<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
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 Number 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 North Pine River Street
Ithaca, Michigan 48847
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 875-4144
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
Aggregate market value as of March 8, 1996: $15,956,848
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock outstanding as of March 8, 1996: 818,800 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to security holders for the year
ended December 31, 1995, are incorporated by reference in Part II and Part IV.
Portions of the registrant's proxy statement for its April 23, 1996, annual
shareholders meeting are incorporated by reference in Part III.
<PAGE> 2
PART I
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
<PAGE> 3
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.
<PAGE> 4
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:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994
--------- -----------
(Dollars in Thousands)
<S> <C> <C>
Assets:
Cash and Due From Banks $ 4,283 $ 3,782
Federal Funds Sold 5,457 5,271
Investment Securities:
Taxable 17,896 23,247
Tax-Exempt 10,157 8,986
Total Loans 104,175 97,918
Allowance for Loan Losses (1,573) (1,408)
-------- --------
Net Loans 102,602 96,510
Premises and Equipment 2,869 2,337
Other Assets 2,541 2,817
-------- --------
Total Assets $145,805 $142,950
======== ========
Liabilities and Shareholders' Equity:
Deposits:
Non-Interest Bearing $ 14,097 $ 13,638
Interest Bearing:
Savings and demand 59,363 67,490
Time 51,576 46,583
Short-Term Borrowings 5,591 1,457
Other Liabilities 927 750
-------- --------
Total Liabilities $131,554 $129,918
-------- --------
Shareholders' Equity:
Common Stock $ 808 $ 721
Surplus 10,712 9,466
Retained Earnings 2,731 2,845
-------- --------
Total Shareholders' Equity $ 14,251 $ 13,032
-------- --------
Total Liabilities and Shareholders' Equity $145,805 $142,950
======== ========
</TABLE>
3
<PAGE> 5
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.
<TABLE>
<CAPTION>
Average Balance
Outstanding Interest Average Rate
--------------- -------- ------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans(1)(2) $104,175 $ 97,918 $ 9,756 $ 8,460 9.37% 8.64%
Investment Securities:
Taxable 17,896 23,247 1,131 1,251 6.32 5.38
Tax-Exempt(2) 10,157 8,986 888 801 8.74 8.91
Short-Term Investments 5,457 5,271 312 212 5.88 4.02
-------- -------- ------- ------- ---- ----
Total Earning Assets $137,685 $135,422 $12,096 $10,724 8.79 7.92
-------- -------- ------- ------- ---- ----
Interest Bearing Liabilities:
Savings and Demand Deposits $ 59,363 $ 67,490 $ 1,647 $ 1,713 2.77 2.54
Time Deposits 51,576 46,583 2,817 2,107 5.46 4.52
Short-Term Borrowings 5,591 1,457 316 64 5.65 4.39
-------- -------- ------- ------- ---- ----
Total Interest Bearing
Liabilities $116,530 $115,530 $ 4,780 $ 3,884 4.10 3.36
-------- -------- ------- ------- ---- ----
Net Differential $ 21,155 $ 19,892 $ 7,316 $ 6,840 4.69% 4.56%
======== ======== ======= ======= ==== ====
Net Yield on Interest Earning
Assets (net interest earnings
divided by total interest
earning assets) 5.31% 5.05%
==== ====
</TABLE>
- --------------------------------
(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%.
4
<PAGE> 6
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:
<TABLE>
<S> <C>
Volume Variance -Change in volume times old rate.
Rate Variance -Change in rate times old volume.
Rate/Volume Variance -Change in rate times change in volume. This
variance has been allocated to volume and rate
changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
</TABLE>
<TABLE>
<CAPTION>
1995 1994
Compared to Compared to
1994 1993
---------------------------------------------- --------------------------------------
Net Net
Increase Due to Due to Increase Due to Due to
(Decrease) Volume Rate (Decrease) Volume Rate
-------------- -------------- -------------- -------------- -------------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans(1)(2) 1,296 561 735 $ 51 (143) 194
Investment Securities:
Taxable (120) (325) 205 63 282 (219)
Tax-Exempt(2) 87 102 (15) (22) (9) (13)
Short-Term Investments 109 7 102 (25) (88) 63
------ ------ ------ ------ ----- ------
Total Interest Income $1,372 $ 345 $1,027 $ 67 $ 42 $ 25
------ ------ ------ ------ ----- ------
Interest Expense:
Interest Bearing Deposits
Savings (66) (221) 155 $(205) $ 7 $(212)
Time 710 238 472 (230) (99) (131)
Short-Term Borrowings 252 234 18 19 (2) 21
------ ------ ------ ------ ----- ------
Total Interest Expense $ 896 $ 251 $ 645 $(416) $(94) $(322)
------ ------ ------ ------ ----- ------
Net Interest Income $ 476 $ 94 $ 382 $ 483 $ 136 $ 347
====== ====== ====== ====== ===== ======
</TABLE>
- ---------------------------------
(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%.
5
<PAGE> 7
Investment Portfolio
The book value of investment securities as of the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1995 1994
------------------------------- ------------------------
Held-to- Available- Held-to- Available-
Maturity for-Sale Other Maturity for-Sale
-------- ---------- ----- -------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and
corporations $15,807 $ -0- $ -0- $20,053 $ -0-
States of the U.S. and
political subdivisions 13,623 -0- -0- 9,206 -0-
Other securities -0- -0- 437 -0- -0-
------- ----- ----- ------- -------
Total $29,430 $ -0- 437 $29,259 $ -0-
======= ===== ===== ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
MATURING
-------------------------------------------------------------------------------------------------
After One but After Five but
Within One Year Within Five Years Within Ten Years After Ten Years
---------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S.
government
agencies and
corporations $9,267 6.58% $ 6,539 6.28% $ -0- --- $-0- ---
States and political
subdivisions (2) 332 7.27% 4,942 8.49% 7,588 8.08% 762 9.19%
------ ------- ------ ---- ----
Total (3) $9,599 6.61% $11,481 7.22% $7,588 8.08% $762 9.19%
====== ==== ======= ==== ====== ==== ==== ====
</TABLE>
- ----------------------------
(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.
6
<PAGE> 8
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:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
------------------
(Dollars In Thousands)
<S> <C> <C>
Commercial, financial
and agriculture $ 63,195 $ 53,849
Real estate - construction 2,072 4,070
Real estate - mortgage 30,288 29,806
Consumer and other 13,724 12,310
-------- --------
Total loans $109,279 $100,035
======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
Due in One Due in One Due After
Year or Less to Five Years Five Years Total
------------ ------------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $18,936 $28,759 $15,500 $63,195
Real estate - construction 2,003 69 -0- 2,072
------- ------- ------- -------
Total $20,939 $28,828 $15,500 $65,267
======= ======= ======= =======
Loans due after one year:
With predetermined interest rates $19,355
With floating or adjustable interest rates 24,973
-------
Total $44,328
=======
</TABLE>
The following table summarizes nonaccrual, past due, and restructured
loans at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
------ --------
(Dollars In Thousands)
<S> <C> <C>
Nonaccrual loans $178 $ 14
Accruing loans past due
90 days or more 34 52
Restructured loans 27 578
---- ----
Total Non-performing Loans $239 $644
==== ====
</TABLE>
7
<PAGE> 9
The Corporation estimates the following additional information with
respect to nonaccrual and restructured loans for the year ended December 31,
1995:
<TABLE>
<CAPTION>
(In Dollars)
<S> <C>
Interest income which would
have been recorded under
original term $52,309
Interest income recorded
during the period $23,337
</TABLE>
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.
8
<PAGE> 10
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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1994
---- ----
(Dollars in Thousands)
<S> <C> <C>
Loans
Amount of loans outstanding at
end of period $109,279 $100,035
======== ========
Daily average of loans outstanding
for the period 104,175 97,918
======== ========
Balance of allowance for loan
losses at beginning of period $ 1,510 $ 1,370
-------- --------
Loans charged off:
Commercial, financial and agricultural $ 143 $ 182
Real estate - construction 0 0
Real estate - mortgage 5 20
Installment loans to individuals 40 18
-------- --------
Total loans charged off $ 188 $ 220
Recoveries of loans previously charged off:
Commercial, financial, and agricultural $ 79 $ 113
Real estate - construction 0 0
Real estate - mortgage 13 6
Installment loans to individuals 5 11
-------- --------
Total recoveries $ 97 $ 130
-------- --------
Net charge-offs $ 92 $ 90
-------- --------
Additions to allowance charged to
operating expense (1): 250 230
-------- --------
Allowance at end of period $ 1,669 $ 1,510
======== ========
Ratio of net charge-offs during period
to average loans outstanding 0.09% 0.00%
Ratio of allowance for loan losses to
loans outstanding at end of period 1.53% 1.51%
</TABLE>
- ----------------
(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.
9
<PAGE> 11
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:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------- -----------------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Allowance Loans Allowance Loans
--------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $1,303 78.07% $1,175 77.81%
Real estate - construction --- --- --- ---
Real estate - mortgage 126 7.55 115 7.62
Installment 240 14.38 220 14.57
------ ------ ------ ------
Total $1,669 100.00% $1,510 100.00%
====== ====== ====== ======
</TABLE>
Deposits
The daily average amounts of deposits and rates paid on such deposits for
the periods indicated are:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1995 1994
---------------------------- ---------------------------
Amount Rate Amount Rate
------ ----- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 14,097 --- $ 13,638
Interest bearing demand deposits 33,282 2.68% 38,017 2.42%
Savings 26,081 2.89 29,473 2.68
Time deposits 51,576 5.46 46,583 4.52
-------- --------
Total Deposits $125,036 $127,711
======== ========
</TABLE>
The time remaining until maturity of time certificates of deposits of
$100,000 or more at December 31, 1995, is as follows:
<TABLE>
<CAPTION>
Time Certificates
of Deposits
-----------------
<S> <C>
3 months or less $ 4,807
Over 3 through 6 months 943
Over 6 through 12 months 634
Over 12 months 4,143
-------
Total $10,527
=======
</TABLE>
10
<PAGE> 12
Return on Equity and Assets
The following table sets forth certain financial ratios at the end of
each period:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1995 1994
---- ----
<S> <C> <C>
Return on average assets 1.15% 1.07%
Return on average equity 11.73 11.76
Dividend payout 49.56 47.64
Average equity to average assets 9.79 9.12
</TABLE>
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:
<TABLE>
<CAPTION>
Securities Sold
Under Agreements Demand Notes Issued
To Repurchase To U.S. Treasury
------------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Amounts outstanding at
year-end $5,305 $2,729 $560 $649
Average amount outstanding
during year 4,913 875 678 582
Maximum amount outstanding
at any month-end 7,511 3,149 2,357 1,184
Weighted average interest
rate at year-end 5.01% 5.56% 5.17% 5.75%
Weighted average interest
rate during year 5.66% 4.76% 5.61% 3.89%
</TABLE>
The weighted average interest rates are derived by dividing the interest
expense for the period by the daily average balance during the period.
11
<PAGE> 13
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. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
12
<PAGE> 14
PART II
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. 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. 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. 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. 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.
13
<PAGE> 15
PART III
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. 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. 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. 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.
14
<PAGE> 16
PART IV
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.*
15
<PAGE> 17
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.
16
<PAGE> 18
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
17
<PAGE> 19
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.
<TABLE>
<S> <C>
March 20, 1996 /s/ Dean E. Milligan
-----------------------------------------------
Dean E. Milligan
Director, President and Chief Executive Officer
March 20, 1996 /s/ Richard F. Abbott
-----------------------------------------------
Richard F. Abbott
Director and Executive Vice President
March 20, 1996 /s/ Jefferson P. Arnold*
-----------------------------------------------
Jefferson P. Arnold
Director
March 20, 1996 /s/ Don J. Dewey*
-----------------------------------------------
Don J. Dewey
Director
March 20, 1996 /s/ David A. Ferguson*
-----------------------------------------------
David A. Ferguson
Director
March 20, 1996 /s/ Kenneth R. Luneack*
-----------------------------------------------
Kenneth R. Luneack
Director
March 20, 1996 /s/ Kim C. Newson*
-----------------------------------------------
Kim C. Newson
Director
March 20, 1996 /s/ Howard D. Poindexter*
-----------------------------------------------
Howard D. Poindexter
Director
March 20, 1996 /s/ Scott E. Sheldon*
-----------------------------------------------
Scott E. Sheldon
Director
March 20, 1996 /s/ Russell M. Simmet*
-----------------------------------------------
Russell M. Simmet
Director
March 20, 1996 /s/ Joseph B. Simon*
-----------------------------------------------
Joseph B. Simon
Director
March 20, 1996 /s/ Marlyn Artecki
-----------------------------------------------
Marlyn Artecki
Principal Financial and Accounting Officer
March 20, 1996 *By: /s/ Dean E. Milligan
-------------------------------------------
Dean E. Milligan
Attorney-in-Fact
</TABLE>
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit
- ------ ---------------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
19
<PAGE> 1
EXHIBIT 10(D)
AMENDMENT TO 1991 STOCK OPTION PLAN
<PAGE> 2
Exhibit 10(d)
AMENDMENT TO THE
COMMERCIAL NATIONAL FINANCIAL CORPORATION
1991 STOCK OPTION PLAN
The Commercial National Financial Corporation 1991 Stock Option Plan is
hereby amended effective as of the date approved by the shareholders of the
Corporation by making the following change.
The first sentence in Section 3, Shares Subject to Plan, is hereby
replaced in its entirety with the following:
A maximum of 60,388 shares of Common Stock (subject to adjustment
in accordance with Paragraph 16 below) may be subject to the
exercise of options granted under the Plan.
COMMERCIAL NATIONAL
FINANCIAL CORPORATION
Dated: 5-22-95 By: /s/ Dean E. Milligan
--------------- ------------------------
Dean E. Milligan,
President
<PAGE> 1
EXHIBIT 10(H)
BRANCH LEASE FOR ALMA SUPERMARKET BRANCH
<PAGE> 2
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") has been made and entered into as of
June 1, 1995, by and between ASHCRAFT'S MARKETS, INC., a Michigan Corporation,
with offices at 206 East Oak Street, P.O. Box 584, Harrison, Michigan 48625
(Supermarket), and COMMERCIAL NATIONAL FINANCIAL CORPORATION, a Michigan Banking
corporation having its principal place of business located at 101 N. Pine River
Street, Ithaca, Michigan 48847 ("Bank").
WITNESSETH:
WHEREAS, Supermarket is the Tenant of certain real estate and
improvements thereon situated in the City of Alma, and State of Michigan,
commonly known as the Ashcraft's - Alma, located at 1700 Wright Avenue, Alma,
Michigan ("Store"); and
WHEREAS, Supermarket desires to sublease to Bank certain space in the
Store and Bank desires to lease the space on the terms and conditions stated
below.
IN CONSIDERATION of the mutual promises and subject to the terms and
conditions set forth therein, Supermarket hereby grants to Bank the right to
install, maintain and operate a Financial Service Facility, as defined below,
through this Lease in the Store in accordance with the provisions hereinafter
set forth.
1. DEFINITIONS
When used in this Lease, the following-defined terms shall carry the
definitions which follow them, unless the context clearly indicates to the
contrary:
A. "Common Areas" means all portions of the Property available for
common use and not intended to be leased.
