ITEM 1. BUSINESS
Commercial National Financial Corporation (the "Corporation" or "registrant"), a bank holding company, was incorporated in Michigan on December 30, 1987. On May 31, 1988, the Corporation acquired all of the stock of Commercial National Bank, a national banking association chartered in 1962. On December 30, 1992, Commercial National Bank converted to a state-chartered bank under the name Commercial Bank (the "Bank").
The Bank's business is concentrated in a single industry segment - commercial banking. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. The Bank 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 vehicles, including checking, savings, money market and individual retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the Michigan communities in which the Bank is located and the areas immediately surrounding these communities. The Bank serves these markets through nine offices located in and near these communities. Neither the Corporation nor the Bank has any material foreign assets or income.
The principal source of revenue for the Corporation and its subsidiary is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 78.1% of the Corporation's total revenues in 1995, 75.5% in 1994, and 74.7% in 1993. Interest on investment securities accounted for 13.9% of the Corporation's total revenues in 1995, 16.1% in 1994, and 15.6% in 1993.
At December 31, 1995, the Bank had no significant concentrations of loans to any group of borrowers engaged in similar activities that would be impacted by economic or other conditions.
The business of banking is highly competitive. In addition to competition from other commercial banks, banks face competition from nonbank financial institutions. Savings associations compete with commercial banks for deposits and loans. Credit unions and finance companies compete for consumer loans. Commercial banks compete for deposits with other investments such as mutual funds and corporate and government debt securities. Financial service providers compete for customers principally through price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers).
The Bank competes directly with fifteen financial institutions in the market it serves. The Bank's competitors include other commercial banks, savings associations and local credit unions. When combining the deposits of those branches, the Bank ranks second in deposit size. The Bank does not believe that its ability to compete for loans and deposits is affected by the rank among its competitors.
Banks and bank holding companies are extensively regulated. The Bank is chartered as a state bank under Michigan law and is supervised, examined and regulated by the Michigan Financial Institutions Bureau and the Federal Deposit Insurance Corporation ("FDIC"). The business activities of the registrant are limited to banking and to other activities determined by the Board of Governors of the Federal Reserve System to be closely related to banking. Deposits of the Bank are insured by the FDIC to the extent provided by law.
Commercial banks are subject to a number of federal and state laws and regulations that have a material impact on their business. These include, among others, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, electronic funds transfer laws, redlining laws, antitrust laws, environmental laws and privacy laws. The policies of the Federal Reserve System, and other authorities, may materially affect the growth and distribution of loans, investments and deposits and interest rates on deposits and loans.
The FDIC Improvement Act of 1991 (the "FDIC Improvement Act"), revised sections of the Federal Deposit Insurance Act affecting bank regulation, deposit insurance and provisions for the funding of the bank insurance fund. The FDIC
Improvement Act also revised bank regulatory structures embodied in several other federal banking statutes, links the bank regulators' authority to intervene to the deterioration of a bank's capital level, places limits on real estate lending and increases audit requirements. Among the significant revisions that could have an impact on the Corporation is the authority granted the FDIC to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semiannual assessment rates on bank insurance fund member banks so as to maintain the bank insurance fund at the designated reserve ratio defined in the FDIC Improvement Act. The FDIC Improvement Act also required the FDIC to implement a system of risk-based premiums for deposit insurance pursuant to which the premiums paid by a depository institution are based on the perceived probability that the bank insurance fund will incur a loss in respect of such institution.
Under 1994 amendments to the Federal Bank Holding Company Act, the Corporation is authorized to acquire subsidiary banks in any state in which state laws permit such acquisitions. Out-of-state bank holding companies in any state are permitted to acquire banks located in Michigan if the laws of the state in which the out-of-state bank holding company is located authorize a bank holding company located in Michigan to acquire ownership of banks in that state on a reciprocal basis. Under amendments to the Michigan Banking Code which became effective on November 29, 1995, the Bank is authorized to merge with or acquire out-of-state banks or branches in any state in which state laws permit such acquisitions.
As of December 31, 1995, the Corporation and its subsidiary employed approximately 91 employees on a full-time equivalent basis.
The statistical information on the following pages further describes certain aspects of registrant's business.
Distribution of Assets, Liabilities, and Shareholders' Equity
The following table sets forth the average amount of each principal category of assets, liabilities, and shareholders' equity for the periods indicated:
Interest Rates and Interest Differential
The following tables present an analysis of net interest earnings for the periods indicated. All interest (including tax-exempt securities and tax-exempt loans) is presented on a fully taxable-equivalent basis.
