<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 September 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 November 5, 1996
----- -------------------------------
Common Stock 831,525
$1.00 Par Value
Page 1 of 11
<PAGE> 2
COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 (page 3)
Consolidated Statements of Income for the three months and nine months
ended September 30, 1996 and 1995. (page 4)
Consolidated Statements of Cash Flows for the nine months ended September
30, 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 23 - Selected financial data
(b) Reports on Form 8-K - - None (page 10)
SIGNATURES (page 11)
</TABLE>
Page 2
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COMMERCIAL NATIONAL FINANCIAL CORPORTION
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
<CAPTION>
Consolidated Balance Sheets (unaudited) September 30, 1996 December 31, 1995
(in thousands, except share data) ------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,150 $ 5,725
Federal funds sold 450 2,850
5,600 8,575
Investment securities:
Held-to-maturity (estimated market value
of $27,586 and $29,500) 27,848 29,430
Other (estimated market value of $1,262 1,262 437
and $437)
Loans:
Commercial and agricultural 69,517 68,704
Real estate 28,154 25,535
Consumer and other 19,690 15,040
--------- ---------
Total loans 117,361 109,279
Allowance for loan losses (1,803) (1,669)
Net loans 115,558 107,610
Property and equipment, net 4,081 3,328
Accrued interest and other assets 1,597 1,695
--------- ---------
TOTAL ASSETS $ 155,946 $ 151,075
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand 14,022 16,002
Interest bearing demand 33,621 33,446
Savings 22,320 24,833
Time 54,341 55,420
--------- ---------
Total deposits 124,304 129,701
Securities sold under agreements to repurchase 3,674 5,306
Federal Home Loan Bank borrowings 10,000 -
Demand notes issued to U.S. Treasury 1,480 560
Accrued interest and other liabilities 1,213 865
Total liabilities 140,671 136,432
SHAREHOLDERS' EQUITY:
Common stock, par value $1, authorized
1,750,000 issued 828,508 and 814,684 SHARES 829 815
Surplus 11,935 11,625
Retained earnings 2,511 2,203
--------- ---------
Total shareholders' equity 15,275 14,643
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,946 $ 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 For the nine months
ended September 30, ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,514 $ 2,415 $ 7,625 $ 7,145
Interest on investment securities:
Taxable 269 274 763 861
Tax exempt 166 139 543 414
Interest on federal funds sold 40 107 113 230
Other investments 9 - 33 -
-------- -------- ------- -------
Total interest income 2,998 2,935 9,077 8,650
INTEREST EXPENSE:
Interest on deposits 1,148 1,148 3,477 3,266
Interest on short term borrowing 131 98 403 229
-------- -------- ------- -------
Total interest expense 1,279 1,246 3,880 3,495
-------- -------- ------- -------
NET INTEREST INCOME 1,719 1,689 5,197 5,155
Provision for loan losses 60 45 170 135
-------- -------- ------- -------
Net income after provision for loan losses 1,659 1,644 5,027 5,020
-------- -------- ------- -------
OTHER INCOME:
Service charges on deposit accounts 78 50 219 160
Other 100 86 304 334
-------- -------- ------- -------
Total other income 178 136 523 494
OTHER EXPENSES:
Salaries and wages 595 539 1,762 1,557
Employee benefits 149 134 451 411
Net occupancy expense 77 74 212 210
Furniture and equipment expense 148 100 432 280
FDIC and SAIF assessment 16 (13) 120 130
Printing and supplies 121 51 242 146
Other 363 381 1,106 1,084
-------- -------- ------- -------
Total other expenses 1,469 1,266 4,325 3,818
INCOME BEFORE FEDERAL INCOME TAXES 368 514 1,225 1,696
Federal income taxes 60 111 200 403
-------- -------- ------- -------
NET INCOME $ 308 $ 403 $ 1,025 $ 1,293
======== ======== ======= =======
NET INCOME PER COMMON SHARE $ 0.41 $ 0.49 $ 1.24 $ 1.59
DIVIDENDS PER COMMON SHARE $ 0.30 $ 0.26 $ 0.87 $ 0.75
</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 nine months
ended September 30,
OPERATING ACTIVITIES: 1996 1995
---- ----
<S> <C> <C>
Net income $ 1,025 $ 1,293
Adjustments to reconcile net income to
net cash from operating activities:
Provision for loan losses 170 135
Provision for depreciation,
amortization and accretion 431 356
Changes in operating assets:
Accrued interest and other assets 69 574
Accrued interest and other liabilities 348 166
------- --------
Net cash from operating
activities 2,043 2,524
------- --------
INVESTING ACTIVITIES:
Purchases of investment securities (7,359) (8,917)
Proceeds from maturities of investment securities 8,030 11,160
Net increase in loans (8,118) (5,151)
Capital expenditures (1,069) (695)
------- --------
Net cash (for) investing
activities (8,516) (3,603)
------- --------
FINANCING ACTIVITIES:
Net (decrease) in deposits (5,397) (2,331)
Net increase in short-term borrowings 9,288 3,965
Proceeds from sale of common stock 324 245
Dividends paid and fractional shares (717) (608)
------- --------
Net cash from financing
activities 3,498 1,271
------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,975) 192
CASH AND CASH EQUIVALENTS
at beginning of year 8,575 10,099
CASH AND CASH EQUIVALENTS ------- --------
at end of period $ 5,600 $ 10,291
======= ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 3,964 $ 3,352
Federal Income taxes $ 141 $ 363
</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 September 30, 1996, and
December 31, 1995, the results of operations for the three months
and nine months ended September 30, 1996 and 1995 and cash flows
for the nine months ended September 30, 1996 and 1995.
NOTE 2. The results of operations for the nine months ended September 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 September 30, 1996, total assets of the Corporation stood at $155,946,000,
representing an increase of $4,871,000 from the December 31, 1995, total of
$151,075,000. Total average assets for the first nine months of 1996 and 1995
were $153,819,000 and $143,777,000 respectively. Total average assets for the
third quarter of 1996 and 1995 were $154,135,000 and $145,535,000
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 $4,650,000 and $2,619,000, respectively. Commercial loans
increased by $813,000. 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 decreases in federal funds sold of $2,400,000,
a decline in securities of $757,000 and a decrease in cash of $575,000. In
January, Commercial Bank entered into a borrowing relationship with the
Federal Home Loan Bank. At September 30, 1996, the borrowings were at
$10,000,000. This relationship will support future mortgages and other loan
growth. Total deposits decreased $5,397,000 to $124,304,000 at September 30,
1996 from $129,701,000 at December 31, 1995. Due to the agricultural community
deposit levels typically decline in the summer. Average deposits were
$128,431,000 for the nine months ended September 30, 1996 compared to
$123,887,000 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 third quarter of 1996 and
1995 were $127,095,000 and $123,218,000.
Total shareholders' equity increased $632,000, which reflects net income for
nine months of $1,025,000 less dividends declared of approximately $717,000,
plus dividend reinvested of $217,000 and exercised stock options of
approximately $107,000.
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 $3,000 to $242,000 at September 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 September 30, 1996, there were $196,000
in impaired loans which includes $69,000 in non-accrual loans. Management
believes that the allowance for loan losses of $1,803,000 at September 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 September 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 $ 69,000
Loans contractually past due 90 days or more as to interest or principal
payments and still accruing 49,000
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 124,000
---------
Total non-performing loans $ 242,000
Loans now current where there are serious doubts as to the ability of the borrower
to comply with present loan repayment terms 125,000
---------
TOTAL $ 367,000
---------
</TABLE>
RESULTS OF OPERATIONS
For the nine months ended September 30, 1996, total interest income increased
$427,000 and total interest expense increased by $385,000 resulting in net
interest income before the provision for loan loss expense of $5,197,000
compared to $5,155,000 for the same period in 1995. This represents an
increase of $42,000 or approximately 1% 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 5.03% for the first nine months of 1996, compared to 5.26% for the
first nine 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 4.26% in September of
1995 to 4.22% at September 30, 1996. The Bank has also experienced a shift of
$1,980,000 from $16,002,000 at December 31, 1995 to $14,022,000 in non interest
bearing demand deposits into interest bearing instruments. 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 increased $29,000 over
the prior year period and total other expense increased $507,000. The largest
dollar increase in this category is reflected in increased employee wages of
$205,000 related to the supermarket branches. The increases in furniture and
equipment expense of $152,000 and printing and supplies of $96,000 are
directly related to the imaging project and the new branch offices. On
September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into
law. In part, this legislation required financial institutions to pay a
special assessment to capitalize the Savings Association Insurance Fund. In
1992 Commercial Bank purchased a branch in Greenville from Great Lakes Bancorp.
The deposits of that branch were subject to this special assessment which
resulted in $77,000 of non recurring expense.
Page 8
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COMMERCIAL NATIONAL FINANCIAL CORPORATION
Income before federal income taxes decreased by $471,000 to $1,225,000 for the
first nine months of 1996 or a decrease of 28% from the $1,696,000 reported for
the first nine months of 1995. The decrease in Federal income taxes of
$203,000 was affected by an average increase in tax exempt loans of $672,000.
The Federal income taxes were $200,000 or 16% of income for the first nine
months of 1996, compared to $403,000 or 24% for the same period in 1995. Net
income after taxes through September 30, 1996 was $1,025,000 compared to
$1,293,000 for the same period in 1995.
CAPITAL AND LIQUIDITY
Total shareholders' equity at September 30, 1996, increased $632,000 over the
December 31, 1995, mark of $14,643,000. Equity as a percentage of assets at
September 30, 1996, stood at 9.8% compared to 9.7% at December 31, 1995.
Dividends declared during the first nine months of 1996 represented
approximately $717,000 or 70% of net income compared to approximately $608,000
or 47% of net income for the same period of 1995.
The net liquidity ratio at September 30, 1996, was 1.65% compared to 1.66% at
September 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 any available lines of credit
through correspondent banks and the available borrowings from the Federal Home
Bank. Net liquid liabilities include any maturities on $100,000 and over on
certificates of deposit of, the average percentage of withdrawals from other
deposits and an allowance for off balance sheet committments that my need to be
funded in the immediate future. 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%
September 30, 1996 3.00% 8.90% 4.00% 12.63% 8.00% 13.88%
</TABLE>
page 9
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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: October 10, 1996
/s/ Dean E. Milligan
President and CEO
/s/ Marlyn E. Artecki
Vice President & Cashier
page 11
<PAGE> 12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,150
<INT-BEARING-DEPOSITS> 110,282
<FED-FUNDS-SOLD> 450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,262
<INVESTMENTS-CARRYING> 27,848
<INVESTMENTS-MARKET> 28,848
<LOANS> 117,361
<ALLOWANCE> 1,803
<TOTAL-ASSETS> 155,946
<DEPOSITS> 124,304
<SHORT-TERM> 15,154
<LIABILITIES-OTHER> 1,213
<LONG-TERM> 0
0
0
<COMMON> 829
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 155,946
<INTEREST-LOAN> 7,625
<INTEREST-INVEST> 1,419
<INTEREST-OTHER> 33
<INTEREST-TOTAL> 9,077
<INTEREST-DEPOSIT> 3,477
<INTEREST-EXPENSE> 3,880
<INTEREST-INCOME-NET> 5,197
<LOAN-LOSSES> 170
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,325
<INCOME-PRETAX> 1,225
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,025
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 8.60
<LOANS-NON> 69
<LOANS-PAST> 49
<LOANS-TROUBLED> 124
<LOANS-PROBLEM> 242
<ALLOWANCE-OPEN> 1,668
<CHARGE-OFFS> 105
<RECOVERIES> 70
<ALLOWANCE-CLOSE> 1,803
<ALLOWANCE-DOMESTIC> 1,366
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 437
</TABLE>
