<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 June 30, 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.
Class Outstanding at August 5, 1996
----- -----------------------------
Common Stock 828,109
$1.00 Par Value
Page 1 of 11
<PAGE> 2
COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
PART I FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 (page 3)
Consolidated Statements of Income for the three months
and six months ended June 30, 1996 and 1995. (page 4)
Consolidated Statements of Cash Flows for the six 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)
Page 2
<PAGE> 3
COMMERCIAL NATIONAL F
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
<CAPTION>
Consolidated Balance Sheets (unaudited) June 30, 1996 December 31, 1995
(in thousands, except share data) ------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,397 $ 5,725
Federal funds sold 1,050 2,850
-------- --------
5,447 8,575
Investment securities:
Held-to-maturity (estimated market value
of $29,374 and $29,500) 29,224 29,430
Other (estimated market value of $631 631 437
and $437)
Loans:
Commercial and agricultural 68,740 68,704
Real estate 26,279 25,535
Consumer and other 18,140 15,040
-------- --------
Total loans 113,159 109,279
Allowance for loan losses (1,752) (1,669)
-------- --------
Net loans 111,407 107,610
Property and equipment, net 3,964 3,328
-------- --------
Accrued interest and other assets 1,563 1,695
-------- --------
TOTAL ASSETS $152,236 $151,075
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand 12,733 16,002
Interest bearing demand 33,005 33,446
Savings 24,564 24,833
Time 52,844 55,420
--------- --------
Total deposits 123,146 129,701
Securities sold under agreements to repurchase 6,706 5,306
Federal Home Loan Bank borrowings 5,000 --
Demand notes issued to U.S. Treasury 1,155 560
Accrued interest and other liabilities 1,131 865
-------- --------
Total liabilities 137,138 136,432
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, par value $1, authorized
1,750,000 issued 825,049 and 814,684 SHARES 825 815
Surplus 11,853 11,625
Retained earnings 2,420 2,203
-------- --------
Total shareholders' equity 15,098 14,643
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $152,236 $151,075
======== ========
</TABLE>
page 3
See accompanying notes to consolidated financial statements
<PAGE> 4
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Consolidated Statements of Income (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,514 $2,406 $4,979 $4,730
Interest on investment securities:
Taxable 269 288 533 587
Tax exempt 166 139 356 275
Interest on federal funds sold 40 60 102 123
Other investments 9 - 18 -
------ ------ ------ ------
Total interest income 2,998 2,893 5,988 5,715
INTEREST EXPENSE:
Interest on deposits 1,148 1,092 2,326 2,118
Interest on short term borrowing 131 69 242 131
------ ------ ------ ------
Total interest expense 1,279 1,161 2,568 2,249
------ ------ ------ ------
NET INTEREST INCOME 1,719 1,732 3,420 3,466
Provision for loan losses 60 45 110 90
------ ------ ------ ------
Net income after provision for loan losses 1,659 1,687 3,310 3,376
------ ------ ------ ------
OTHER INCOME:
Service charges on deposit accounts 78 50 145 110
Other 100 144 210 248
------ ------ ------ ------
Total other income 178 194 355 358
OTHER EXPENSES:
Salaries and wages 595 523 1,168 1,018
Employee benefits 149 136 301 277
Net occupancy expense 77 67 155 136
Furniture and equipment expense 148 103 278 180
FDIC assessment 16 71 31 143
Printing and supplies 121 47 179 95
Other 363 348 732 703
------ ------ ------ ------
Total other expenses 1,469 1,295 2,844 2,552
INCOME BEFORE FEDERAL INCOME TAXES 368 586 821 1,182
Federal income taxes 60 143 136 292
------ ------ ------ ------
NET INCOME $ 308 $ 443 $ 685 $ 890
====== ====== ====== ======
NET INCOME PER COMMON SHARE $ 0.37 $ 0.54 $ 0.83 $ 1.10
DIVIDENDS PER COMMON SHARE $ 0.30 $ 0.26 $ 0.57 $ 0.50
</TABLE>
page 4
See accompanying notes to consolidated financial statements
<PAGE> 5