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(1) Loan fees are included in interest income and are used to calculate average rates earned. Non-accrual loans are included in the average loan balances.
(2) Yields on tax exempt loans and investment securities are computed on a fully taxable-equivalent basis using a federal income tax rate of 34%.
The following table sets forth an analysis of interest differential, including the effect of volume and rate changes on interest income and expenses for the periods indicated. For purposes of these tables, change in interest due to volume and rate were determined as follows:
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(1) Loan fees are included in interest income and are used to calculate average rates earned. Non-accrual loans are included in the average loan balances.
(2) Yields on tax exempt loans and investment securities are computed on a fully taxable-equivalent basis using a federal income tax rate of 34%.
Investment Portfolio
The book value of investment securities as of the dates indicated are summarized as follows:
The following table shows, by class of maturities as of December 31, 1995, the amounts and weighted average yields of held-to-maturity securities (1):
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(1) The effective yields are weighted for the scheduled maturity of each security and weighted average yields are calculated on the basis of par value.
(2) Weighted average interest rates have been computed on a fully taxable-equivalent basis. The rates shown on securities issued by states and political subdivisions have been restated, assuming a 34% tax rate.
(3) As of December 31, 1995, the aggregate book value of investment securities issued by the State of Michigan and all its political subdivisions totaled $9,726 with an aggregate market value of $9,834.
Loan Portfolio
The following table presents the amount of loans outstanding at the indicated dates by loan type, based on classifications used for regulatory reporting:
The following table shows the maturity of loans (excluding real estate mortgages and installment loans) outstanding at December 31, 1995. Also provided are the amounts due after one year classified according to their sensitivity to changes in interest rates.
The following table summarizes nonaccrual, past due, and restructured loans at the dates indicated:
The Corporation estimates the following additional information with respect to nonaccrual and restructured loans for the year ended December 31, 1995:
Loan performance is reviewed regularly by loan review personnel, loan officers and senior management. Loans are placed on nonaccrual status when principal or interest is past due 90 days or more and the loan is not well-secured and in the process of collection, or when reasonable doubt exists concerning collectibility of interest or principal. Any interest previously accrued in the current period but not collected is reversed and charged against current earnings.
At December 31, 1995, the Corporation had $2,800 in domestic loans for which payments are presently current, but where the borrowers are currently experiencing financial difficulties. Those loans are subject to constant management attention and their classification is reviewed on a regular basis.
As of December 31, 1995, there were no concentrations of loans exceeding 10% of total loans.
Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each period and daily averages; changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category; and additions to the allowance which have been charged to expense.
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(1) The provision for loan losses charged to expense is based on loan loss experience and such other factors which, in management's judgment, deserve current recognition in maintaining an adequate allowance for loan losses. These other factors include, but are not limited to, a review of current economic conditions as they relate to loan collectibility and reviews of specific loans to evaluate their collectibility.
The allowance for loan losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories at the dates indicated:
Deposits
The daily average amounts of deposits and rates paid on such deposits for the periods indicated are:
The time remaining until maturity of time certificates of deposits of $100,000 or more at December 31, 1995, is as follows:
Return on Equity and Assets
The following table sets forth certain financial ratios at the end of each period:
Short-Term Borrowings
Short-term borrowed funds consist of securities sold under agreements to repurchase and treasury tax and loan demand notes. The following amounts and rates applied during the last two years:
The weighted average interest rates are derived by dividing the interest expense for the period by the daily average balance during the period.
ITEM 2.
ITEM 2. PROPERTIES.
The Bank currently conducts business from nine banking offices including two branches located in supermarkets owned by a related party. The executive offices of the Corporation are located at 101 North Pine River Street, Ithaca, Michigan. The main office of the Bank is located at 301 North State Street, Alma, Michigan. The main office property of the Bank is leased for a term expiring on December 31, 2013. The branches of the Bank are located in Alma, Greenville, Midland, Middleton, Pompeii, and St. Louis, Michigan.