B. "Leased Premises" means that area within the Store containing
approximately 440 net rentable square feet pursuant to Building and Office
Manager Association ("BOMA") standards to be leased by Bank, together with the
appurtenant right to the use, in common with others, of lobbies, parking area,
telephone and electric closets, truck docks, rest rooms, entrances, stairs,
elevators, access ways, platforms, passageways, pipes, ducts, conduits, wires
and appurtenant facilities, and all public portions and facilities of the Store
C. "Property" means the real estate upon which the Supermarket is
located and all improvements constructed or to be constructed, by Supermarket
1
<PAGE> 3
thereon commonly known as Ashcraft's - Midland, located at 2030 North Saginaw
Road, Midland, Michigan (sometimes referred to as the "Store").
D. "Automated Teller Machine" or "ATM" shall mean an electronic
terminal that performs certain banking functions, including dispensing cash,
coupons and traveler's checks, accepting deposits and loan payments, making
transfers between accounts and giving account balances. These terms however,
shall not include point-of-sale systems or other direct debit systems installed
by Supermarket at its check-out lanes.
E. "Financial Service Facility" or "FSF" shall mean a banking facility
staffed with one (1) or more bank employees whose functions include without
limitation, opening new deposit accounts, accepting loan applications and
performing customary teller transactions, such as cashing checks and taking
deposits. An FSF may be equipped with an ATM, safe deposit boxes and a night
depository. An FSF may also offer such other products and services as may be
permitted by applicable law and regulation, including, without limitation,
insurance, investment products and travel agency services.
2. DEMISE OF LEASED PREMISES; TERM; OPTION TO RENEW.
(a) The term of this Lease shall be Five (5) years (the "original
Term"). The beginning date of the Original Term shall be the
date upon which FSF opens for business, but not later than June 1,
1995, unless the opening of the FSF is delayed because of circumstances
beyond the reasonable control of Bank. This date shall be called the
"Commencement Date" and, unless sooner terminated as herein provided,
the Original Term shall expire Five (5) years from the Commencement
Date.
(b) Bank covenants to pay to Supermarket's address set forth below,
rent as follows: (i) during the first through fifth lease years, the
annual rent will be Seven Thousand Five Hundred and Twenty Dollars
($7,520). This yearly rental payment is based upon Twenty Dollars
($20.00) per square foot per year payable in equal monthly installments
of Six Hundred Twenty-Six and 67/100 ($626.67).
(c) Each monthly installment of rent shall be due and payable on the
first day of each and every month during the term hereof except that
the first month's rent shall be paid on the date on which the term of
this Lease shall commence, and rent shall be apportioned for any period
during the term hereof of less than a full month.
2
<PAGE> 4
3. RENEWAL OPTION
Supermarket hereby grants Bank the exclusive right and option to renew
or extend this Lease by notice to Supermarket, as hereinafter provided, for two
additional terms of five (5) years each upon and subject to the same terms,
conditions, and provisions as are herein set forth and provided with respect to
the original term. During the first five (5) year renewal term, the annual
rental shall be increased to ________________________($) Dollars, payable in
equal monthly installments of _________________________($) Dollars.
The annual rental during the second five (5) year term shall be
increased to _______________________________($) Dollars, payable in equal
monthly installments of _________________________________($) Dollars.
Notice of intention to exercise any extension period hereunder shall be
given by Bank to Supermarket, in writing, at least one hundred twenty (120) days
prior to the expiration of the Original Term or the immediately preceding
Renewal Term, as applicable.
4. USE OF LEASED PREMISES; SUPERMARKET'S TITLE
ALLOWABLE USE; ENVIRONMENTAL
A. Bank shall have the exclusive right to operate an FSF and ATM within
the store and may provide and promote those financial services which are
typically transacted or conducted by the Bank in operation of its facilities.
Supermarket shall not conduct nor allow any other entity to conduct or offer
competing banking services, including, but not limited to, operating and
servicing of checking and savings accounts, acquiring and servicing loans or
other extensions of credit, including consumer financing, commercial financing,
credit cards and mortgages; trust company functions; operating a safe deposit
box business; issuance and sale of U.S. Savings Bonds and travelers checks; tax
planning and preparation; selling credit life insurance; providing financial
counseling and portfolio investment advice; providing securities brokerage
service; engaging in the sale of annuity and similar products; engaging in title
insurance activities; and providing real estate appraisal services. Supermarket
shall not allow a financial institution other than Bank to advertise in the
Store. Supermarket shall be permitted to provide such service of making change,
cashing checks, verifying checks, selling money orders and conducting point of
sale transactions.
B. Each party shall conduct its business at the Store in a clean and
lawful manner. Each party agrees that it shall not block or restrict the aisles
or passageways of the other party, nor shall either party interfere with the
other party's business.
3
<PAGE> 5
C. Bank agrees to open for business in the premises on the
commencement date, and thereafter during the term of this Lease, continuously
use the Premises for the purpose stated in this Lease, carrying on Bank's
business with reasonable diligence.
D. Supermarket represent and warrants to Bank that it is leasing the
Store from Market Development Corporation pursuant to a Master Lease dated
11-01-94. This Lease is subject to the terms and conditions of the Master Lease,
a copy of which will be given to the Bank by the Supermarket upon request
therefore. Said Master Lease with Ray's Shopping Center, Inc. permits the
Supermarket to lease the premises to the Bank hereunder, and the Supermarket has
the right to make this Lease for the original term and any renewal term
aforesaid; that the provisions of this Lease do not conflict with or violate the
provision of the existing agreement between Supermarket and third parties; that
the Certificate of Occupancy for the Store will allow Bank to use the Leased
Premises for the purposes set forth above; that the Leased premises and Common
Areas and the uses thereof for the purposes specified in this Lease are, or will
be at the commencement of the Original Term, in conformity with all applicable
federal, state, local and other legal requirements including, without
limitation, the Americans with Disabilities Act of 1990, applicable
environmental legislation, zoning and planning ordinances, and all applicable
restrictions, if any. These representations and warranties shall remain in full
force and effect throughout the Original Term and any Renewal Term, and
Supermarket shall indemnify and hold Bank harmless from any and all costs,
including attorneys' fees, in connection with a breach of said representations
and warranties.
E. Supermarket represents and warrants that there is no Hazardous
Material on the Property or in the Store, including its interior systems or
structure. "Hazardous Material" shall mean: (i) asbestos or asbestos containing
material, (ii) polychlorinated biphenyl in concentrations greater than 50 parts
per million and (iii) any other material or substance, whether solid, gaseous or
liquid, which may pose a present or potential hazard to human health or the
environment including (1) hazardous waste identified in accordance with Section
3001 of the Federal Resource Conservation and Recovery Act of 1976, as amended,
and (b) hazardous waste or material identified by regulation of any governmental
authority regulating environmental or health matters. In the event that any such
Hazardous Material is present in the Property or the Store, Supermarket shall,
at its own cost, (i.e., this is not an Operating Expense), in accordance with
applicable laws and regulations remove such Hazardous Material and restore the
Premises and Store to its conditions prior to Supermarket's removal of the
Hazardous Material. There shall be an abatement or adjustment of Rent for any
period that Bank is restricted in its use of the Leased Premises as a result of
the presence of Hazardous Material therein or as a result of remedial measures
in respect thereto taken by Supermarket.
4
<PAGE> 6
F. Bank shall have the option, in its sole discretion, to have a
qualified environmental consultant of its choice perform testing, which may
include invasive testing such as the installation of soil borings and/or monitor
wells, at its own expense, to further assess the environmental condition of the
Property and Store at any time prior to the Commencement Date. If the results of
such testing are unsatisfactory to Bank in Bank's sole discretion, Bank shall
notify Supermarket of said results within ten (10) days. Bank shall thereafter
have the option to declare this Lease null or void.
G. Supermarket shall indemnify, defend and hold harmless the Bank, its
agents, employees, officers, directors, affiliates, assigns and/or contractors
from and against any and all loss, liability, suits, fines (both civil and
criminal), damages, judgments, penalties, claims, charges, costs and/or expenses
(including actual attorneys fees) imposed on, incurred by or otherwise suffered
as a result of any claim made by any party whatsoever, public or private,
including the Bank itself, arising from the environmental condition of the
Property unless such condition is caused by Bank. This indemnity shall survive
the termination by any means of this Lease and shall not require a third party
claim to trigger by discovery or damage, contamination, loss or expense incurred
by Bank itself.
H. Bank is not and shall not be considered an operator of the property
for purposes of determining environmental liability. Bank has no authority to
and does not control the subsurface or air space of the property. Supermarket is
the operator of the property for any purpose encompassed by this provision.
I. Supermarket shall provide to Bank, prior to the Commencement Date, a
copy of all its environmental audits of the Property and Store.
5. POSSESSION
Bank shall have access to the Leased Premises at least Sixty (60) days
prior to the Commencement Date of the Lease for Bank to construct the FSF, to
utilize the premises for on-site training of its employees and to install its
communication systems, furniture and equipment. Such access shall be under all
the terms and conditions of this Lease except for the obligation to pay rent.
Supermarket will cooperate with Bank in allowing the type of access to the
Leased Premises which will allow bank to construct its FSF within the
Supermarket building.
It is anticipated that the Commencement date will be approximately June
1, 1995. If possession of the Leased Premises for Bank's use as contemplated in
Section 4 above, shall not be delivered by the Supermarket to Bank by June 1,
5
<PAGE> 7
1995, Bank, at its option may terminate this Lease by and upon written notice to
Supermarket.
6. QUIET ENJOYMENT
A. Supermarket covenants and agrees with Bank that upon Bank's paying
the Rent and observing and performing all the material terms, covenants and
conditions to be performed and observed hereunder, Bank may peaceably and
quietly enjoy the Leased Premises.
B. All persons employed by Bank in or about, or in connection with, the
operation of the FSF shall be Bank's employees for all purposes under this
Agreement. Bank's employees and agents and employees of companies which service
the FSF who are not Bank employees or agents shall be granted access to the
Store for the purpose of servicing, maintaining and otherwise performing
services in connection with the FSF. Supermarket agrees to cooperate with Bank
in providing access to the Premises during periods of time the Store may not be
open for business.
C. Bank shall, at its own cost and expense, maintain worker's
compensation coverage, unemployment compensation coverage and any other
insurance which may be required by law with respect to its employees.
D. Employees of Bank, while working at the FSF, shall be entitled to
use the toilet facilities and break-room in the Store provided by Supermarket
for the convenience of Supermarket employees.
E. Employees of Bank, while working at the FSF, shall be permitted to
park their automobiles in spaces designated by Supermarket for parking by
Supermarket employees.
F. The Supermarket grants to Bank the right to have Bank's employees
conduct promotional activities in the aisles of Supermarket's supermarket in
which the Leased Premises is located so long as the promotional activities do
not interfere with the ability of Supermarket's customers to conduct their
shopping activities in the Supermarket. The Supermarket acknowledges that such
promotional activities are extremely important to the success of the Bank's
operation of its FSF in the Store. The Store Manager and the FSF Manager will
coordinate special promotional campaigns. All in-store promotional campaigns
shall be conducted by the Bank in a professional and courteous manner, and shall
not unreasonably interfere with Supermarket's conduct of its business at the
Store.
6
<PAGE> 8
G. Bank shall have access to intercommunications systems ("Intercom")
within the Store. The use of such intercom shall be coordinated between the
Store Manager and the FSF Manager.
H. Supermarket and Bank may advertise the existence and location of
the FSF in such media and in such manner as each deems appropriate.
I. Supermarket shall maintain the Store free of all ads, fliers and
signs that might prohibit or unreasonably hinder the operation of Bank's
business within the Premises or which might prohibit or hinder viewing through
or into the Premises.
J. Supermarket shall maintain the Store free and clear of any sale
items, fixtures, barriers, signs or other obstructions that would materially
inhibit the ingress to, and egress from the Premises, and shall, in all events,
keep the Store free and clear of all items within a reasonable distance from the
Teller counters in the FSF.
7. USE, MAINTENANCE AND CONTROL OF COMMON AREAS
Supermarket hereby grants to Bank the nonexclusive right to use the
Common Areas for the purposes for which they were designed. Supermarket shall
maintain and operate the Common Areas.
8. USE, MAINTENANCE AND CONTROL OF COMMON AREAS
A. Bank shall, at all times during the initial and any renewal term of
this Lease, put, keep, and maintain in good repair and in an ordinary condition
all portions of the Leased Premises and shall be responsible for the expenses of
housekeeping of the Leased Premises, including janitorial services for the FSF.
Supermarket shall furnish, at its sole cost and expense, air conditioning, heat,
and electricity to the Leased Premises and the Common Areas and in addition
shall furnish to the Leased Premises, at its sole cost and expense the HVAC
units and any utility lines to the Leased Premises. Bank will provide all
necessary electrical conduits, communication conduits, wiring and communication
services (herein "Special Utility Services") required in connection with the
operation of Bank's banking services. The cost of installation of the Specialist
Utility Services, hardware and services is to be paid by the Bank. Installation
of the Special Utility Services is to be coordinated with the Supermarket to
insure minimum disruption of the Supermarket's business. When the Bank vacates
the Leased Premises, all Special Utility Services located above the ceiling
elevation are to be abandoned by Bank. Subject to the provisions of the C. of
this Section, Supermarket shall not be in default hereunder by reason of (1) the
installation, use or interruption of use of any equipment in connection with the
furnishing of any of the foregoing services
7
<PAGE> 9
when such failure or delay is caused by accident or any condition beyond the
reasonable control of Supermarket or by the making of necessary repairs or
improvements to the Leased Premises or the total Store; or (3) so long as the
condition is generally prevailing and does not arise from any default by
Supermarket, the limitation curtailment, rationing or restrictions on use of
water, electricity, gas or any other form of energy serving the Leased Premises
or the Store. Supermarket shall use its best efforts to diligently remedy any
interruption in the furnishing of such services.
B. Supermarket, at its sole cost and expense, shall maintain, in
condition and repair, consistent with that of other first-class buildings,
(including replacement, when necessary, to maintain such standards), the Store
and the Common Areas, including, without limitation, the plumbing, electrical,
HVAC and other utility facilities servicing, the Store and the Leased Premises;
the structural components of the Store, including, without limitation, footings
and foundations, bearing and exterior walls, subflooring and roof, and fire
sprinkler system which are a part of and/or service the Leased Premises. Such
maintenance and repair shall include, but not be limited to periodic painting of
the Store's exterior and interior public areas, replacement of carpeting in the
public areas, and the maintenance and cleaning of all exterior windows.
Supermarket shall maintain or cause to be maintained, the parking area,
sidewalks, curbs and passageways and driveways and keep the same in a clean and
orderly condition, free of rubbish, snow, ice unlawful obstructions.
C. Supermarket shall be obligated to make repairs of which it does not
have notice, only after Bank has given Supermarket notice of the need for the
repair and only if the repair was not caused by the negligence or willful act of
Bank or its agents, employees, invitees or licensees. Bank shall also be
responsible for all repairs or replacement occasioned by the negligence or
willful act of Bank or its agents, employees, invitees or licensees.
9. PREPARATION OF LEASED PREMISES
A. Bank, at its sole cost and expense, shall furnish all fixtures
equipment and furnishings which it deems necessary or desirable for FSF
operations and shall pay any and all costs of modification of the Store for the
installation of its fixtures, equipment and furnishings. Bank shall not make any
modification or attach any substantial fixtures or equipment without
Supermarket's prior written approval, which shall not be unreasonably withheld.
Supermarket consents to all work to be completed by Bank at its own expense, as
described on Exhibit C, attached hereto ("Bank's Work").
B. If the Bank's plans for improvements (the FSF) have not been
finalized at the time of the execution of this Lease, Bank shall, within thirty
(30) days hereof, submit to Supermarket plans for all improvements proposed,
including
8
<PAGE> 10
without limitation, construction materials, colors, fixtures, lighting, signing
and graphics. Supermarket agrees, within fifteen (15) days after receipt of the
plans from Bank, to give Bank written approval, disapproval or approval with
conditions to such plans. In the event Supermarket fails to so notify Bank, in
writing, within the fifteen (15) day period, such plans shall be construed as
being approved as submitted. If Supermarket refuses to approve plans, Bank shall
have the right to terminate this agreement with no further obligation with
return of any amounts paid to date of termination.
C. Supermarket expressly waives its right to a lien upon any and all
fixtures, machinery or equipment installed or to be installed on the Premises by
or through Bank for the satisfaction of any cause which may accrue to
Supermarket under the provisions of this Lease. Supermarket further agrees to
execute any documents necessary to evidence said waiver as may be required from
time to time by third parties from which Bank leases such fixtures, machinery or
equipment.
10. COVENANT AGAINST LIENS
A. Bank expressly covenants and agrees that it will during the Original
Term and any Renewal Term hereof, promptly remove or release, by the posting of
a bond or otherwise, as required or permitted by law, any lien attached to or
upon said Leased Premises or any portion thereof by reason of any act or
omission on the part of Bank, and hereby expressly agrees to save and hold
harmless the Supermarket from or against any such lien or claim of lien. In the
event any such lien does attach, or any claim of lien is made against said
Leased Premises which is occasioned by any act or omission upon the part of
Bank, and shall not be thus released within sixty (60) days after notice
thereof, Supermarket, in its sole discretion (but nothing herein contained shall
be construed as requiring it to do so) may pay and discharge the said lien and
relieve the Leased Premises from any such lien, and Bank agrees to pay and
reimburse to Supermarket upon demand for or on account of any reasonable expense
which may be incurred by Supermarket in discharging such lien or claims.
Supermarket shall immediately contact Bank if there is any claim of lien and
ascertain if there is reasonable cause for said lien. Nothing in this Lease
shall require Bank to remove or release any lien(s) which may attach to said
Leased Premises or any portion thereof by reason of Supermarket's act or
omission.
B. Supermarket covenants and agrees that at the Commencement Date, the
said Leased Premises shall be free and clear of all liens and charges of any
kind or nature with the exception of the master Lease and any master mortgage
and Supermarket further covenants and agrees that Supermarket shall protect,
save and hold harmless Bank from any such liens and charges against the Leased
Premises.
9
<PAGE> 11
11. ALTERATIONS BY BANK
A. Except as permitted by Section 9 above, Bank shall not make any
alterations, improvements, additions or physical changes ("Alterations") to the
Leased Premises without the prior written consent of Supermarket, such consent
not to be unreasonably withheld, conditioned or delayed. Notwithstanding the
foregoing, Bank shall have the right to make Alterations, the costs of which do
not exceed Twenty Five Thousand and 00/100 Dollars ($25,000.00) without
Supermarket's consent, provided Bank complies with all applicable laws and
furnishes Supermarket with a copy of the plans indicating the work to be done.
12. SIGNS; BUILDING IDENTIFICATION
Supermarket shall permit Bank to place signs identifying its operations
inside the Store at locations to be agreed upon by the parties. Bank will submit
to Supermarket for its approval, a signage package detailing the appearance and
size of all signs to be installed. Exterior signs at such dimensions as
Supermarket and Bank may agree upon may be permitted only upon the consent of
Supermarket, its Supermarket, if needed, and compliance with all local
ordinances and regulations. Supermarket agrees to cooperate with Bank in
obtaining all necessary approvals from third parties with respect to such signs.
Supermarket's approval under this paragraph shall not be unreasonably withheld
or delayed.
13. APPROVALS
A. Supermarket agrees to cooperate with and assist Bank in obtaining
any necessary approvals and permits in connection with construction,
installation and operations of the FSF.
B. Notwithstanding any other provision hereunder, this Agreement is
subject to and conditioned upon the receipt by Bank of regulatory approval to
operate the FSF and any local governmental approvals, including zoning, to allow
the conduct of the Bank's business activities and the FSF at the Store. If said
approvals are not obtained, then the Bank shall be entitled to terminate this
Lease upon written notice to Supermarket. Bank agrees to use reasonable efforts
to obtain all such necessary approvals.
C. This Lease is contingent upon the Supermarket/Bank obtaining from
Market Development Corporation, written consent allowing the Bank to operate its
FSF upon the Leased Premises; and in obtaining any other consents necessary from
the Master Landlord as required by the Master Lease with Market Development
Corporation dated 11-01-95. Supermarket shall use its best efforts to obtain
such consent and if all such written consents are not
10
<PAGE> 12
obtained within thirty (30) days from the date of execution of this Lease
Agreement, Bank shall have the option to terminate this Lease upon written
notice to the Supermarket prior to the Commencement Date.
14. CONDITION OF LEASES PREMISES; REPAIRS
Bank shall, at all times during the Term hereof and at Bank's sole cost
and expense, repair any damage which it does to the Leased Premises and every
part thereof, including all improvements and fixtures, whether installed by
Supermarket or Bank, except for ordinary wear and tear, earthquakes, casualty,
acts of God or the elements and at the end of the Term of this Lease, Bank shall
surrender the Leased Premises to Supermarket in the same condition as received,
except as described in this paragraph above or covered by Supermarket's repair
obligations.
Supermarket shall, at its expense, maintain the Store in good condition
and repair. Without limiting the Supermarket's obligation to maintain and
repair, Supermarket specifically agrees at its expense:
A. To replace any windows damaged other than by the fault of Bank;
B. To repaint those portions of the Leased Premises bearing a painted
surface as requested by Bank, but not more often than once every
five (5) years during the Term of this Lease;
C. To retain a maintenance staff for the making of minor repairs and
adjustments; and
D. To provide and replace light bulbs and fluorescent bulbs in
ceilings as needed.
Supermarket shall keep and maintain the roof, exterior walls (including
exterior window glass), structural floor slabs, columns, elevators, public
stairways, corridors and lobbies, lavatories, equipment and systems, including
plumbing, electrical, security, and heating, ventilating and air conditioning,
and the common facilities of the Store and any associated Common Area and
parking spaces in first class condition and repair and in compliance with all
applicable laws, codes and regulations. In particular, all Store systems and
equipment shall be repaired by competent repairmen, and serviced, inspected and
maintained in accordance with good business practice.
Bank shall have the right, at its cost and expense, to install a
security system for the Leased Premises and shall have the right to remove the
security system at the termination of this Lease or any extension thereof.
11
<PAGE> 13
15. DESTRUCTION FIRE OR OTHER CAUSE
A. If the Store shall be totally destroyed by fire, wind, or other
casualty, or the casualty exceeds fifty percent (50%) of the replacement cost of
the Store as determined by a mutually acceptable insurance adjuster, then in
either event, either Bank or Supermarket may terminate this Lease by giving the
other written notice of its election to terminate this Lease, not more than
thirty (30) days following the date of such damage or destruction. In the event
of partial destruction (less than 50% of the replacement Store cost), or if
destruction is greater but neither Supermarket or Bank elects to terminate this
Lease, said Store shall be restored and repaired by Supermarket. The Rent for
the Leased Premises shall be abated during the period of restoration and repairs
if the Leased premises is unusable by Bank for the purpose set forth in this
Lease.
B. If the Leased Premises are partially damaged or rendered partially
unusable by fire, earthquake or other casualty, the damages hereto shall be
promptly repaired by and at the expense of Supermarket and the Rent, until such
repair shall be substantially completed, shall be apportioned from the date
following the casualty according to the part of the Leased Premises which is
usable.
C. If the Leased Premises are totally destroyed or rendered
substantially unusable, as determined by Bank in its sole discretion, by fire,
earthquake or other casualty, then Bank, at its option, may either terminate
this Lease or elect that the Rent shall be paid up to the time of the casualty
and thence forth shall cease until the date which, in Bank's sole judgment, the
Leased Premises may be used by the Bank for the purpose set forth in this Lease.
16. EMINENT DOMAIN
If all or any part of the Leased Premises or the Store or a material
portion of the Common Areas shall be taken or condemned by any competent
authority for any public use or purpose, or if the same shall be sold by
Supermarket to any public agency or authority in lieu of condemnation, the Term
shall, at the option of Bank, end as of the date of the actual taking or sale,
but Bank's obligations hereunder shall terminate on the date the condemning
authority takes possession of all or such portion of the Leased Premises, the
Store, or such material portion of the Common Areas. In such event, Bank may
terminate this Lease by written notice to Supermarket within ten (10) days after
Supermarket shall have given Bank written notice of such taking, or in the
absence of such notice from Supermarket, within ten (10) days after the
condemning authority shall have taken possession. If Bank does not so terminate
this Lease, it shall remain in full force and effect as to the remaining portion
of the Leased Premises, except that Bank's Rent shall be reduced based on the
proportion that the area taken bears to the total Leased Premises. In such
event, Supermarket
12
<PAGE> 14
shall, to the extent of compensation received by Supermarket in connection with
such condemnation of the Leased Premises, the Store or the Common Areas, repair
any damage to same caused by such condemnation, except to the extent Bank has
been reimbursed therefore by the condemning authority. In either case, there
shall be no apportionment to Bank of any portion of the award or damages for
such taking; provided, however, that Bank shall be entitled to any funds awarded
it for moving expenses or business interruption. In the event of a termination
pursuant to this Section 16, Rent shall be prorated to the date of such taking.
17. INDEMNIFICATION
A. Bank shall indemnify Supermarket against and hold it harmless from
any and all liabilities, obligations, damages, penalties, claims, costs and
expenses, including reasonable attorneys' fees, paid or incurred as a result of
or in connection with (i) the carelessness, negligence or improper conduct of
Bank, any of its subtenants, or any of its agents, contractors, employees,
customers, invitees, or licensees, or (ii) any breach by Bank, and its
subtenants, or any of its agents, contractors, employees, customers, invitees of
licensees, or any covenant or condition of this Lease.
B. Supermarket shall indemnify Bank against and hold it harmless from
any and all liabilities, obligations, damages, penalties, claims, costs and
expenses, including reasonable attorneys' fees, paid or incurred as a result of
or in connection with (i) the carelessness, negligence or improper conduct of
Supermarket, or any of its agents, contractors, employees, customers, invitees,
or licensees, or (ii) any breach by Supermarket, or any of its agents,
contractors, employees, customers, invitees or licensees, of any covenant or
condition of this Lease.
18. INSURANCE
A. Bank shall secure and maintain in force during the Term of this
Lease Commercial general liability insurance with a combined single limit for
bodily injury and property damage in an amount not less than One Million Dollars
($1,000,000) per occurrence. Bank's general liability insurance policy shall
insure the performance by Bank of the indemnity agreement set forth in Section
17, and shall be endorsed to provide that Supermarket is named as additional
insured. Bank shall have the option to self-insure its insurance obligations
under this Lease.
B. Supermarket will maintain at all times during the terms of this
Lease:
(i) All risk or comprehensive peril insurance in an amount not less
than the actual replacement costs (exclusive of foundations and
13
<PAGE> 15
excavations) of the Store as calculated annually. Bank shall be named as an
additional insured and the insurer shall acknowledge acceptance of the mutual
waiver of claims by Supermarket and Bank set forth in this Section 18 below. In
the event that Bank obtains insurance on the store, such insurance shall be
excess and not contributing with insurance maintained by the Supermarket. In the
event Supermarket fails to comply with such requirements, Bank may obtain such
insurance and deduct the premium from the next rent payment due.
(ii) Commercial general liability insurance insuring against damage
occurring in, on or about the Store and Common Areas in such an
amount as are customary for properties comparable to the building,
but in no event in an amount less than One Million Dollars
($1,000,000) combined single limit, per occurrence. Supermarket's
commercial general liability insurance policy shall insure the
performance by the Supermarket of the indemnity agreement set
forth in Section 17. Bank shall be named as an additional insured
in Supermarket's public liability insurance policy.
C. Notwithstanding anything to the contrary contained herein, each of
the parties hereto releases the other Store, to the extent of each party's
insurance coverage, from any and all liability for any loss or damage which may
be inflicted upon the property of such party even if such loss or damage shall
be brought about by the fault or negligence of the other party, or other
tenants, or their agents, employees or assigns; provided, however that this
release shall be effective only with respect to loss or damage occurring during
such time as the appropriate policy of insurance shall contain a clause to the
effect that this release shall not affect the policy or the right of the insured
to recover thereunder.
The provisions of this Section 18 shall survive the termination or
earlier expiration of the Term of this Lease with respect to any damage, injury,
or death occurring prior to termination.
19. DEFAULT; REMEDIES
A. Default of Bank
The happening of any one or more of the following events shall
constitute an event of default hereunder by Bank.
(i) Non-payment by Bank when due of any Rent due hereunder and such
non-payment shall continue for a period of fifteen (15) days after
written notice thereof from Supermarket; or
14
<PAGE> 16
(ii) Non-observance or non-performance of any other covenant,
obligation, condition or requirement imposed upon Bank by this
Lease and the continuation of such non-performance or non-
observance of a period of thirty (30) days after written notice
thereof from Supermarket to Bank except that in case of any
default relating to the condition or maintenance of the Leased
Premises there shall be excluded from the calculation of such
period of thirty (30) days, periods of unavoidable delays,
including, but not limited to, delays due to strikes, Acts of
God, governmental restrictions, unavailability of labor or
materials, enemy action, civil commotion, fire, unavoidable
casualties or causes beyond the control of Bank, and period
during which Bank shall be diligently proceeding to cure such
default to the end it shall be cured expeditiously and without
delay.
B. Supermarket's Remedies Upon Default
In the event of the uncured default of Bank, Supermarket may:
(i) Cancel and terminate this Lease by notifying Bank of
Supermarket's election of this remedy and upon giving such
written notice this Lease will cease and terminate; or
(ii) Supermarket may be appropriate legal proceedings require Bank to
specifically perform its covenants and obligations hereunder; or
(iii) Supermarket may relet said Leased Premises or any part thereof
as agent for Bank and receive the rent therefore and Bank shall
pay all of Supermarket's reasonable expenses in connection with
such reletting, including the expenses of keeping said Leased
Premises in repair, brokerage commissions, concessions to Bank
or other expenses that Supermarket may incur, and Bank shall be
liable for any deficiency, which deficiency may be recovered
from time to time. Supermarket shall actively attempt to relet
the Leased Premises in order to mitigate the damages of
Supermarket.
(iv) Supermarket may recover by appropriate legal proceedings, if
necessary as liquidated and agreed current damages the Rent and
other sum payable to Supermarket by Bank under the Term of this
Lease up to and including the date of termination, of what would
have been the Original Term or applicable Renewal Term in the
absence of termination, expiration, default or repossession.
