<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, 1997, 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 April 1, 1997
------------ ----------------------------
Common Stock 884,582
$1.00 Par Value
Page 1 of 13
<PAGE> 2
COMMERCIAL NATIONAL FINANCIAL CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 (page 3)
Consolidated Statements of Income for the three months ended
March 31, 1997 and 1996 (page 4)
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (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 (pages 10-12)
SIGNATURES (page 13)
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
COMMERCIAL NATIONAL FINANCIAL CORPORTION
<TABLE>
<CAPTION>
Consolidated Balance Sheets March 31, 1997 December 31,1996
--------------------------------
(in thousands) (unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,358 $ 6,551
Federal funds sold 3,000 6,600
-------- --------
9,358 13,151
Securities held-to-maturity (estimated market value
of $24,920 and $25,484) 24,815 25,532
Federal Home Loan Bank stock, at cost 1,262 1,262
Loans
Commercial and agricultural 71,410 72,012
Real estate 28,910 28,887
Consumer and other 21,638 21,426
-------- --------
Total loans 121,958 122,325
Allowance for loan losses (1,881) (1,824)
-------- --------
Net loans 120,077 120,501
Property and equipment, net 4,021 4,047
Accrued interest and other assets 1,689 1,697
-------- --------
Total Assets $161,222 $166,190
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing demand $ 14,937 $ 17,110
Interest bearing demand 36,550 36,010
Savings 21,989 21,379
Time 53,320 58,518
-------- --------
Total deposits 126,796 133,017
Securities sold under agreements to repurchase 6,374 5,602
Demand notes issued to U.S. Treasury 943 942
Federal Home Loan Bank borrowings 10,000 10,000
Accrued interest and other liabilities 1,208 1,134
-------- --------
Total liabilities 145,321 150,695
-------- --------
Shareholders' equity
Common stock, par value $1.00, authorized
1,750,000, issued 884,582 and 872,982 shares 885 873
Additional paid-in capital 13,363 13,123
Retained earnings 1,653 1,499
-------- --------
Total shareholders' equity 15,901 15,495
-------- --------
Tolal liabilities and shareholders' equity $161,222 $166,190
======== ========
</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,
1997 1996
------ ------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,717 $2,465
Interest on investment securities
Taxable 167 264
Tax exempt 189 190
Interest on Federal funds sold 86 62
FHLB stock dividends 24 9
------ ------
Total interest income 3,183 2,990
INTEREST EXPENSE
Interest on deposits 1,158 1,178
Interestrepurchase agreements
and other short term borrowings 86 95
Interest on FHLB borrowing 142 16
Total interest expense 1,386 1,289
------ ------
NET INTEREST INCOME 1,797 1,701
Provision for loan losses 60 50
------ ------
Net income after provision for loan losses 1,737 1,651
------ ------
OTHER INCOME
Service charges on deposit accounts 73 67
Other 111 110
------ ------
Total other income 184 177
OTHER EXPENSES
Salaries and wages 534 573
Employee benefits 156 152
Occupancy expense 69 78
Furniture and equipment expense 170 130
FDIC assessment 5 15
Printing and supplies 55 51
Other 390 376
------ ------
Total other expenses 1,379 1,375
Income before federal income taxes 542 453
Federal income taxes 124 76
------ ------
Net income $ 418 $ 377
====== ======
Net income per common share $ 0.47 $ 0.44
====== ======
Dividends per common share $ 0.30 $ 0.26
====== ======
</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,
CASH FLOW FROM OPERATING ACTIVITIES 1997 1996
---- ----
<S> <C> <C>
Net income $ 418 $ 377
Adjustments to reconcile net income to
net cash from operating activities:
Provision for loan losses 60 50
Depreciation, amortization and accretion 148 125
Amortization of goodwill and premium
associated with an acquisition 14 14
Gain on sale of mortgage loans (15) -
Proceeds from mortgage loan sales 1,121 -
Mortgage loans originated for sale (1,114) -
Accrued interest and other assets (6) (304)
Accrued interest and other liabilities 74 213
------- -------
Net cash from operating activities 700 475
------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of investment securities (1,998) (4,468)
Proceeds from maturities of investment securities 2,700 1,500
Net (increase) decrease in loans 359 (269)
Capital expenditures (93) (289)
------- -------
Net cash from investing activities 968 (3,526)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Net decrease in deposits (6,221) (1,387)
Increase in FHLB borrowings 2,000 3,000
Proceeds from maturities of FHLB borrowings (2,000) -