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Consolidated Statements of Cashflows (unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
For the six months
ended June 30,
1996 1995
------- ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 685 $ 890
Adjustments to reconcile net income
to net cash from operating activities:
Provision for loan losses 110 90
Provision for depreciation,
amortization and accretion 286 242
Changes in operating assets:
Accrued interest and other assets 112 653
Accrued interest and other liabilities 265 85
-------- -------
Net cash from operating activities 1,458 1,960
-------- -------
INVESTING ACTIVITIES:
Purchases of investment securities (5,182) (5,989)
Proceeds from maturities of investment
securities 5,130 8,510
Net (increase) decrease in loans (3,907) (2,849)
Capital expenditures (839) (542)
-------- -------
Net cash from (for) investing activities (4,798) (870)
-------- -------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (6,555) (3,628)
Net increase (decrease) in short-term borrowings 6,996 5,236
Proceeds from sale of common stock 239 164
Dividends paid and fractional shares (468) (399)
-------- -------
Net cash from (for) financing activities 212 1,373
-------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,128) 2,463
CASH AND CASH EQUIVALENTS
at beginning of year 8,575 10,099
-------- -------
CASH AND CASH EQUIVALENTS
at end of period $ 5,447 $12,562
======== =======
CASH PAID DURING THE PERIOD FOR:
Interest $ 2,554 $ 2,192
Federal Income taxes $ 127 $ 248
</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 June 30, 1996, and December 31, 1995, the
results of operations for the three months and six months ended June
30, 1996 and 1995 and cash flows for the six months ended June 30,
1996 and 1995.
NOTE 2. The results of operations for the six months ended June 30, 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 for each period retroactively adjusted for stock
dividends.
page 6
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
At June 30, 1996, total assets of the Corporation stood at $152,236,000,
representing an increase of $1,161,000 from the December 31, 1995, total of
$151,075,000. Total average assets for the first six months of 1996 and 1995
were $153,657,000 and $143,229,000 respectively. 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 personal loans
and real estate loans of $3,100,000 and $744,000, 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 $3,128,000. The Bank has also processed and sold to
the secondary market $3,080,000 in Freddie Mac mortgages. In January,
Commercial Bank entered into a borrowing relationship with the Federal Home
Loan Bank. At June 30, 1996, the borrowings were at $5,000,000. This
relationship will support future mortgages not sold into the secondary market
and other loan growth. Total deposits decreased $6,555,000 to $123,146,000 at
June 30, 1996 from $129,701,000 at December 31, 1995. This decrease was
partially offset by an increase in agreements to repurchase of $1,400,000. Due
to the agricultural community deposit levels typically decline in the summer.
Average deposits were $129,106,000 for the six months ended June 30, 1996
compared to $124,228,000 for the same period in 1995. 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 six
months of 1996 and 1995 were $129,106,000 and $124,228,000.
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 $455,000, which reflects net income for
six months of $685,000 less dividends declared of approximately $469,000, plus
dividend reinvested of $138,000 and exercised stock options of approximately
$101,000.
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 decreased $100,000 to $139,000 at June 30,
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 June 30, 1996, there were $139,000 in
impaired loans. Management believes that the allowance for loan losses of
$1,752,000 at June 30, 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 and a correlating increase
in the provision due to planned loan growth and changes in the loan mix within
the portfolio.