15
<PAGE> 17
C. Default of Supermarket
The happening of the following event shall constitute an event of
default hereunder by Supermarket:
(i) Non-observance or non-performance of any covenant, obligation,
condition or requirement imposed upon it by this Lease,
including, but not limited to, presence of Hazardous Material on
the Property, and the continuation of such non-performance or
non-observance for a period of thirty (30) days after written
notice thereof from Bank to Supermarket except that in case of
any default relating to the condition or maintenance of the
Leased Premises, the Building or Common Areas, there shall be
excluded from the calculation of such period of thirty (30)
days, periods of unavoidable delays, including, but not limited
to, delays due to strikes, Acts of God, governmental
restrictions, unavailability of labor or materials, enemy
action, civil commotion, fire, unavoidable casualties or causes
beyond the control of Supermarket, and period during which
Supermarket shall be diligently proceeding to cure such default
to the end it shall be cured expeditiously and without delay.
D. Bank's Remedies Upon Default
In the event of an uncured default of Supermarket, Bank may:
(i) Perform such obligations of Supermarket and deduct the
reasonable costs of completing such obligations from future
Rent; or
(ii) By appropriate legal proceedings, require Supermarket to
specifically perform its covenants and obligations hereunder; or
(iii) Cancel and terminate this Lease by notifying Supermarket of
Bank's election of this remedy and upon giving such written
notice this Lease will cease and terminate.
E. Remedies Are Cumulative
The remedies as given in this Lease to Supermarket and Bank are
cumulative and shall be in addition to all other remedies now and hereafter
existing, whether in law, at equity, or by statute. No waiver by the Supermarket
or Bank of any default or breach of any covenant, condition or stipulation
herein contained shall be regarded as a waiver of any subsequent default or
breach of the same or of any other covenant, condition or stipulation hereof.
16
<PAGE> 18
F. Expense of Enforcement
In the event any legal proceedings arise under or in connection with
this Lease, the prevailing party shall be awarded costs, reasonable attorneys
fees and reasonable expert witness fees incurred in connection with such
proceedings.
20. TERMINATION: SURRENDER OF POSSESSION
A. Upon the expiration or termination of this Lease, Bank shall:
(i) Restore the Leased Premises to its condition at the beginning of
the Original Term (other than any Bank's work), ordinary wear
and tear excepted, remove all of its personal property and trade
fixtures from the Leased Premises (including, at its option the
FSF) and the Property and repair any damage caused by such
removal; and
(ii) Surrender possession of the Leased Premises to Supermarket.
21. HOLDING OVER
If Bank remains in possession of the premises after the expiration or
termination of the Lease, it shall be deemed to be occupying the premises as a
Bank from month-to-month, subject to all the conditions, provisions and
obligations of this Lease as far as it applies to month-to-month tenancy,
cancelable by either party upon thirty (30) days written notice to the other
party.
22. ASSIGNMENT AND SUBLETTING
Bank shall have the right to assign this Lease or any interest
hereunder or sublet the Leased Premises or any part thereof. However, such
assignment or subletting must be approved by Supermarket which approval shall
not be unreasonably withheld, conditioned or delayed and shall no be construed
to relieve Bank from its obligations hereunder, unless agreed to in writing by
Supermarket. Notwithstanding the foregoing, in the event Bank is purchased by or
merged into another financial institution or if Bank desires to assign this
Lease to successors interest, the interest of Bank hereunder can be assigned to
its successor without the consent of Supermarket. Supermarket will allow Bank to
sublet to its subsidiary, Commercial Bank, under the same terms and conditions
as the lease to Bank (Holding Company).
17
<PAGE> 19
23. SUPERMARKET'S ACCESS TO LEASED PREMISES
Supermarket may enter the Leased Premises at reasonable times upon
reasonable notice for the purpose of inspecting or showing them, preventing
waste, loss or destruction, enforcing any of its rights or powers under this
Lease, or making such repairs or alterations as it is required or permitted to
make. If Bank is not present to open and permit entry, Supermarket may enter the
Leased Premises by master key (or forcibly) only in the event of an emergency,
except for routine cleaning. The obligations of Bank hereunder shall not be
affected by any such entry.
24. PARKING
For and in consideration of the Rent paid pursuant to this Lease,
Supermarket shall provide to Bank a sufficient number of parking spaces located
in close proximity to the Supermarket Store for use by Bank's employees and
customers.
25. NOTICES
All communications required hereunder shall be in writing and shall be
deemed to have been given if either delivered personally or mailed by certified
or registered mail to a party at the addresses set forth on the first page of
this Lease. The parties' addresses may from time to time be changed by written
notice.
Copies of any notices to Bank shall also be sent to:
COMMERCIAL BANK
ATTN: DEAN E. MILLIGAN
PRESIDENT AND CEO
P.O. BOX 280
101 N. PINE RIVER ST.
ITHACA, MI 48847
26. LITIGATION
Supermarket and Bank waive trial by jury in any proceeding brought by
either party pursuant to this Lease.
27. GOVERNING LAW; INVALIDATION
This Lease shall be governed by and construed in accordance with the
laws of the State of Michigan. The invalidation of one or more terms of this
Lease shall not affect the validity of the remaining terms.
18
<PAGE> 20
28. AMENDMENT
This Lease, including any exhibits, schedules, or riders attached
hereto, represents the entire agreement between the parties. No oral or written,
prior or contemporaneous agreements shall have any force or effect, and this
Lease may not be amended, altered or modified unless done so by means of a
written instrument signed by both parties.
29. SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATE
A. This Lease shall, at the option of Supermarket or its lenders, be
subject and subordinate to the interests of the holders of any notes secured by
mortgages on the Property or the Leased Premises, now or in the future, and to
all renewals, modifications, consolidations, replacements and extensions
thereof. While the provisions of this Section 29 are self-executing, Bank shall
execute such documents as many reasonably be desired by Supermarket or any
mortgagee to affirm or give notice of such subordination. In turn, Bank shall be
entitled to receive the customary non-disturbance agreement from each such
lender in form and substance satisfactory to Bank whereby the lender agrees to
recognize Bank's rights under this Lease following foreclosure so long as Bank
is not in material default hereunder.
B. Bank shall attorn to any foreclosing mortgagee, or to any purchaser
of the Property or the Leased Premises at any foreclosure sale, or sale in lieu
of foreclosure, for the balance of the Original Term or applicable Renewal Term
on all the terms and conditions herein contained.
C. At the request of Supermarket, Bank shall within ten (10) days
deliver to Supermarket, or anyone designated by Supermarket, a certificate
stating and certifying to such information as may reasonably be requested to
verify the state of the Supermarket-Bank relationship established by this Lease.
D. Notwithstanding any provisions with respect to the subordination of
the Lease to any superior lease or any superior mortgage which may hereafter be
made or to any renewal, modification, replacement or extension hereafter of any
superior lease or any superior mortgage, any such subordination is subject to
the express conditions that so long as the Lease is in full force and effect:
(i) Bank shall not be joined as a party defendant (a) in any action
or proceeding which may be instituted or taken by the lessor of
such superior lease for the purpose of terminating such superior
lease by reason of any default thereunder, or (b) in any
foreclosure action or proceeding which may be instituted or
taken by the holder of such superior mortgage;
19
<PAGE> 21
(ii) Bank shall not be evicted from the Leased Premises, nor shall
Bank's continuing use and occupancy of the Leased Premises be
interrupted, restricted or impaired, nor shall any of Bank's
rights under the Lease be affected in any way be reason of any
default under such superior lease or such superior mortgage; and
(iii) Bank's leasehold estate under the Lease shall not be terminated
or disturbed by reason of any default under such superior lease
or such superior mortgage and this Lease and Bank's rights
hereunder, including any rights of offset, shall be recognized
by the lessor under any such superior lease or the holder of any
such superior mortgage.
Supermarket represents that there are the following superior leases and
superior mortgages existing at the date of the Lease: Bobenal Investments.
Supermarket further represents that there are not existing defaults by
Supermarket under any such superior lease or superior mortgage, nor shall there
be as of the Commencement Date. Supermarket agrees to procure and deliver to
Bank, with reasonable promptness after the date of the Lease, written agreements
of the lessors of the aforesaid superior leases and the holders of the aforesaid
mortgages. If all such agreements shall not be tendered to Bank within ten (10)
days after the date of the Lease, Bank may, at Bank's option (a) delay the
Commencement Date of the Lease and the payment of Rent until Supermarket
procures such agreements, or (b) cancel the Lease on the date set forth in such
notice, which shall not be less than ten (10) nor more then sixty (60)) days
after the date of such notice, and the Lease and the terms and estate hereby
granted shall then terminate at noon of such cancellation date as if such
cancellation date were the expiration date, unless all of such agreements shall
have been tendered meanwhile. Upon any such cancellation Supermarket shall have
no further obligation to Bank hereunder except to return any monies theretofore
paid by Bank to Supermarket on account of Rent under the Lease.
30. SECURITY; HOURS OF BUSINESS
A. It shall be Bank's obligation to provide security for the FSF. Bank
shall have the right to have the Security Guard who is an employee or agent of
Bank in the Store at all times, and to install any electronic surveillance
equipment it deems necessary.
B. The Leased Premises are located entirely within the Supermarket's
building and because there is no separate access for ingress or egress to the
Leased Premises, Bank acknowledges that access to the Leased Premises will be
limited to those hours in which the Supermarket's operation is open for
business.
20
<PAGE> 22
Bank shall have the right to access the Leased Premises during the time
that the Supermarket operation is not open for business for the following
reasons:
(a) Security purposes
(b) To ready the Leased Premises for Bank's business;
(c) Emergency matters
Supermarket shall cooperate with Bank in allowing Bank to have access
to the Leased Premises for the reasons stated above, upon Bank's notice to
Supermarket; provided, however, Bank shall not have a key to the Store (without
Supermarket's consent) which contains the Leased Premises and its right of
access herein shall be through the security company maintained by Supermarket
governing access to the premises during the hours in which the Supermarket is
not in operation. Supermarket shall cooperate and direct its building security
company to establish a communication protocol with Bank's security company
and/or staff so that Bank's access as may be required for the above states
purposes will be properly coordinated and Supermarket will direct its security
company to act reasonably to facilitate cooperation between Bank's security
services and Supermarket's security services.
31. BANKING SERVICES
Supermarket may, but is not required to, conduct any of its in-house
banking services at Bank's facility, and the Bank shall maintain sufficient cash
funds to enable the Supermarket to conduct its banking business. Supermarket
shall have the right, during regular banking hours established by Bank, to make
deposits, withdrawals, cash checks, and conduct its other banking business at
Bank's facility, subject to any rules, regulations, policies, procedures, and/or
charges established by the Bank for similar commercial customers from time to
time.
32. GENDER; SINGULAR AND PLURAL
Whenever in this Lease words, including pronouns are used in the
masculine, they shall be read in the feminine or neuter whenever they would so
apply and vice versa, and words in this Lease that are singular shall be read as
plural whenever the latter would so apply and vice versa.
33. AMERICANS WITH DISABILITIES ACT
Bank shall, regarding the FSF, at all times and at its own expense,
comply with all federal, state and local laws, rules, regulations, ordinances,
and requirements regarding discrimination towards those who are disabled,
removal of architectural and communication barriers, providing auxiliary aids
and services
21
<PAGE> 23
for disabled persons, and making facilities accessible to disabled persons,
including, without limitation, the Americans Disabilities Act, 42 USC Section
12101 et seq., and the regulations issued thereunder at 28 CFR Part 36
(together, the "Act"). Bank's obligations under the Act shall not apply to (i)
any structural components of the Store, (ii) any new construction or alterations
undertaken by Supermarket, and (iii) any portions of the Leased Premises which
are not specifically Bank's responsibility; provided, however, that Bank's
compliance responsibilities under the Act shall in any event extend to the vault
and safety deposit box areas. Supermarket shall at all times and at its own
expense, comply with all federal, state and local laws, rules, regulations,
ordinances, and requirements regarding discrimination towards those who are
disabled, removal of architectural and communication barriers, providing
auxiliary aids and services for disabled persons, and making facilities
accessible to disabled persons, including, without limitation, the Americans
Disabilities Act, 42 USC Section 12101 et seq., and the regulations issued
thereunder at 28 CFR Part 36 (together, the "Act").
Bank shall defend, indemnify and hold Supermarket harmless from all
claims, costs and liabilities, including attorneys' fees and costs, arising out
of or in connection with Bank's failure to comply with the Act as required
pursuant to the terms hereof. Supermarket shall defend, indemnify and hold Bank
harmless from all claims, costs and liabilities, including attorneys' fees and
costs, arising out of or in connection with Supermarket's failure to comply with
the Act as required pursuant to the terms hereof.
34. SUCCESSORS AND ASSIGNS
The covenants, conditions, and agreements contained in this Lease shall
bind and inure to the benefit of Supermarket and Bank and their respective
successors and assigns.
35. COVENANTS AND CONDITIONS
All covenants and conditions contained in this Lease are independent of
one another.
36. NOTICE OF LEASE
Each party shall, upon the request of the other, execute, acknowledge
and deliver a memorandum or short form of the Lease in form suitable for
recording in accordance with local law or custom.
22
<PAGE> 24
37. BROKERS
Supermarket and Bank each represent and warrant to the other that it
has dealt with no broker in connection with this Lease. Supermarket and Bank
agree to indemnify and hold harmless the other from any and all claims, losses,
costs and expenses (including reasonable attorneys' fees) and liability for any
compensation, commissions or charges by any broker or agent if its
representation in this Section 37 is not true.
38. CONSENT
Wherever in this Lease it is provided that either party shall not
unreasonably withhold consent or approval, such consent or approval
(collectively referred to as "consent") shall also not be unreasonably
conditioned or delayed. If a party considers that the other party has
unreasonably withheld or delayed a consent it shall so notify the other party
within ten (10) days after receipt of notice of denial of the request consent
or, in case notice of denial is not received, within twenty (20) days after
giving the first mentioned notice, and may submit the question of whether the
withholding or delaying of such consent is unreasonable to determination by
arbitration.
39. AUTHORITY TO EXECUTE
The individuals executing this Lease warrant that they have full and
complete authority properly vested to execute this Lease and thereby bind their
respective entity to each and every term set forth herein applicable to them.
40. CONFIDENTIALITY
Each party acknowledges that in connection with this Agreement or in
the performance thereof, it has or will come into possession or knowledge of
material and information which is proprietary to the other party. Each party,
therefore, agrees to hold such material and information in strictest confidence,
not to make use thereof, except in the performance of this Agreement, and not to
release or disclose it to any other party with the exception of parent
companies, subsidiaries, and affiliates of the parties.
41. TAXES
Supermarket shall pay or cause to be paid all real property taxes and
special assessments levied against the premises. Bank shall pay all personal
property taxes assessed against any personal property owned by the Bank on the
premises.
23
<PAGE> 25
42. RULES AND REGULATIONS
Supermarket reserves the right to adopt from time-to-time reasonable
rules and regulations for the operation of the Supermarket which are not
inconsistent with the provisions of this Lease and which do not unreasonably
interfere with the Bank's use of the Premises for the intended purposes. Bank
and its agents, employees, invitees and licensees will comply with all those
reasonable rules and regulations.
43. CHANGES BY SUPERMARKET
Supermarket reserves the absolute right at any time, and from
time-to-time to make changes or revisions in the center, including changes to
the parking lot, driveways, signs, landscaping and sidewalks by making additions
to, subtractions from, or rearrangements of the improvements in the center,
which do not unreasonably interfere with Bank's use of the Premises for its
intended purposes, including significant alteration of the customer traffic
patterns.
44. NO PARTNERSHIP
Any intention to create a joint venture or partnership between the
parties is expressly disclaimed.
45. FORCE MAJEURE
Neither party shall be responsible for delays or failures in
performance resulting from acts beyond the control of such party, including,
without limitation, acts of God, strikes, lockouts, riots, acts of war,
epidemics, governmental regulation superimposed after the fact, fire;
communication line failures, earthquakes, floods, or other disasters.
24
<PAGE> 26
IN WITNESS WHEREOF, this Lease has been executed as of the day and year
first above written.
WITNESSES: LANDLORD:
BY:
- ---------------------- ----------------------
ITS:
- ---------------------- ----------------------
STATE OF MICHIGAN )
: SS
COUNTY OF GRATIOT )
The foregoing instrument was acknowledged before me by of, a
corporation, on behalf of the corporation. He/she identified the instrument as
Lease Agreement and signed it willingly on behalf of the corporation.
Notary Public
--------------------
County
----------------
My Commission Expires:
-----------
WITNESSES: TENANT:
BY:
- ---------------------- --------------------------
ITS:
- ---------------------- ---------------------------
STATE OF MICHIGAN )
: SS
COUNTY OF GRATIOT )
The foregoing instrument was acknowledged before me by of, a
corporation, on behalf of the corporation. He/she identified the instrument as
Lease Agreement and signed it willingly on behalf of the corporation.
Notary Public
-------------------
County
----------------
My Commission Expires:
-----------
25
<PAGE> 1
EXHIBIT 10(I)
BRANCH LEASE FOR MIDLAND SUPERMARKET BRANCH
<PAGE> 2
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") has been made and entered into as of
November 1, 1995, by and between ASHCRAFT'S MARKETS, INC., a Michigan
Corporation, with offices at 206 East Oak Street, P.O. Box 584, Harrison,
Michigan 48625 (Supermarket), and COMMERCIAL NATIONAL FINANCIAL CORPORATION, a
Michigan Banking corporation having its principal place of business located at
101 N. Pine River Street, Ithaca, Michigan 48847 ("Bank").
WITNESSETH:
WHEREAS, Supermarket is the Tenant of certain real estate and
improvements thereon situated in the City of Midland, and State of Michigan,
commonly known as the Ashcraft's - Midland, located at 2026 North Saginaw Road,
Midland, Michigan ("Store"); and
WHEREAS, Supermarket desires to sublease to Bank certain space in the
Store and Bank desires to lease the space on the terms and conditions stated
below.
IN CONSIDERATION of the mutual promises and subject to the terms and
conditions set forth therein, Supermarket hereby grants to Bank the right to
install, maintain and operate a Financial Service Facility, as defined below,
through this Lease in the Store in accordance with the provisions hereinafter
set forth.
1. DEFINITIONS
When used in this Lease, the following-defined terms shall carry the
definitions which follow them, unless the context clearly indicates to the
contrary:
A. "Common Areas" means all portions of the Property available for
common use and not intended to be leased.
B. "Leased Premises" means that area within the Store containing
approximately 440 net rentable square feet pursuant to Building and Office
Manager Association ("BOMA") standards to be leased by Bank, together with the
appurtenant right to the use, in common with others, of lobbies, parking area,
telephone and electric closets, truck docks, rest rooms, entrances, stairs,
elevators, access ways, platforms, passageways, pipes, ducts, conduits, wires
and appurtenant facilities, and all public portions and facilities of the Store
C. "Property" means the real estate upon which the Supermarket is
located and all improvements constructed or to be constructed, by Supermarket
1
<PAGE> 3
thereon commonly known as Ashcraft's - Midland, located at 2030 North Saginaw
Road, Midland, Michigan (sometimes referred to as the "Store").
D. "Automated Teller Machine" or "ATM" shall mean an electronic
terminal that performs certain banking functions, including dispensing cash,
coupons and traveler's checks, accepting deposits and loan payments, making
transfers between accounts and giving account balances. These terms however,
shall not include point-of-sale systems or other direct debit systems installed
by Supermarket at its check-out lanes.
E. "Financial Service Facility" or "FSF" shall mean a banking facility
staffed with one (1) or more bank employees whose functions include without
limitation, opening new deposit accounts, accepting loan applications and
performing customary teller transactions, such as cashing checks and taking
deposits. An FSF may be equipped with an ATM, safe deposit boxes and a night
depository. An FSF may also offer such other products and services as may be
permitted by applicable law and regulation, including, without limitation,
insurance, investment products and travel agency services.
2. DEMISE OF LEASED PREMISES; TERM; OPTION TO RENEW.
(a) The term of this Lease shall be Five (5) years (the "original
Term"). The beginning date of the Original Term shall be the
date upon which FSF opens for business, but not later than November
1, 1995, unless the opening of the FSF is delayed because of
circumstances beyond the reasonable control of Bank. This date shall be
called the "Commencement Date" and, unless sooner terminated as herein
provided, the Original Term shall expire Five (5) years from the
Commencement Date.
(b) Bank covenants to pay to Supermarket's address set forth below,
rent as follows: (i) during the first through fifth lease years, the
annual rent will be Eight Thousand Eight Hundred Dollars ($8,800). This
yearly rental payment is based upon Twenty Dollars ($20.00) per square
foot per year payable in equal monthly installments of Seven Hundred
Thirty-Three and 33/100 ($733.33).
(c) Each monthly installment of rent shall be due and payable on the
first day of each and every month during the term hereof except that
the first month's rent shall be paid on the date on which the term of
this Lease shall commence, and rent shall be apportioned for any period
during the term hereof of less than a full month.
2
<PAGE> 4
3. RENEWAL OPTION
Supermarket hereby grants Bank the exclusive right and option to renew
or extend this Lease by notice to Supermarket, as hereinafter provided, for two
additional terms of five (5) years each upon and subject to the same terms,
conditions, and provisions as are herein set forth and provided with respect to
the original term. During the first five (5) year renewal term, the annual
rental shall be increased to ________________________($) Dollars, payable in
equal monthly installments of _________________________($) Dollars.
The annual rental during the second five (5) year term shall be
increased to _______________________________($) Dollars, payable in equal
monthly installments of _________________________________($) Dollars.
Notice of intention to exercise any extension period hereunder shall be
given by Bank to Supermarket, in writing, at least one hundred twenty (120) days
prior to the expiration of the Original Term or the immediately preceding
Renewal Term, as applicable.
4. USE OF LEASED PREMISES; SUPERMARKET'S TITLE
ALLOWABLE USE; ENVIRONMENTAL
A. Bank shall have the exclusive right to operate an FSF and ATM within
the store and may provide and promote those financial services which are
typically transacted or conducted by the Bank in operation of its facilities.
Supermarket shall not conduct nor allow any other entity to conduct or offer
competing banking services, including, but not limited to, operating and
servicing of checking and savings accounts, acquiring and servicing loans or
other extensions of credit, including consumer financing, commercial financing,
credit cards and mortgages; trust company functions; operating a safe deposit
box business; issuance and sale of U.S. Savings Bonds and travelers checks; tax
planning and preparation; selling credit life insurance; providing financial
counseling and portfolio investment advice; providing securities brokerage
service; engaging in the sale of annuity and similar products; engaging in title
insurance activities; and providing real estate appraisal services. Supermarket
shall not allow a financial institution other than Bank to advertise in the
Store. Supermarket shall be permitted to provide such service of making change,
cashing checks, verifying checks, selling money orders and conducting point of
sale transactions.
B. Each party shall conduct its business at the Store in a clean and
lawful manner. Each party agrees that it shall not block or restrict the aisles
or passageways of the other party, nor shall either party interfere with the
other party's business.
3
<PAGE> 5
C. Bank agrees to open for business in the premises on the commencement
date, and thereafter during the term of this Lease, continuously use the
Premises for the purpose stated in this Lease, carrying on Bank's business with
reasonable diligence.
D. Supermarket represent and warrants to Bank that it is leasing the
Store from Ray's Shopping Center, Inc. pursuant to a Master Lease dated
02-27-95. This Lease is subject to the terms and conditions of the Master Lease,
a copy of which will be given to the Bank by the Supermarket upon request
therefore. Said Master Lease with Ray's Shopping Center, Inc. permits the
Supermarket to lease the premises to the Bank hereunder, and the Supermarket has
the right to make this Lease for the original term and any renewal term
aforesaid; that the provisions of this Lease do not conflict with or violate the
provision of the existing agreement between Supermarket and third parties; that
the Certificate of Occupancy for the Store will allow Bank to use the Leased
Premises for the purposes set forth above; that the Leased premises and Common
Areas and the uses thereof for the purposes specified in this Lease are, or will
be at the commencement of the Original Term, in conformity with all applicable
federal, state, local and other legal requirements including, without
limitation, the Americans with Disabilities Act of 1990, applicable
environmental legislation, zoning and planning ordinances, and all applicable
restrictions, if any. These representations and warranties shall remain in full
force and effect throughout the Original Term and any Renewal Term, and
Supermarket shall indemnify and hold Bank harmless from any and all costs,
including attorneys' fees, in connection with a breach of said representations
and warranties.
E. Supermarket represents and warrants that there is no Hazardous
Material on the Property or in the Store, including its interior systems or
structure. "Hazardous Material" shall mean: (i) asbestos or asbestos containing
material, (ii) polychlorinated biphenyl in concentrations greater than 50 parts
per million and (iii) any other material or substance, whether solid, gaseous or
liquid, which may pose a present or potential hazard to human health or the
environment including (1) hazardous waste identified in accordance with Section
3001 of the Federal Resource Conservation and Recovery Act of 1976, as amended,
and (b) hazardous waste or material identified by regulation of any governmental
authority regulating environmental or health matters. In the event that any such
Hazardous Material is present in the Property or the Store, Supermarket shall,
at its own cost, (i.e., this is not an Operating Expense), in accordance with
applicable laws and regulations remove such Hazardous Material and restore the
Premises and Store to its conditions prior to Supermarket's removal of the
Hazardous Material. There shall be an abatement or adjustment of Rent for any
period that Bank is restricted in its use of the Leased Premises as a result of
the presence of Hazardous Material therein or as a result of remedial measures
in respect thereto taken by Supermarket.
4
<PAGE> 6
F. Bank shall have the option, in its sole discretion, to have a
qualified environmental consultant of its choice perform testing, which may
include invasive testing such as the installation of soil borings and/or monitor
wells, at its own expense, to further assess the environmental condition of the
Property and Store at any time prior to the Commencement Date. If the results of
such testing are unsatisfactory to Bank in Bank's sole discretion, Bank shall
notify Supermarket of said results within ten (10) days. Bank shall thereafter
have the option to declare this Lease null or void.
G. Supermarket shall indemnify, defend and hold harmless the Bank, its
agents, employees, officers, directors, affiliates, assigns and/or contractors
from and against any and all loss, liability, suits, fines (both civil and
criminal), damages, judgments, penalties, claims, charges, costs and/or expenses
(including actual attorneys fees) imposed on, incurred by or otherwise suffered
as a result of any claim made by any party whatsoever, public or private,
including the Bank itself, arising from the environmental condition of the
Property unless such condition is caused by Bank. This indemnity shall survive
the termination by any means of this Lease and shall not require a third party
claim to trigger by discovery or damage, contamination, loss or expense incurred
by Bank itself.
H. Bank is not and shall not be considered an operator of the property
for purposes of determining environmental liability. Bank has no authority to
and does not control the subsurface or air space of the property. Supermarket is
the operator of the property for any purpose encompassed by this provision.
I. Supermarket shall provide to Bank, prior to the Commencement Date, a
copy of all its environmental audits of the Property and Store.
5. POSSESSION
Bank shall have access to the Leased Premises at least Sixty (60) days
prior to the Commencement Date of the Lease for Bank to construct the FSF, to
utilize the premises for on-site training of its employees and to install its
communication systems, furniture and equipment. Such access shall be under all
the terms and conditions of this Lease except for the obligation to pay rent.
Supermarket will cooperate with Bank in allowing the type of access to the
Leased Premises which will allow bank to construct its FSF within the
Supermarket building.
It is anticipated that the Commencement date will be approximately
November 1, 1995. If possession of the Leased Premises for Bank's use as
contemplated in Section 4 above, shall not be delivered by the Supermarket to
5
<PAGE> 7
Bank by November 1, 1995, Bank, at its option may terminate this Lease by and
upon written notice to Supermarket.
6. QUIET ENJOYMENT
A. Supermarket covenants and agrees with Bank that upon Bank's paying
the Rent and observing and performing all the material terms, covenants and
conditions to be performed and observed hereunder, Bank may peaceably and
quietly enjoy the Leased Premises.
B. All persons employed by Bank in or about, or in connection with, the
operation of the FSF shall be Bank's employees for all purposes under this
Agreement. Bank's employees and agents and employees of companies which service
the FSF who are not Bank employees or agents shall be granted access to the
Store for the purpose of servicing, maintaining and otherwise performing
services in connection with the FSF. Supermarket agrees to cooperate with Bank
in providing access to the Premises during periods of time the Store may not be
open for business.
C. Bank shall, at its own cost and expense, maintain worker's
compensation coverage, unemployment compensation coverage and any other
insurance which may be required by law with respect to its employees.
D. Employees of Bank, while working at the FSF, shall be entitled to
use the toilet facilities and break-room in the Store provided by Supermarket
for the convenience of Supermarket employees.
E. Employees of Bank, while working at the FSF, shall be permitted to
park their automobiles in spaces designated by Supermarket for parking by
Supermarket employees.
F. The Supermarket grants to Bank the right to have Bank's employees
conduct promotional activities in the aisles of Supermarket's supermarket in
which the Leased Premises is located so long as the promotional activities do
not interfere with the ability of Supermarket's customers to conduct their
shopping activities in the Supermarket. The Supermarket acknowledges that such
promotional activities are extremely important to the success of the Bank's
operation of its FSF in the Store. The Store Manager and the FSF Manager will
coordinate special promotional campaigns. All in-store promotional campaigns
shall be conducted by the Bank in a professional and courteous manner, and shall
not unreasonably interfere with Supermarket's conduct of its business at the
Store.
6
<PAGE> 8
G. Bank shall have access to intercommunications systems ("Intercom")
within the Store. The use of such intercom shall be coordinated between the
Store Manager and the FSF Manager.
H. Supermarket and Bank may advertise the existence and location of the
FSF in such media and in such manner as each deems appropriate.
I. Supermarket shall maintain the Store free of all ads, fliers and
signs that might prohibit or unreasonably hinder the operation of Bank's
business within the Premises or which might prohibit or hinder viewing through
or into the Premises.
J. Supermarket shall maintain the Store free and clear of any sale
items, fixtures, barriers, signs or other obstructions that would materially
inhibit the ingress to, and egress from the Premises, and shall, in all events,
keep the Store free and clear of all items within a reasonable distance from the
Teller counters in the FSF.
7. USE, MAINTENANCE AND CONTROL OF COMMON AREAS
Supermarket hereby grants to Bank the nonexclusive right to use the
Common Areas for the purposes for which they were designed. Supermarket shall
maintain and operate the Common Areas.
8. USE, MAINTENANCE AND CONTROL OF COMMON AREAS
A. Bank shall, at all times during the initial and any renewal term of
this Lease, put, keep, and maintain in good repair and in an ordinary condition
all portions of the Leased Premises and shall be responsible for the expenses of
housekeeping of the Leased Premises, including janitorial services for the FSF.
Supermarket shall furnish, at its sole cost and expense, air conditioning, heat,
and electricity to the Leased Premises and the Common Areas and in addition
shall furnish to the Leased Premises, at its sole cost and expense the HVAC
units and any utility lines to the Leased Premises. Bank will provide all
necessary electrical conduits, communication conduits, wiring and communication
services (herein "Special Utility Services") required in connection with the
operation of Bank's banking services. The cost of installation of the Specialist
Utility Services, hardware and services is to be paid by the Bank. Installation
of the Special Utility Services is to be coordinated with the Supermarket to
insure minimum disruption of the Supermarket's business. When the Bank vacates
the Leased Premises, all Special Utility Services located above the ceiling
elevation are to be abandoned by Bank. Subject to the provisions of the C. of
this Section, Supermarket shall not be in default hereunder by reason of (1) the
installation, use or interruption of use of any equipment in connection with the
furnishing of any of the foregoing services
7
<PAGE> 9
when such failure or delay is caused by accident or any condition beyond the
reasonable control of Supermarket or by the making of necessary repairs or
improvements to the Leased Premises or the total Store; or (3) so long as the
condition is generally prevailing and does not arise from any default by
Supermarket, the limitation curtailment, rationing or restrictions on use of
water, electricity, gas or any other form of energy serving the Leased Premises
or the Store. Supermarket shall use its best efforts to diligently remedy any
interruption in the furnishing of such services.
B. Supermarket, at its sole cost and expense, shall maintain, in
condition and repair, consistent with that of other first-class buildings,
(including replacement, when necessary, to maintain such standards), the Store
and the Common Areas, including, without limitation, the plumbing, electrical,
HVAC and other utility facilities servicing, the Store and the Leased Premises;
the structural components of the Store, including, without limitation, footings
and foundations, bearing and exterior walls, subflooring and roof, and fire
sprinkler system which are a part of and/or service the Leased Premises. Such
maintenance and repair shall include, but not be limited to periodic painting of
the Store's exterior and interior public areas, replacement of carpeting in the
public areas, and the maintenance and cleaning of all exterior windows.
Supermarket shall maintain or cause to be maintained, the parking area,
sidewalks, curbs and passageways and driveways and keep the same in a clean and
orderly condition, free of rubbish, snow, ice unlawful obstructions.
C. Supermarket shall be obligated to make repairs of which it does not
have notice, only after Bank has given Supermarket notice of the need for the
repair and only if the repair was not caused by the negligence or willful act of
Bank or its agents, employees, invitees or licensees. Bank shall also be
responsible for all repairs or replacement occasioned by the negligence or
willful act of Bank or its agents, employees, invitees or licensees.
9. PREPARATION OF LEASED PREMISES
A. Bank, at its sole cost and expense, shall furnish all fixtures
equipment and furnishings which it deems necessary or desirable for FSF
operations and shall pay any and all costs of modification of the Store for the
installation of its fixtures, equipment and furnishings. Bank shall not make any
modification or attach any substantial fixtures or equipment without
Supermarket's prior written approval, which shall not be unreasonably withheld.
Supermarket consents to all work to be completed by Bank at its own expense, as
described on Exhibit C, attached hereto ("Bank's Work").
B. If the Bank's plans for improvements (the FSF) have not been
finalized at the time of the execution of this Lease, Bank shall, within thirty
(30) days hereof, submit to Supermarket plans for all improvements proposed,
including
8
<PAGE> 10
without limitation, construction materials, colors, fixtures, lighting, signing
and graphics. Supermarket agrees, within fifteen (15) days after receipt of the
plans from Bank, to give Bank written approval, disapproval or approval with
conditions to such plans. In the event Supermarket fails to so notify Bank, in
writing, within the fifteen (15) day period, such plans shall be construed as
being approved as submitted. If Supermarket refuses to approve plans, Bank shall
have the right to terminate this agreement with no further obligation with
return of any amounts paid to date of termination.
C. Supermarket expressly waives its right to a lien upon any and all
fixtures, machinery or equipment installed or to be installed on the Premises by
or through Bank for the satisfaction of any cause which may accrue to
Supermarket under the provisions of this Lease. Supermarket further agrees to
execute any documents necessary to evidence said waiver as may be required from
time to time by third parties from which Bank leases such fixtures, machinery or
equipment.
10. COVENANT AGAINST LIENS
A. Bank expressly covenants and agrees that it will during the Original
Term and any Renewal Term hereof, promptly remove or release, by the posting of
a bond or otherwise, as required or permitted by law, any lien attached to or
upon said Leased Premises or any portion thereof by reason of any act or
omission on the part of Bank, and hereby expressly agrees to save and hold
harmless the Supermarket from or against any such lien or claim of lien. In the
event any such lien does attach, or any claim of lien is made against said
Leased Premises which is occasioned by any act or omission upon the part of
Bank, and shall not be thus released within sixty (60) days after notice
thereof, Supermarket, in its sole discretion (but nothing herein contained shall
be construed as requiring it to do so) may pay and discharge the said lien and
relieve the Leased Premises from any such lien, and Bank agrees to pay and
reimburse to Supermarket upon demand for or on account of any reasonable expense
which may be incurred by Supermarket in discharging such lien or claims.
Supermarket shall immediately contact Bank if there is any claim of lien and
ascertain if there is reasonable cause for said lien. Nothing in this Lease
shall require Bank to remove or release any lien(s) which may attach to said
Leased Premises or any portion thereof by reason of Supermarket's act or
omission.
B. Supermarket covenants and agrees that at the Commencement Date, the
said Leased Premises shall be free and clear of all liens and charges of any
kind or nature with the exception of the master Lease and any master mortgage
and Supermarket further covenants and agrees that Supermarket shall protect,
save and hold harmless Bank from any such liens and charges against the Leased
Premises.
9
<PAGE> 11
11. ALTERATIONS BY BANK
A. Except as permitted by Section 9 above, Bank shall not make any
alterations, improvements, additions or physical changes ("Alterations") to the
Leased Premises without the prior written consent of Supermarket, such consent
not to be unreasonably withheld, conditioned or delayed. Notwithstanding the
foregoing, Bank shall have the right to make Alterations, the costs of which do
not exceed Twenty Five Thousand and 00/100 Dollars ($25,000.00) without
Supermarket's consent, provided Bank complies with all applicable laws and
furnishes Supermarket with a copy of the plans indicating the work to be done.
12. SIGNS; BUILDING IDENTIFICATION
Supermarket shall permit Bank to place signs identifying its operations
inside the Store at locations to be agreed upon by the parties. Bank will submit
to Supermarket for its approval, a signage package detailing the appearance and
size of all signs to be installed. Exterior signs at such dimensions as
Supermarket and Bank may agree upon may be permitted only upon the consent of
Supermarket, its Supermarket, if needed, and compliance with all local
ordinances and regulations. Supermarket agrees to cooperate with Bank in
obtaining all necessary approvals from third parties with respect to such signs.
Supermarket's approval under this paragraph shall not be unreasonably withheld
or delayed.
13. APPROVALS
A. Supermarket agrees to cooperate with and assist Bank in obtaining
any necessary approvals and permits in connection with construction,
installation and operations of the FSF.
B. Notwithstanding any other provision hereunder, this Agreement is
subject to and conditioned upon the receipt by Bank of regulatory approval to
operate the FSF and any local governmental approvals, including zoning, to allow
the conduct of the Bank's business activities and the FSF at the Store. If said
approvals are not obtained, then the Bank shall be entitled to terminate this
Lease upon written notice to Supermarket. Bank agrees to use reasonable efforts
to obtain all such necessary approvals.
C. This Lease is contingent upon the Supermarket/Bank obtaining from
Ray's Shopping Center, Inc., written consent allowing the Bank to operate its
FSF upon the Leased Premises; and in obtaining any other consents necessary from
the Master Landlord as required by the Master Lease with Ray's Shopping Center,
Inc. dated 02-27-95. Supermarket shall use its best efforts to obtain such
consent and if all such written consents are not obtained within thirty (30)
10
<PAGE> 12
days from the date of execution of this Lease Agreement, Bank shall have the
option to terminate this Lease upon written notice to the Supermarket prior to
the Commencement Date.
14. CONDITION OF LEASES PREMISES; REPAIRS
Bank shall, at all times during the Term hereof and at Bank's sole cost
and expense, repair any damage which it does to the Leased Premises and every
part thereof, including all improvements and fixtures, whether installed by
Supermarket or Bank, except for ordinary wear and tear, earthquakes, casualty,
acts of God or the elements and at the end of the Term of this Lease, Bank shall
surrender the Leased Premises to Supermarket in the same condition as received,
except as described in this paragraph above or covered by Supermarket's repair
obligations.
Supermarket shall, at its expense, maintain the Store in good condition
and repair. Without limiting the Supermarket's obligation to maintain and
repair, Supermarket specifically agrees at its expense:
A. To replace any windows damaged other than by the fault of Bank;
B. To repaint those portions of the Leased Premises bearing a
painted surface as requested by Bank, but not more often than
once every five (5) years during the Term of this Lease;
C. To retain a maintenance staff for the making of minor repairs and
adjustments; and
D. To provide and replace light bulbs and fluorescent bulbs in
ceilings as needed.
Supermarket shall keep and maintain the roof, exterior walls (including
exterior window glass), structural floor slabs, columns, elevators, public
stairways, corridors and lobbies, lavatories, equipment and systems, including
plumbing, electrical, security, and heating, ventilating and air conditioning,
and the common facilities of the Store and any associated Common Area and
parking spaces in first class condition and repair and in compliance with all
applicable laws, codes and regulations. In particular, all Store systems and
equipment shall be repaired by competent repairmen, and serviced, inspected and
maintained in accordance with good business practice.
Bank shall have the right, at its cost and expense, to install a
security system for the Leased Premises and shall have the right to remove the
security system at the termination of this Lease or any extension thereof.
11
<PAGE> 13
15. DESTRUCTION FIRE OR OTHER CAUSE
A. If the Store shall be totally destroyed by fire, wind, or other
casualty, or the casualty exceeds fifty percent (50%) of the replacement cost of
the Store as determined by a mutually acceptable insurance adjuster, then in
either event, either Bank or Supermarket may terminate this Lease by giving the
other written notice of its election to terminate this Lease, not more than
thirty (30) days following the date of such damage or destruction. In the event
of partial destruction (less than 50% of the replacement Store cost), or if
destruction is greater but neither Supermarket or Bank elects to terminate this
Lease, said Store shall be restored and repaired by Supermarket. The Rent for
the Leased Premises shall be abated during the period of restoration and repairs
if the Leased premises is unusable by Bank for the purpose set forth in this
Lease.
B. If the Leased Premises are partially damaged or rendered partially
unusable by fire, earthquake or other casualty, the damages hereto shall be
promptly repaired by and at the expense of Supermarket and the Rent, until such
repair shall be substantially completed, shall be apportioned from the date
following the casualty according to the part of the Leased Premises which is
usable.
C. If the Leased Premises are totally destroyed or rendered
substantially unusable, as determined by Bank in its sole discretion, by fire,
earthquake or other casualty, then Bank, at its option, may either terminate
this Lease or elect that the Rent shall be paid up to the time of the casualty
and thence forth shall cease until the date which, in Bank's sole judgment, the
Leased Premises may be used by the Bank for the purpose set forth in this Lease.
16. EMINENT DOMAIN
If all or any part of the Leased Premises or the Store or a material
portion of the Common Areas shall be taken or condemned by any competent
authority for any public use or purpose, or if the same shall be sold by
Supermarket to any public agency or authority in lieu of condemnation, the Term
shall, at the option of Bank, end as of the date of the actual taking or sale,
but Bank's obligations hereunder shall terminate on the date the condemning
authority takes possession of all or such portion of the Leased Premises, the
Store, or such material portion of the Common Areas. In such event, Bank may
terminate this Lease by written notice to Supermarket within ten (10) days after
Supermarket shall have given Bank written notice of such taking, or in the
absence of such notice from Supermarket, within ten (10) days after the
condemning authority shall have taken possession. If Bank does not so terminate
this Lease, it shall remain in full force and effect as to the remaining portion
of the Leased Premises, except that Bank's Rent shall be reduced based on the
proportion that the area taken bears to the total Leased Premises. In such
event, Supermarket
12
<PAGE> 14
shall, to the extent of compensation received by Supermarket in connection with
such condemnation of the Leased Premises, the Store or the Common Areas, repair
any damage to same caused by such condemnation, except to the extent Bank has
been reimbursed therefore by the condemning authority. In either case, there
shall be no apportionment to Bank of any portion of the award or damages for
such taking; provided, however, that Bank shall be entitled to any funds awarded
it for moving expenses or business interruption. In the event of a termination
pursuant to this Section 16, Rent shall be prorated to the date of such taking.
17. INDEMNIFICATION
A. Bank shall indemnify Supermarket against and hold it harmless from
any and all liabilities, obligations, damages, penalties, claims, costs and
expenses, including reasonable attorneys' fees, paid or incurred as a result of
or in connection with (i) the carelessness, negligence or improper conduct of
Bank, any of its subtenants, or any of its agents, contractors, employees,
customers, invitees, or licensees, or (ii) any breach by Bank, and its
subtenants, or any of its agents, contractors, employees, customers, invitees of
licensees, or any covenant or condition of this Lease.
B. Supermarket shall indemnify Bank against and hold it harmless from
any and all liabilities, obligations, damages, penalties, claims, costs and
expenses, including reasonable attorneys' fees, paid or incurred as a result of
or in connection with (i) the carelessness, negligence or improper conduct of
Supermarket, or any of its agents, contractors, employees, customers, invitees,
or licensees, or (ii) any breach by Supermarket, or any of its agents,
contractors, employees, customers, invitees or licensees, of any covenant or
condition of this Lease.
18. INSURANCE
A. Bank shall secure and maintain in force during the Term of this
Lease Commercial general liability insurance with a combined single limit for
bodily injury and property damage in an amount not less than One Million Dollars
($1,000,000) per occurrence. Bank's general liability insurance policy shall
insure the performance by Bank of the indemnity agreement set forth in Section
17, and shall be endorsed to provide that Supermarket is named as additional
insured. Bank shall have the option to self-insure its insurance obligations
under this Lease.
B. Supermarket will maintain at all times during the terms of this
Lease:
(i) All risk or comprehensive peril insurance in an amount not less
than the actual replacement costs (exclusive of foundations and
13
<PAGE> 15
excavations) of the Store as calculated annually. Bank shall be named as an
additional insured and the insurer shall acknowledge acceptance of the mutual
waiver of claims by Supermarket and Bank set forth in this Section 18 below. In
the event that Bank obtains insurance on the store, such insurance shall be
excess and not contributing with insurance maintained by the Supermarket. In the
event Supermarket fails to comply with such requirements, Bank may obtain such
insurance and deduct the premium from the next rent payment due.
(ii) Commercial general liability insurance insuring against damage
occurring in, on or about the Store and Common Areas in such an
amount as are customary for properties comparable to the
building, but in no event in an amount less than One Million
Dollars ($1,000,000) combined single limit, per occurrence.
Supermarket's commercial general liability insurance policy shall
insure the performance by the Supermarket of the indemnity
agreement set forth in Section 17. Bank shall be named as an
additional insured in Supermarket's public liability insurance
policy.
C. Notwithstanding anything to the contrary contained herein, each of
the parties hereto releases the other Store, to the extent of each party's
insurance coverage, from any and all liability for any loss or damage which may
be inflicted upon the property of such party even if such loss or damage shall
be brought about by the fault or negligence of the other party, or other
tenants, or their agents, employees or assigns; provided, however that this
release shall be effective only with respect to loss or damage occurring during
such time as the appropriate policy of insurance shall contain a clause to the
effect that this release shall not affect the policy or the right of the insured
to recover thereunder.
The provisions of this Section 18 shall survive the termination or
earlier expiration of the Term of this Lease with respect to any damage, injury,
or death occurring prior to termination.
19. DEFAULT; REMEDIES
A. Default of Bank
The happening of any one or more of the following events shall
constitute an event of default hereunder by Bank.
(i) Non-payment by Bank when due of any Rent due hereunder and such
non-payment shall continue for a period of fifteen (15) days
after written notice thereof from Supermarket; or
14
<PAGE> 16
(ii) Non-observance or non-performance of any other covenant,
obligation, condition or requirement imposed upon Bank by this
Lease and the continuation of such non-performance or non-
observance of a period of thirty (30) days after written notice
thereof from Supermarket to Bank except that in case of any
default relating to the condition or maintenance of the Leased
Premises there shall be excluded from the calculation of such
period of thirty (30) days, periods of unavoidable delays,
including, but not limited to, delays due to strikes, Acts of
God, governmental restrictions, unavailability of labor or
materials, enemy action, civil commotion, fire, unavoidable
casualties or causes beyond the control of Bank, and period
during which Bank shall be diligently proceeding to cure such
default to the end it shall be cured expeditiously and without
delay.
B. Supermarket's Remedies Upon Default
In the event of the uncured default of Bank, Supermarket may:
(i) Cancel and terminate this Lease by notifying Bank of
Supermarket's election of this remedy and upon giving such
written notice this Lease will cease and terminate; or
(ii) Supermarket may be appropriate legal proceedings require Bank to
specifically perform its covenants and obligations hereunder; or
(iii) Supermarket may relet said Leased Premises or any part thereof as
agent for Bank and receive the rent therefore and Bank shall pay
all of Supermarket's reasonable expenses in connection with such
reletting, including the expenses of keeping said Leased Premises
in repair, brokerage commissions, concessions to Bank or other
expenses that Supermarket may incur, and Bank shall be liable for
any deficiency, which deficiency may be recovered from time to
time. Supermarket shall actively attempt to relet the Leased
Premises in order to mitigate the damages of Supermarket.
(iv) Supermarket may recover by appropriate legal proceedings, if
necessary as liquidated and agreed current damages the Rent and
other sum payable to Supermarket by Bank under the Term of this
Lease up to and including the date of termination, of what would
have been the Original Term or applicable Renewal Term in the
absence of termination, expiration, default or repossession.
15
<PAGE> 17
C. Default of Supermarket
The happening of the following event shall constitute an event of
default hereunder by Supermarket:
(i) Non-observance or non-performance of any covenant, obligation,
condition or requirement imposed upon it by this Lease,
including, but not limited to, presence of Hazardous Material on
the Property, and the continuation of such non-performance or
non-observance for a period of thirty (30) days after written
notice thereof from Bank to Supermarket except that in case of
any default relating to the condition or maintenance of the
Leased Premises, the Building or Common Areas, there shall be
excluded from the calculation of such period of thirty (30) days,
periods of unavoidable delays, including, but not limited to,
delays due to strikes, Acts of God, governmental restrictions,
unavailability of labor or materials, enemy action, civil
commotion, fire, unavoidable casualties or causes beyond the
control of Supermarket, and period during which Supermarket shall
be diligently proceeding to cure such default to the end it shall
be cured expeditiously and without delay.
D. Bank's Remedies Upon Default
In the event of an uncured default of Supermarket, Bank may:
(i) Perform such obligations of Supermarket and deduct the reasonable
costs of completing such obligations from future Rent; or
(ii) By appropriate legal proceedings, require Supermarket to
specifically perform its covenants and obligations hereunder; or
(iii) Cancel and terminate this Lease by notifying Supermarket of
Bank's election of this remedy and upon giving such written
notice this Lease will cease and terminate.
E. Remedies Are Cumulative
The remedies as given in this Lease to Supermarket and Bank are
cumulative and shall be in addition to all other remedies now and hereafter
existing, whether in law, at equity, or by statute. No waiver by the Supermarket
or Bank of any default or breach of any covenant, condition or stipulation
herein contained shall be regarded as a waiver of any subsequent default or
breach of the same or of any other covenant, condition or stipulation hereof.
16
<PAGE> 18
F. Expense of Enforcement
In the event any legal proceedings arise under or in connection with
this Lease, the prevailing party shall be awarded costs, reasonable attorneys
fees and reasonable expert witness fees incurred in connection with such
proceedings.
20. TERMINATION: SURRENDER OF POSSESSION
A. Upon the expiration or termination of this Lease, Bank shall:
(i) Restore the Leased Premises to its condition at the beginning of
the Original Term (other than any Bank's work), ordinary wear and
tear excepted, remove all of its personal property and trade
fixtures from the Leased Premises (including, at its option the
FSF) and the Property and repair any damage caused by such
removal; and
(ii) Surrender possession of the Leased Premises to Supermarket.
21. HOLDING OVER
If Bank remains in possession of the premises after the expiration or
termination of the Lease, it shall be deemed to be occupying the premises as a
Bank from month-to-month, subject to all the conditions, provisions and
obligations of this Lease as far as it applies to month-to-month tenancy,
cancelable by either party upon thirty (30) days written notice to the other
party.
22. ASSIGNMENT AND SUBLETTING
Bank shall have the right to assign this Lease or any interest
hereunder or sublet the Leased Premises or any part thereof. However, such
assignment or subletting must be approved by Supermarket which approval shall
not be unreasonably withheld, conditioned or delayed and shall no be construed
to relieve Bank from its obligations hereunder, unless agreed to in writing by
Supermarket. Notwithstanding the foregoing, in the event Bank is purchased by or
merged into another financial institution or if Bank desires to assign this
Lease to successors interest, the interest of Bank hereunder can be assigned to
its successor without the consent of Supermarket. Supermarket will allow Bank to
sublet to its subsidiary, Commercial Bank, under the same terms and conditions
as the lease to Bank (Holding Company).
17
<PAGE> 19
23. SUPERMARKET'S ACCESS TO LEASED PREMISES
Supermarket may enter the Leased Premises at reasonable times upon
reasonable notice for the purpose of inspecting or showing them, preventing
waste, loss or destruction, enforcing any of its rights or powers under this
Lease, or making such repairs or alterations as it is required or permitted to
make. If Bank is not present to open and permit entry, Supermarket may enter the
Leased Premises by master key (or forcibly) only in the event of an emergency,
except for routine cleaning. The obligations of Bank hereunder shall not be
affected by any such entry.
24. PARKING
For and in consideration of the Rent paid pursuant to this Lease,
Supermarket shall provide to Bank a sufficient number of parking spaces located
in close proximity to the Supermarket Store for use by Bank's employees and
customers.
25. NOTICES
All communications required hereunder shall be in writing and shall be
deemed to have been given if either delivered personally or mailed by certified
or registered mail to a party at the addresses set forth on the first page of
this Lease. The parties' addresses may from time to time be changed by written
notice.
Copies of any notices to Bank shall also be sent to:
COMMERCIAL BANK
ATTN: DEAN E. MILLIGAN
PRESIDENT AND CEO
P.O. BOX 280
101 N. PINE RIVER ST.
ITHACA, MI 48847
26. LITIGATION
Supermarket and Bank waive trial by jury in any proceeding brought by
either party pursuant to this Lease.
27. GOVERNING LAW; INVALIDATION
This Lease shall be governed by and construed in accordance with the
laws of the State of Michigan. The invalidation of one or more terms of this
Lease shall not affect the validity of the remaining terms.
18
<PAGE> 20
28. AMENDMENT
This Lease, including any exhibits, schedules, or riders attached
hereto, represents the entire agreement between the parties. No oral or written,
prior or contemporaneous agreements shall have any force or effect, and this
Lease may not be amended, altered or modified unless done so by means of a
written instrument signed by both parties.
29. SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATE
A. This Lease shall, at the option of Supermarket or its lenders, be
subject and subordinate to the interests of the holders of any notes secured by
mortgages on the Property or the Leased Premises, now or in the future, and to
all renewals, modifications, consolidations, replacements and extensions
thereof. While the provisions of this Section 29 are self-executing, Bank shall
execute such documents as many reasonably be desired by Supermarket or any
mortgagee to affirm or give notice of such subordination. In turn, Bank shall be
entitled to receive the customary non-disturbance agreement from each such
lender in form and substance satisfactory to Bank whereby the lender agrees to
recognize Bank's rights under this Lease following foreclosure so long as Bank
is not in material default hereunder.
B. Bank shall attorn to any foreclosing mortgagee, or to any purchaser
of the Property or the Leased Premises at any foreclosure sale, or sale in lieu
of foreclosure, for the balance of the Original Term or applicable Renewal Term
on all the terms and conditions herein contained.
C. At the request of Supermarket, Bank shall within ten (10) days
deliver to Supermarket, or anyone designated by Supermarket, a certificate
stating and certifying to such information as may reasonably be requested to
verify the state of the Supermarket-Bank relationship established by this Lease.
D. Notwithstanding any provisions with respect to the subordination of
the Lease to any superior lease or any superior mortgage which may hereafter be
made or to any renewal, modification, replacement or extension hereafter of any
superior lease or any superior mortgage, any such subordination is subject to
the express conditions that so long as the Lease is in full force and effect:
(i) Bank shall not be joined as a party defendant (a) in any action
or proceeding which may be instituted or taken by the lessor of
such superior lease for the purpose of terminating such superior
lease by reason of any default thereunder, or (b) in any
foreclosure action or proceeding which may be instituted or
taken by the holder of such superior mortgage;
19
<PAGE> 21
(ii) Bank shall not be evicted from the Leased Premises, nor shall
Bank's continuing use and occupancy of the Leased Premises be
interrupted, restricted or impaired, nor shall any of Bank's
rights under the Lease be affected in any way be reason of any
default under such superior lease or such superior mortgage; and
(iii) Bank's leasehold estate under the Lease shall not be terminated
or disturbed by reason of any default under such superior lease
or such superior mortgage and this Lease and Bank's rights
hereunder, including any rights of offset, shall be recognized by
the lessor under any such superior lease or the holder of any
such superior mortgage.
Supermarket represents that there are the following superior leases and
superior mortgages existing at the date of the Lease: Rays Food Fair Supermarket
further represents that there are not existing defaults by Supermarket under any
such superior lease or superior mortgage, nor shall there be as of the
Commencement Date. Supermarket agrees to procure and deliver to Bank, with
reasonable promptness after the date of the Lease, written agreements of the
lessors of the aforesaid superior leases and the holders of the aforesaid
mortgages. If all such agreements shall not be tendered to Bank within ten (10)
days after the date of the Lease, Bank may, at Bank's option (a) delay the
Commencement Date of the Lease and the payment of Rent until Supermarket
procures such agreements, or (b) cancel the Lease on the date set forth in such
notice, which shall not be less than ten (10) nor more then sixty (60)) days
after the date of such notice, and the Lease and the terms and estate hereby
granted shall then terminate at noon of such cancellation date as if such
cancellation date were the expiration date, unless all of such agreements shall
have been tendered meanwhile. Upon any such cancellation Supermarket shall have
no further obligation to Bank hereunder except to return any monies theretofore
paid by Bank to Supermarket on account of Rent under the Lease.
30. SECURITY; HOURS OF BUSINESS
A. It shall be Bank's obligation to provide security for the FSF. Bank
shall have the right to have the Security Guard who is an employee or agent of
Bank in the Store at all times, and to install any electronic surveillance
equipment it deems necessary.
B. The Leased Premises are located entirely within the Supermarket's
building and because there is no separate access for ingress or egress to the
Leased Premises, Bank acknowledges that access to the Leased Premises will be
limited to those hours in which the Supermarket's operation is open for
business.
20
<PAGE> 22
Bank shall have the right to access the Leased Premises during the time
that the Supermarket operation is not open for business for the following
reasons:
(a) Security purposes
(b) To ready the Leased Premises for Bank's business;
(c) Emergency matters
Supermarket shall cooperate with Bank in allowing Bank to have access
to the Leased Premises for the reasons stated above, upon Bank's notice to
Supermarket; provided, however, Bank shall not have a key to the Store (without
Supermarket's consent) which contains the Leased Premises and its right of
access herein shall be through the security company maintained by Supermarket
governing access to the premises during the hours in which the Supermarket is
not in operation. Supermarket shall cooperate and direct its building security
company to establish a communication protocol with Bank's security company
and/or staff so that Bank's access as may be required for the above states
purposes will be properly coordinated and Supermarket will direct its security
company to act reasonably to facilitate cooperation between Bank's security
services and Supermarket's security services.
31. BANKING SERVICES
Supermarket may, but is not required to, conduct any of its in-house
banking services at Bank's facility, and the Bank shall maintain sufficient cash
funds to enable the Supermarket to conduct its banking business. Supermarket
shall have the right, during regular banking hours established by Bank, to make
deposits, withdrawals, cash checks, and conduct its other banking business at
Bank's facility, subject to any rules, regulations, policies, procedures, and/or
charges established by the Bank for similar commercial customers from time to
time.
32. GENDER; SINGULAR AND PLURAL
Whenever in this Lease words, including pronouns are used in the
masculine, they shall be read in the feminine or neuter whenever they would so
apply and vice versa, and words in this Lease that are singular shall be read as
plural whenever the latter would so apply and vice versa.
33. AMERICANS WITH DISABILITIES ACT
Bank shall, regarding the FSF, at all times and at its own expense,
comply with all federal, state and local laws, rules, regulations, ordinances,
and requirements regarding discrimination towards those who are disabled,
removal of architectural and communication barriers, providing auxiliary aids
and services
21
<PAGE> 23
for disabled persons, and making facilities accessible to disabled persons,
including, without limitation, the Americans Disabilities Act, 42 USC Section
12101 et seq., and the regulations issued thereunder at 28 CFR Part 36
(together, the "Act"). Bank's obligations under the Act shall not apply to (i)
any structural components of the Store, (ii) any new construction or alterations
undertaken by Supermarket, and (iii) any portions of the Leased Premises which
are not specifically Bank's responsibility; provided, however, that Bank's
compliance responsibilities under the Act shall in any event extend to the vault
and safety deposit box areas. Supermarket shall at all times and at its own
expense, comply with all federal, state and local laws, rules, regulations,
ordinances, and requirements regarding discrimination towards those who are
disabled, removal of architectural and communication barriers, providing
auxiliary aids and services for disabled persons, and making facilities
accessible to disabled persons, including, without limitation, the Americans
Disabilities Act, 42 USC Section 12101 et seq., and the regulations issued
thereunder at 28 CFR Part 36 (together, the "Act").