The Bank owns the property for five of the branch office locations. One branch office is leased pursuant to a lease that expires August 1, 1998, subject to 3 renewals of 10 years each. The Alma Supermarket Branch is leased pursuant to a five year lease beginning June 1, 1995 with two five year renewals. The Midland Supermarket Branch is leased pursuant to a five year lease beginning January 1, 1996 with two five year renewals. Aggregate rental expense represents less than 5% of the registrant's operating expenses. The Corporation considers all of its facilities to be well maintained and in generally good operating condition and suitable for the purposes for which they are intended.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Corporation and the Bank are parties, as plaintiff or defendant, to several legal proceedings, none of which is considered material, and all of which arose in the ordinary course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The information under the captions "Common Stock Information" and "Dividend Information" of the registrant's annual report to shareholders for the year ended December 31, 1995, is here incorporated by reference to Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Financial Data" of the registrant's annual report to shareholders for the year ended December 31, 1995, is here incorporated by reference to Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information under the heading "Management's Review and Analysis" of the registrant's annual report to shareholders for the year ended December 31, 1995, is here incorporated by reference to Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes and independent auditors' report of the registrant's annual report to shareholders for the year ended December 31, 1995, are here incorporated by reference to Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective December 13, 1995, the Corporation's Board of Directors approved the dismissal of its certifying accountants, BDO Seidman, LLP, to be effective upon completion of audit services for the year ending December 31, 1995, and retained as its new certifying accountants, Crowe, Chizek, and Co. LLP, for audit services beginning in 1996. BDO Seidman LLP's report on the Corporation's financial statements during the two most recent fiscal years preceding December 13, 1995 contained no adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the last two fiscal years and the subsequent interim period to December 13, 1995, there were no disagreements between the Corporation and BDO Seidman, LLP, on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Corporation within the last two fiscal years and the subsequent interim period to December 13, 1995.
Effective December 13, 1995, the Corporation engaged Crowe, Chizek, and Co. LLP, as its principal accountants for audit services for the year ending December 31, 1996. During the last two fiscal years and the subsequent interim period to December 13, 1995, the Corporation did not consult Crowe, Chizek, and Co. LLP regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Directors and Executive Officers" and "Other Matters" in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Compensation of Executive Officers", "Compensation of Directors", and "Employment, Termination of Employment, and Change in Control Agreement", in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Voting Securities" in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships" in the registrant's definitive Proxy Statement for its April 23, 1996, annual meeting of shareholders is here incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements, notes to financial statements, and independent auditors' report of the Corporation and its subsidiary are filed as part of this report:
Independent Auditors' Report Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Income for each of the three years ended December 31, 1995 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1995 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995 Notes to Consolidated Financial Statements
The financial statements, notes to financial statements, and independent auditors' report for the years ended December 31, 1995 and 1994, listed above are incorporated by reference in Item 8 of this report from the corresponding portions of the registrant's annual report to shareholders for the year ended December 31, 1995. With the exception of the portions of the registrant's annual report to shareholders for the year ended December 31, 1995 specifically incorporated herein by reference, such report shall not be deemed filed as part of this annual report on Form 10-K.
(2) All schedules have been omitted because they are inapplicable or otherwise not required.
(3) The following exhibits are filed as part of this report:
Number Exhibit
3(a) Restated Articles of Incorporation. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
3(b) Bylaws. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
10(a) Form of Indemnity Agreement. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
10(b) 1989 Stock Option Plan. Previously filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1988. Here incorporated by reference.*
10(c) 1991 Stock Option Plan. Previously filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1990. Here incorporated by reference.*
10(d) Amendment to 1991 Stock Option Plan.*
10(e) Lease for Main Office. Previously filed as an exhibit to registrant's Form 10-K for the year ended December 31, 1991. Here incorporated by reference.
10(f) Branch Purchase and Assumption Agreement. Previously filed as an exhibit to registrant's Form 10-K for the year ended December 31, 1991. Here incorporated by reference.
10(g) Executive Employment, Change of Control and Severance Agreements. Previously filed as an exhibit to registrant's Form 10-K for the year ended December 31, 1991. Here incorporated by reference.*
10(h) Branch Lease for Alma Supermarket Branch.
10(i) Branch Lease for Midland Supermarket Branch.
13 Incorporated portions from 1995 Annual Report to Shareholders.
16 Letter Concerning Change in Certifying Public Accountant. Previously filed as an exhibit to registrant's Form 8-K, filed December 28, 1995. Here incorporated by reference.
21 Subsidiary of Registrant. Previously filed as an exhibit to the registrant's Form S-4 filed January 22, 1988. Here incorporated by reference.
23 Consent of Independent Certified Public Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement
The registrant will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Marlyn Artecki, Commercial National Financial Corporation, 101 North Pine River Street, Ithaca, Michigan 48847.
(b) Reports on Form 8-K.
A Form 8-K was filed by the registrant on December 28, 1995, for Item 4, "Changes in the Registrant's Certifying Accountant."
(c) Exhibits.
See Item 14(a)(3)
(d) Financial Statement Schedules.
There are no financial statement schedules required to be filed with this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 20, 1996 By: /s/ Dean E. Milligan ------------------------------------- Dean E. Milligan President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS