generally, the accrual of interest
income on a loan is suspended when the loans becomes 90 days past due, unless
the loan is fully secured and is in the process of collection. A restructured
loan is generally one that is accruing interest, but on which concessions in
terms have been granted as a result of deterioration in the financial condition
of the borrower. At March 31, 1996, there were $173,000 in impaired loans.
Management believes that the allowance for loan losses of $1,742,000 at March
31, 1996, is adequate to cover all potential losses on non-performing loans and
other loans not specifically identified as non-performing based on its analysis
of the loan portfolio. However, the Bank does expect the level of net chargeoffs
to increase in the future as a result of planned loan growth and changes in the
loan mix within the portfolio.
page 7
<PAGE> 8
COMMERCIAL NATIONAL FINANCIAL CORPORATION
The status of non-performing loans as of March 31, 1996 is as follows:
COMMERCIAL NATIONAL FINANCIAL CORPORATION
ANALYSIS OF NON-PERFORMING LOANS
<TABLE>
<S> <C>
Loans accounted for on a non-interest accrual basis $173,000
Loans contractually past due 90 days or more as to interest or principal
payments and still accruing 89,000
Loans, the terms of which have been renegotiated to provide a reduction
or deferral of interest or principal because of a deterioration in the financial
position of the borrower 68,000
--------
Total non-performing loans $331,000
Loans now current where there are serious doubts as to the ability of the borrower
to comply with present loan repayment terms 0
--------
TOTAL $331,000
========
</TABLE>
RESULTS OF OPERATIONS
For the three months ended March 31, 1996, total interest income increased
$168,000 and total interest expense increased by $201,000 resulting in net
interest income before the provision for loan loss expense of $1,701,000
compared to $1,734,000 for the same period in 1995. This represents a decrease
of $33,000 or approximately 1.9% over the same period in 1995 and results from
decline in net interest margin. The net interest margin, which is expressed
as the net interest income (federal tax equivalent interest income minus
interest expense) divided by average earning assets was 5.02% for the first
three months of 1996, compared to 5.35% for the first three months of 1995.
The decrease in margin was primarily due to decreased interest rates and volume
related to certain variable rate loans (interest rates are tied to the prime
interest rate) compared to the volume of variable rate deposits. The effect
of rate and volume decreases on these loans was partially offset by the effects
of a decrease in weighted average interest rates on interest bearing
liabilities from 4.27% in January of 1996 to 4.14% at March 31, 1996. The
Bank has also experienced a shift of $2,627,000 from $16,002,000 at December
31, 1995 to $13,375,000 in non interest bearing demand deposits into interest
bearing instruments. When comparing the first three months the weighted
average interest rate was 4.14% at March 31, 1996 and 3.86% for the same period
in 1995. The decrease in weighted average interest rates on loans could impact
future earnings due to unfavorable changes in the prime rate, however,
management feels that it can continue to originate loans which generate
adequate net interest margin .
The provision for loan loss expense was $50,000 for the first three months of
1996 and $45,000 for the same period in 1995. Total other income increased
$13,000 over the prior year period due in part to increased volume in Freddie
Mac loans and a increase in the amount of fees charged to customers on deposit
accounts. Total other expense increased $118,000. The largest dollar
increase in this category is reflected in increased employee wages of $78,000.
On June 1, 1995, and on January 5, 1996, Commercial Bank opened two new super
market branches causing this dollar increase in wages. The additional
salaries, benefits, depreciation and other general expenses are all associated
with the new branch offices. The increases due to new branches have been
partially offset by a reduction in FDIC insurance expense of $57,000.
page 8
<PAGE> 9
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Income before federal income taxes decreased by $143,000 to $453,000 for the
first three months of 1996 or a decrease of 24% from the $596,000 reported for
the first three months of 1995. The decrease in Federal income taxes of
$73,000 was affected by an average increase in tax exempt loans of $1,546,000.
The Federal income taxes were $76,000 or 17% of income for the first three
months of 1996, compared to $149,000 or 25% for the same period in 1995. Net
income after taxes through March 31, 1996 was $377,000 compared to $447,000
for the same period in 1995.
CAPITAL AND LIQUIDITY
Total shareholders' equity at March 31, 1996, increased $262,000 over the
December 31, 1995, mark of $14,643,000. Equity as a percentage of assets at
March 31, 1996, stood at 9.6% compared to 9.7% at December 31, 1995. Dividends
declared during the first three months of 1996 represented approximately
$221,000 or 59% of net income compared to approximately $191,000 or 43% of net
income for the same period of 1995.
Net cash from operating activities increased by $564,000 from ($93,000) to
$471,000 for the first three months ended March 31, 1996 compared to the same
period in 1995. This was due to increased earnings positively adjusted for
changes in accrued interest receivable and payable. Investing activities
caused an increase in the use of cash and cash equivalents of $2,662,000 from
($860,000) to ($3,522,000) for the first three months ended March 31, 1996
compared to the corresponding period in 1995. These changes are reflective of
decreased loan origination activity and increased investment security purchase
activity. Increased short term borrowings offset by a decrease in deposits
resulted in an increase in net cash and cash equivalents from financing
activities of $6,457,000 from ($2,901,000) at March 31, 1996 compared to
$3,556,000 for the corresponding period in 1995.
The net liquidity ratio at March 31, 1996, was 27% compared to 39% at March
31, 1995. The liquidity ratio is expressed as a percentage of net liquid
assets to net liquid liabilities. Net liquid assets are investment securities
not pledged, federal funds sold, and cash due from banks less the Federal
Reserve Bank reserve requirement. Net liquid liabilities include total
deposits less demand notes issued by the U.S. Treasury which have investment
securities pledged on a dollar for dollar basis, and the Michigan farm disaster
deposits that fund certain farm loans. Federal funds borrowings and borrowings
from the Federal Home Loan Bank are another potential source of funds.
Management, through the asset and liability committee, reviews and evaluates
the liquidity position, and the gap position of the Bank on a monthly basis.
The primary liquidity goal is to meet the cash flow requirements of depositor
withdrawals and loan funding needs of the local community. To properly assess
the accomplishment of the liquidity goal, the asset and liability committee
evaluates the seasonal loan funding demand, maturities of the investment
portfolio and corresponding sources of funds that support each facet of the
Banks' liquidity.
Based on regulatory guidelines the leverage ratio, tier I capital ratio and the
risk-based capital ratio is as follows:
COMMERCIAL NATIONAL FINANCIAL CORPORATION
LEVERAGE RATIO, TIER I, AND RISK-BASED CAPITAL RATIO
<TABLE>
<CAPTION>
Risk-Based
Leverage Ratio Tier I Ratio Capital Ratio
Required Actual Required Actual Required Actual
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 3.00% 9.43% 4.00% 13.04% 8.00% 14.29%
March 31, 1996 3.00% 9.47% 4.00% 13.98% 8.00% 15.23%
</TABLE>
page 9
<PAGE> 10
COMMERCIAL NATIONAL FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 - FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
None
10
<PAGE> 11
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 6, 1996
---------------------
Dean E. Milligan
President and CEO
Marlyn E. Artecki
Vice President & Cashier
page 11
<PAGE> 12
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
Financial Data Schedule
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,230
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 32,812
<INVESTMENTS-MARKET> 33,049
<LOANS> 109,565
<ALLOWANCE> 1,742
<TOTAL-ASSETS> 155,219
<DEPOSITS> 128,314
<SHORT-TERM> 10,922
<LIABILITIES-OTHER> 1,078
<LONG-TERM> 0
0
0
<COMMON> 819
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 155,219
<INTEREST-LOAN> 2,465
<INTEREST-INVEST> 463
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 2,990
<INTEREST-DEPOSIT> 1,178
<INTEREST-EXPENSE> 111
<INTEREST-INCOME-NET> 1,701
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,375
<INCOME-PRETAX> 453
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 377
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 8.45
<LOANS-NON> 173
<LOANS-PAST> 89
<LOANS-TROUBLED> 68
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,668
<CHARGE-OFFS> 11
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 1,742
<ALLOWANCE-DOMESTIC> 1,067
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 675
</TABLE>