Net increase in short-term borrowings 773 2,056
Proceeds from issuance of common stock 251 106
Dividends paid and fractional shares (264) (219)
------- -------
Net cash from financing activities (5,461) 3,556
------- -------
NET CHANGE IN CASH
AND CASH EQUIVALENTS (3,793) 505
Cash and cash equivalents,
at beginning of year 13,151 8,575
------- -------
Cash and cash equivalents,
at end of period $ 9,358 $ 9,080
======= =======
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,562 $ 1,296
Federal Income taxes $ - $ 105
</TABLE>
page 5
See accompanying notes to consolidated financial statements
<PAGE> 6
COMMERCIAL NATIONAL FINANCIAL CORPORATION
Notes to Consolidated Financial Statements(Unaudited)
Note 1-Summary of Significant Accounting Policies
Basic Presentation: The accompanying unaudited condensed consolidated
- ------------------
financial statements were prepared in accordance with Rule 10-01 of regulation
S-X and the instructions for Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting principles for complete
presentation of financial statements. In the opinion of management, the
condensed consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial
condition of Commercial National Financial Corporation as of March 31, 1997 and
December 31, 1996, and the results of its operations and cash flow for the three
months ending March 31, 1997 and March 31, 1996. The results for the three
months ended March 31, 1997 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
(the Corporation) and its wholly owned subsidiary, Commercial Bank (the Bank).
All material inter-company accounts and transactions have been eliminated in
consolidation.
Investment in Debt and Equity Securities: Securities are classified into held
- ----------------------------------------
to maturity, available for sale and trading categories. Held to maturity
securities are those which the Corporation has the positive intent and ability
to hold to maturity. These securities are reported at amortized cost.
Available for sale securities are those which the Corporation may decide to
sell if needed for liquidity, asset-liability management, tax planning or other
reasons. Available for sale securities are reported at fair value, with
unrealized gains or losses included as a separate component of equity net of
tax. Trading securities are bought principally for sale in the near term, and
are reported at fair value with unrealized gains or losses included in
earnings. The Corporation did not hold an securities as available for sale or
for trading at any time during the first quarter of 1997.
Income Taxes: Income tax for the quarter ended March 31, 1997and 1996 is based
- ------------
upon the liability method, according to SFAS No. 109, "Accounting for Income
Taxes." Certain income tax and expense items are reported in different time
periods for tax purposes. Deferred or prepaid taxes are recorded in Other
Assets in the balance sheet.
Earnings Per Share: Earnings per share is computed by dividing net income by
- ------------------
the weighted average number of common shares outstanding and common equivalent
shares with a dilutive effect. Common equivalent shares are shares which may
be issuable to employees upon exercise of outstanding stock options. The
average number of shares was 878,387 in the first quarter of 1997 and 858,742
in the first quarter of 1996.
Page 6
<PAGE> 7
FINANCIAL CONDITION
Average assets for the quarter ending March 31, 1997 increased to $164,000,000
from the $161,220,000 at the quarter ending December 31, 1996. The Bank
continues to benefit from strong loan demand and a healthy loan portfolio.
Total loans averaged $122,000,000 during the first quarter of 1997. This is a
$2,697,000 or 2.3% increase over the quarter ending December 31, 1996 balance of
$119,303,000. Commercial loans contributed $1,652,000 of the growth. Loans to
consumers contributed an additional $1,015,000 of the growth while mortgage loan
balances remained stable. Interest rates and a strong local economy should
allow for continued demand for business related loans over the next several
quarters. Reduced dealer reserves will adversely affect the growth rate in
consumer loans. Average balances were as follows:
<TABLE>
<CAPTION>
3/31/97 12/31/96
------------- -------------
<S> <C> <C>
Mortgage $ 28,836,000 $ 28,806,000
Commercial and commercial real estate 71,628,000 69,976,000
Consumer and other 21,536,000 20,521,000
------------- -------------
Total average loans $122,000,000 $119,303,000
============= =============
</TABLE>
Total securities averaged $26,697,000 during the quarter ending March 31, 1997.