page 7
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
The status of non-performing loans as of June 30, 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 $ 70,000
Loans contractually past due 90 days or more as to interest or principal
payments and still accruing 3,000
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 66,000
--------
Total non-performing loans $139,000
Loans now current where there are serious doubts as to the ability of the borrower
to comply with present loan repayment terms 0
--------
TOTAL $139,000
========
</TABLE>
RESULTS OF OPERATIONS
For the six months ended June 30, 1996, total interest income increased
$273,000 and total interest expense increased by $319,000 resulting in net
interest income before the provision for loan loss expense of $3,420,000
compared to $3,466,000 for the same period in 1995. This represents a decrease
of $46,000 or approximately 1.3% over the same period in 1995. 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 5.04% for the first six months of 1996, compared to 5.33% for the
first six 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 4.10% at June 30, 1996. The Bank has also experienced a shift of
$3,269,000 from $16,002,000 at December 31, 1995 to $12,733,000 in non interest
bearing demand deposits into interest bearing instruments. When comparing the
first six months the weighted average interest rate was 4.10% at June 30, 1996
and 4.18% 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 a reasonable interest rate
risk position has been established through its asset/liability management.
On June 1, 1995, and on January 5, 1996, Commercial Bank opened two new super
market branches and in April of 1996, the bank began with the installation of a
check processing system (Imaging). Total other income decreased $3,000 over
the prior year period due in part to imaging. Total other expense increased
$292,000. The largest dollar increase in this category is reflected in
increased employee wages of $150,000 related to the supermarket branches. The
increases in furniture and equipment expense of $98,000 and printing and
supplies of $182,000 are directly related to the imaging project and the new
branch offices. The increases due to new branch offices and the imaging
project have been partially offset by a reduction in FDIC insurance expense of
$112,000.
page 8
<PAGE> 9
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Income before federal income taxes decreased by $361,000 to $821,000 for the
first six months of 1996 or a decrease of 30% from the $1,182,000 reported for
the first six months of 1995. The decrease in Federal income taxes of $156,000
was affected by an average increase in tax exempt loans of $1,290,000. The
Federal income taxes were $136,000 or 17% of income for the first six months of
1996, compared to $292,000 or 25% for the same period in 1995. Net income
after taxes through June 30, 1996 was $685,000 compared to $890,000 for the
same period in 1995.
CAPITAL AND LIQUIDITY
Total shareholders' equity at June 30, 1996, increased $455,000 over the
December 31, 1995, mark of $14,643,000. Equity as a percentage of assets at
June 30, 1996, stood at 9.9% compared to 9.7% at December 31, 1995. Dividends
declared during the first six months of 1996 represented approximately
$469,000 or 68% of net income compared to approximately $398,000 or 45% of net
income for the same period of 1995.
The net liquidity ratio at June 30, 1996, was 24% compared to 26% at June 30,
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 and 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%
June 30, 1996 3.00% 9.02% 4.00% 12.83% 8.00% 14.08%
</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
page 10
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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: August 12, 1996
---------------------
/s/ Richard F. Abbott
------------------------
Richard F. Abbott
Executive Vice President
/s/ Marlyn E. Artecki
------------------------
Marlyn E. Artecki
Vice President & Cashier
page 11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ------------
<S> <C> <C>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,397
<INT-BEARING-DEPOSITS> 110,413
<FED-FUNDS-SOLD> 1,050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 631
<INVESTMENTS-CARRYING> 29,224
<INVESTMENTS-MARKET> 29,374
<LOANS> 113,159
<ALLOWANCE> 1,752
<TOTAL-ASSETS> 152,236
<DEPOSITS> 123,146
<SHORT-TERM> 12,861
<LIABILITIES-OTHER> 1,131
<LONG-TERM> 0
0
0
<COMMON> 825
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 152,236
<INTEREST-LOAN> 4,979
<INTEREST-INVEST> 991
<INTEREST-OTHER> 18
<INTEREST-TOTAL> 5,988
<INTEREST-DEPOSIT> 2,326
<INTEREST-EXPENSE> 242
<INTEREST-INCOME-NET> 2,568
<LOAN-LOSSES> 110
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,844
<INCOME-PRETAX> 821
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 685
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 8.60
<LOANS-NON> 70
<LOANS-PAST> 3
<LOANS-TROUBLED> 66
<LOANS-PROBLEM> 139
<ALLOWANCE-OPEN> 1,668
<CHARGE-OFFS> 77
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 1,752
<ALLOWANCE-DOMESTIC> 1,137
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 615
</TABLE>