This is $1,876,000 less than the quarter ending December 31, 1996. We
anticipate increasing the balance in Treasury securities to accommodate requests
for repurchase agreements and for future short term liquidity needs.
Average deposits for the quarter ending March 31, 1997 totaled $130,478,000.
The balances remained stable compared to the quarter ending December 31, 1996.
There was, however, a shift in deposits categories from savings to
interest-bearing demand deposits.
<TABLE>
<CAPTION>
3/31/97 12/31/96
------------- -------------
<S> <C> <C>
Non-interest bearing demand $ 14,752,000 $ 14,766,000
Interest-bearing demand 37,795,000 35,277,000
Savings 21,720,000 22,863,000
Time 56,211,000 56,526,000
------------- -------------
Total deposits $130,478,000 $129,431,000
============= =============
</TABLE>
The Bank continues to use Federal Home Loan Bank (FHLB) advances to fund loan
growth. Average advances outstanding remained unchanged at $10,000,000 during
the quarter ending March 31, 1997, the Bank has the ability to access an
additional $5,000,000 in borrowings from the FHLB in Indianapolis. Depending on
the interest rate environment, type of assets to be funded, and availability of
liquidity through other sources, the Bank may increase FHLB borrowings in the
future.
LIQUIDITY AND RATE SENSITIVITY
Loan growth continues to outpace deposit growth. The loan to deposit ratio
based on ending balances increased to 96.2% at March 31, 1997 from 92.0% at
December 31, 1996.
Maturities of securities have been used to partially fund loan growth. The Bank
has previously elected to classify all securities as held to maturity.
Accordingly these securities are not available to fund short term liquidity
needs except as they mature. During 1997, $11,780,000 of securities will
mature. We anticipate that a percentage of securities purchased to replace
maturities will be classified as held-for-sale. The available for sale
securities will be used to assist the Bank in managing liquidity. As
previously discussed, the Bank has available an additional $5,000,000 in FHLB
advances to fund loan growth.
Fed funds sold averaged $6,566,000 during the quarter compared to $4,510,000
during the fourth quarter of 1996. The goal of the Bank is to maintain fed
funds sold at least equal to 2% of total assets. The percentage of fed funds
sold to total assets at March 31, 1997 was 4%.
Page 7
<PAGE> 8
ASSET QUALITY
The allowance for loan losses was 1.54% of total loans at March 31, 1997
compared to 1.49% at December 31, 1996. Net charge-offs totaled $3,494 for the
quarter ending March 31, 1997. The Bank expects that these ratios will
continue to be below historical levels, however, we anticipate that net
charge-offs will increase over the next several quarters as the portfolio of
new consumer loans seasons.
CAPITAL RESOURCES
Total shareholder's equity at March 31, 1997 was $15,901,000. On April 19,1997
the board of director's approved a $.33 dividend per share payable to
shareholders of record as of June 13, 1997 on July 1, 1997. The Corporation's
capital ratios continue to exceed regulatory guidelines for the classification
of well capitalized. A summary of the Corporation's capital ratios follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 Well Capitalized
-------------- ----------------- ----------------
<S> <C> <C> <C>
Total capital to risk weighted
assets 13.5% 14.3% 8.0%
===== ===== =====
Tier 1 capital to risk weighted
assets 12.2% 13.0% 4.0%
===== ===== =====
Tier 1 capital to average assets 8.7% 9.4% 4.0%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1997 was $418,000, an increase of
$41,000 over the same period in 1996. The Corporation achieved this increase
though improved net interest income and non-interest income and maintaining
stable non-interest expense. The increase in net income was adversely affected
by a $10,000 increase in the provision for loan losses and a $48,000 increase in
Federal income tax expenses.
The improved net income produced a return on average shareholders' equity of
10.88% compared to 10.22% for the quarter ending March 31, 1996. The increase
in net income combined with higher average assets improved the return on
average assets to 1.03% for the quarter ending March 31, 1997 compared to .99%
for the quarter ending March 31, 1996.
Net Interest Income
- -------------------
The following table illustrates the effect that changes in rates and volumes of
earning assets and interest-bearing liabilities had on net interest income for
the three months ending March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ending March 31,
1997 1996
------------- -------------
<S> <C> <C>
Interest Income(tax equivalent) $ 3,277,000 $ 3,088,000
Interest Expense 1,386,000 1,289,000
------------ ------------
Net Interest Income $ 1,891,000 $ 1,799,000
============ ============
Average Volume
Interest-earning Assets $155,262,000 $144,756,000
Interest-bearing Liabilities 132,369,000 123,293,000
------------ ------------
Net differential $ 22,893,000 $ 21,463,000
============ ============
Average Yields/Rates
Yield on Earning Assets 8.56% 8.58%
Rate Paid on Liabilities 4.25% 4.20%
------------ ------------
Interest Spread 4.31% 4.38%
============ ============
Net Interest Margin 4.94% 5.00%
============ ============
</TABLE>
Page 8
<PAGE> 9
The change in net interest income is attributable to the following:
<TABLE>
<CAPTION>
Volume Rate Inc/(Dec)
---------- ---------- ---------
<S> <C> <C> <C>
Interest Earning Assets $1,013,000 $(823,000) $190,000
Interest Bearing Liabilities 520,000 (422,000) 98,000
---------- --------- ---------
Net Interest Income $ 493,000 $(401,000) $ 92,000
========== ========= =========
</TABLE>
The increase in net interest income is primarily due to an increase in earning
assets and interest bearing liabilities. A decrease in net interest margin
from 5.00% to 4.94% partially offset the effect of the net increase in
interest earning assets.
Non-interest Income
- -------------------
Non-interest income was $184,000 at March 31, 1997. This represents a $7,000 or
3.7% increase over the same period in 1996.
The major changes that affected this increase were an increase in per item NSF
fees resulting in an $8,000 increase in NSF fee income, offset by reduced DDA
service charge income related to the Bank's introduction of check imaging.
Prior to check imaging, the Bank assessed a service charge to customers that
did not participate in check truncation. The Bank now provides all customers
with images of checks and deposits without charge. Other income remained flat
at $110,000.
Non-interest Expense
- --------------------
Non-interest expense increased $4,000 to $1,379,000 for the quarter ending
March 31, 1997, as compared to the quarter ended March 31, 1996. Salary and
employee benefits were $35,000 lower than the same period in 1996 primarily as
the result of reduced staffing levels at the Bank's two supermarket branches.
The $9,000 decline in occupancy expense was primarily the result of reduced
depreciation, and lower than anticipated repairs and maintenance costs.
Furniture and equipment costs increased $40,000 primarily as a result of the
Bank's continued investment in technology and the associated costs of repairing
and maintaining this equipment. As a result of flat overhead expenses and an
increase in average assets, the Corporation's ratio of non-interest expense to
average assets for the quarter ending March 31, 1997 improved to 3.41% from
3.61% for the quarter ending March 31, 1996.
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
Attached
(b) Reports on Form 8-K
None
Page 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 13, 1996
-----------------------
Patrick G. Duffy
Vice President and CFO
Marlyn E. Artecki
Vice President & Cashier
page 11
<PAGE> 12
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- -------------
27 Financial Data Schedule
Page 12
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,358
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 26,077
<INVESTMENTS-MARKET> 27,444
<LOANS> 121,958
<ALLOWANCE> 1,881
<TOTAL-ASSETS> 161,222
<DEPOSITS> 126,796
<SHORT-TERM> 7,317
<LIABILITIES-OTHER> 1,208
<LONG-TERM> 10,000
0
0
<COMMON> 885
<OTHER-SE> 15,016
<TOTAL-LIABILITIES-AND-EQUITY> 161,222
<INTEREST-LOAN> 2,717
<INTEREST-INVEST> 384
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 3,183
<INTEREST-DEPOSIT> 1,158
<INTEREST-EXPENSE> 228
<INTEREST-INCOME-NET> 1,797
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,379
<INCOME-PRETAX> 542
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 8.51
<LOANS-NON> 20
<LOANS-PAST> 68
<LOANS-TROUBLED> 96
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,824
<CHARGE-OFFS> 32
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 1,881
<ALLOWANCE-DOMESTIC> 1,204
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 677
</TABLE>