Bank shall defend, indemnify and hold Supermarket harmless from all
claims, costs and liabilities, including attorneys' fees and costs, arising out
of or in connection with Bank's failure to comply with the Act as required
pursuant to the terms hereof. Supermarket shall defend, indemnify and hold Bank
harmless from all claims, costs and liabilities, including attorneys' fees and
costs, arising out of or in connection with Supermarket's failure to comply with
the Act as required pursuant to the terms hereof.
34. SUCCESSORS AND ASSIGNS
The covenants, conditions, and agreements contained in this Lease shall
bind and inure to the benefit of Supermarket and Bank and their respective
successors and assigns.
35. COVENANTS AND CONDITIONS
All covenants and conditions contained in this Lease are independent of
one another.
36. NOTICE OF LEASE
Each party shall, upon the request of the other, execute, acknowledge
and deliver a memorandum or short form of the Lease in form suitable for
recording in accordance with local law or custom.
22
<PAGE> 24
37. BROKERS
Supermarket and Bank each represent and warrant to the other that it
has dealt with no broker in connection with this Lease. Supermarket and Bank
agree to indemnify and hold harmless the other from any and all claims, losses,
costs and expenses (including reasonable attorneys' fees) and liability for any
compensation, commissions or charges by any broker or agent if its
representation in this Section 37 is not true.
38. CONSENT
Wherever in this Lease it is provided that either party shall not
unreasonably withhold consent or approval, such consent or approval
(collectively referred to as "consent") shall also not be unreasonably
conditioned or delayed. If a party considers that the other party has
unreasonably withheld or delayed a consent it shall so notify the other party
within ten (10) days after receipt of notice of denial of the request consent
or, in case notice of denial is not received, within twenty (20) days after
giving the first mentioned notice, and may submit the question of whether the
withholding or delaying of such consent is unreasonable to determination by
arbitration.
39. AUTHORITY TO EXECUTE
The individuals executing this Lease warrant that they have full and
complete authority properly vested to execute this Lease and thereby bind their
respective entity to each and every term set forth herein applicable to them.
40. CONFIDENTIALITY
Each party acknowledges that in connection with this Agreement or in
the performance thereof, it has or will come into possession or knowledge of
material and information which is proprietary to the other party. Each party,
therefore, agrees to hold such material and information in strictest confidence,
not to make use thereof, except in the performance of this Agreement, and not to
release or disclose it to any other party with the exception of parent
companies, subsidiaries, and affiliates of the parties.
41. TAXES
Supermarket shall pay or cause to be paid all real property taxes and
special assessments levied against the premises. Bank shall pay all personal
property taxes assessed against any personal property owned by the Bank on the
premises.
23
<PAGE> 25
42. RULES AND REGULATIONS
Supermarket reserves the right to adopt from time-to-time reasonable
rules and regulations for the operation of the Supermarket which are not
inconsistent with the provisions of this Lease and which do not unreasonably
interfere with the Bank's use of the Premises for the intended purposes. Bank
and its agents, employees, invitees and licensees will comply with all those
reasonable rules and regulations.
43. CHANGES BY SUPERMARKET
Supermarket reserves the absolute right at any time, and from
time-to-time to make changes or revisions in the center, including changes to
the parking lot, driveways, signs, landscaping and sidewalks by making additions
to, subtractions from, or rearrangements of the improvements in the center,
which do not unreasonably interfere with Bank's use of the Premises for its
intended purposes, including significant alteration of the customer traffic
patterns.
44. NO PARTNERSHIP
Any intention to create a joint venture or partnership between the
parties is expressly disclaimed.
45. FORCE MAJEURE
Neither party shall be responsible for delays or failures in
performance resulting from acts beyond the control of such party, including,
without limitation, acts of God, strikes, lockouts, riots, acts of war,
epidemics, governmental regulation superimposed after the fact, fire;
communication line failures, earthquakes, floods, or other disasters.
24
<PAGE> 26
IN WITNESS WHEREOF, this Lease has been executed as of the day and year
first above written.
WITNESSES: LANDLORD:
BY:
- ---------------------- ----------------------
ITS:
- ---------------------- ----------------------
STATE OF MICHIGAN )
: SS
COUNTY OF GRATIOT )
The foregoing instrument was acknowledged before me by of, a
corporation, on behalf of the corporation. He/she identified the instrument as
Lease Agreement and signed it willingly on behalf of the corporation.
Notary Public
-----------------
County
--------------
My Commission Expires
---------
WITNESSES: TENANT:
BY:
- ---------------------- --------------------------
ITS:
- ---------------------- --------------------------
STATE OF MICHIGAN )
: SS
COUNTY OF GRATIOT )
The foregoing instrument was acknowledged before me by of, a
corporation, on behalf of the corporation. He/she identified the instrument as
Lease Agreement and signed it willingly on behalf of the corporation.
Notary Public
-----------------
County
--------------
My Commission Expires:
---------
25
<PAGE> 1
EXHIBIT 13
INCORPORATED PORTIONS FROM 1995 ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 2
MANAGEMENT'S REVIEW AND ANALYSIS
This financial review should be read in conjunction with the consolidated
financial statements and accompanying notes.
INTRODUCTION
The information in this financial review explains certain significant financial
matters over the past several years. The financial information included in
this annual report frequently compares current amounts to historical amounts.
Financial information is presented on a consolidated basis including the
subsidiary, Commercial Bank (Bank), and the parent company, Commercial National
Financial Corporation (Commercial National, also herein referred to as the
consolidated entity). All per share information has been restated to reflect
the 5% stock dividends in 1995, 1994 and 1993.
BUSINESS OF COMMERCIAL NATIONAL
Commercial National is a one-bank holding company which conducts no direct
business activities. All business activities are performed by the Bank.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It 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, individual retirement accounts and certificates of deposit.
The principal source of revenue for Commercial National and the Bank is
interest and fees on loans. The Bank's results of operations depend primarily
on the level of its net interest income and other operating income and its
operating expenses. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rate
earned or paid on them, respectively. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, and actions of regulatory
authorities. On a consolidated basis, interest and fees on loans accounted for
78.1% of Commercial National's total income (comprised of interest income and
other income) in 1995, 75.5% in 1994, and 74.7% in 1993. Interest on
investment securities accounted for 13.9% of Commercial National's total
revenues in 1995, 16.1% in 1994, and 15.6% in 1993.
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. Commercial National and the Bank serve these markets
through nine offices located in and near these communities.
Commercial National and the Bank employ approximately 91 persons on a full-time
equivalent basis.
<PAGE> 3
ANALYSIS OF 1995 TO 1994
EARNINGS PERFORMANCE
Commercial National reported net income of $1,668,000 in 1995, an increase of
$136,000, or 8.9%, over 1994 net income of $1,532,000. Return on average
shareholders' equity for 1995 was 11.7% compared to 11.8% for 1994. The 1995
return on average assets was 1.15% compared to 1.07% for 1994.
NET INTEREST INCOME
Net interest income is the difference between interest earned on earning assets
and interest paid on interest-bearing liabilities. Changes in the mix and
volume of assets and liabilities, and the yields and rates earned or paid, have
a major impact on earnings. The level of net interest income achieved is also
influenced by market rates of interest, the financial strength of loan
customers and the federal government's monetary policies. Interest income
represented 94.6% of total income in 1995 and 93.5% in 1994.
For the year ended December 31, 1995, total interest income was $11,650,000, an
increase of $1,316,000 from $10,334,000 for 1994. Total interest expense
increased $896,000 from $3,884,000 in 1994 to $4,780,000 in 1995. As a result,
net interest income increased $420,000 from $6,450,000 in 1994 to $6,870,000 in
1995.
On a fully taxable-equivalent basis (whereby tax-exempt income is adjusted to
be comparable to income from taxable investments), total interest income
increased by $1,372,000 or 12.8% from 1995 and 1994. The increase is due to a
$2,263,000, or 1.7%, increase in average outstanding earning assets
($137,685,000 for 1995 and $135,422,000 for 1994) and an 11.0% increase in
average interest rates from 7.92% in 1994 to 8.79% for 1995. The average
interest rate for loans increased from 8.64% in 1994 to 9.37% in 1995. The
increase in the average interest rate for loans is directly resultant of the
increase in the prime rate charged by the Bank (the majority of the Bank's loan
portfolio rates are tied to the prime rate) in the second half of 1994. The
Bank's prime rate increased in early 1995 to 9%, but fell nominally in late
1995 to 8.5%. This rate increase was supplemented by total loan growth of
$9,244,000, or 9.2%, which primarily consisted of growth in the nonfarm
nonresidential real estate and commercial and industrial portions of the
portfolio. Average interest rates for investment securities increased from
6.37% in 1994 to 7.20% in 1995, largely due to the purchase of higher-rate
investments as lower rate investments matured and were replaced. The effect of
this rate increase was more than offset by the effect of reduced average
outstanding balances, resulting in a nominal decrease in interest income on
investment securities. The average balance outstanding for short-term
investments increased by 3.5% from $5,271,000 in 1994 to $5,457,000 in 1995.
The average interest rate for short-term investments also increased from 4.02%
in 1994 to 5.88% in 1995 as a result of the increase in rates paid for federal
funds sold in 1995 over 1994.
Interest on deposits increased as a result of changes in deposit mix and
greater reliance on higher priced time deposits to fund loan growth. The
average outstanding balance of time certificates of deposits and the year-end
balance of time certificates of deposits increased $4,933,000, or 10.7%, and
$8,236,000 or 17.5%, respectively. Additionally, the rates paid on these
deposits increased as well from 4.52% in 1994 to 5.46% in 1995. The increase
in time certificates of deposit corresponds to the general increase in market
rates in 1995 for these deposits as well as the introduction of the Bank's
higher-yielding "Evergreen" certificate of deposit program. Interest rates
paid on interest-bearing demand deposits and savings accounts also increased
from 2.54% in 1994 to 2.77% in 1995. Consistent with other financial
institutions, the Bank was
<PAGE> 4
forced to increase the rates offered on deposit products as increased yields
on other investment vehicles drew customer funds away from the Bank.
The Bank is unable to predict the impact on future earnings as a result of the
higher rates paid on time deposits due to uncertainties regarding economic
conditions in 1996 and beyond. While the Bank expects rates paid on
interest-bearing demand deposits, savings accounts and time certificates of
deposit issued in 1996 will fall, earnings could be negatively impacted if
interest rates on interest-earning assets fall significantly. This situation
could occur if the prime rate charged by the Bank falls significantly due to
changes in market interest rates. The Bank would be negatively impacted as a
large portion of its loan portfolio consists of adjustable rate loans which
fluctuate with changes in the prime rate.
As discussed in the Asset/Liability Management section of this financial
review, the Bank attempts to manage the structure (i.e., categories and
maturities) of the balance sheet to minimize the effects of interest rate
fluctuations. The Bank's net interest margin (net interest income divided by
total earning assets) increased from 5.05% in 1994 to 5.31% in 1995 and the
interest spread (average rate earned minus average rate paid) increased from
4.56% in 1994 to 4.69% in 1995. While it is difficult to predict 1996 interest
rates, especially in light of the continuing federal budget battle and
forthcoming federal election, it is anticipated that rates will decrease
through most of the year.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses reflects management's judgment of the cost
associated with the credit risk inherent in the loan portfolio. The provision
is determined through management's assessment of the quality of the loan
portfolio, current as well as future economic factors, and the volume of loans
outstanding. Provision amounts from year-to-year are also affected by the
level of net charge offs and management's perception of the adequacy of the
allowance for loan losses. The provision for loan losses for 1995 was
$250,000, an increase of $20,000 over the 1994 provision of $230,000. Net
charge offs increased slightly in 1995 to $91,000 from $90,000 in 1994. The
lack of a significant change in net charge offs is a result of the seasoning of
the Bank's portfolio. However, due to the substantial loan growth in 1995,
future charge-off activity could increase.
At December 31, 1995, the allowance for loan losses amounted to $1,669,000 or
1.53% of total loans outstanding, compared to $1,510,000 or 1.51% of total
loans at December 31, 1994. The allowance is maintained in consideration of
the perceived credit risk in the loan portfolio. Management's determination of
the adequacy of the allowance for loan losses is based upon a continuing review
of the loan portfolio which includes past loan loss experience, current
economic conditions, loan volume, composition of the loan portfolio and
additional factors. The $159,000 increase in the allowance for loan losses
from 1994 to 1995 (compared to a $140,000 increase from 1993 to 1994) is
primarily attributable to loan growth.
Non-accrual, past due and restructured loans decreased by $405,000, or 62.9%,
from $644,000 to $239,000 at December 31, 1994 and 1995, respectively.
Generally, the accrual of interest income on a loan is suspended when the loan
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. The allowance for
loan losses at December 31, 1995, represented 698.3% of total non-accrual, past
due and restructured loans, compared to 234.5% at December 31, 1994. The
increase in the ratio of the allowance to total non-accrual, past due and
restructured loans is due to a decrease in restructured loans offset by a
$146,000 increase in
<PAGE> 5
non-accrual and past due loans. Management believes that the allowance for
loan losses is adequate at December 31, 1995 based upon its analysis of future
loss potential. The Bank's policy is to maintain an allowance sufficient to
cover expected losses based on its analysis of the loan portfolio and at a
level comparable to the Bank's peer group considering historical net charge
offs for the Bank and the industry as a whole. However, the Bank does expect
the level of net charge offs to increase in the future as a result of planned
loan growth and changes in the loan mix within the portfolio.
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.
OTHER INCOME
Other income primarily consists of fees for services performed on a noninterest
income basis. Income related to service charges on deposit accounts consists
of fees for demand deposit accounts, overdraft and non-sufficient fund charges,
and automatic teller machine transactions. Total income from service charges on
deposit accounts was $213,000 for 1995 compared to $302,000 for 1994. The
decrease from 1994 is primarily due to the elimination of the Bank's per item
overdraft fee.
The remaining category of other income is derived from services that include
fees for mortgage servicing and processing, mortgage fee income from new and
refinanced loans sold, safe deposit box rentals, travelers check sales and
other miscellaneous categories. Other income was $452,000 for 1995, a $36,000,
or 8.65%, increase from the 1994 level of $416,000. The net increase was
primarily comprised of three items, $74,000 of interest received upon amendment
of prior year tax returns, a $28,000 increase in merchant charge card fees due
to the offering of debit card services to Bank deposit customers, offset by a
$61,000 decrease in income generated from the sale of single family residential
mortgages in the secondary market. This decrease was expected as purchase and
refinancing activity remained low due to higher long-term interest rates.
Due to the variety of income sources included in other income, fluctuations in
the level of income will occur from year to year. No other individual
component of this category is significant during 1995 or 1994.
OTHER EXPENSES
Salaries increased $101,000, or 5.1%, due largely to the opening of two
supermarket branches and general wage increases during 1995. Employee benefits
decreased by $106,000, or 17.5%, primarily due to the payment of a final
settlement amount to a former employee in 1994.
The FDIC assessment, which is based on outstanding deposits, decreased
$141,000, or 48.5%, from $291,000 in 1994 to $150,000 in 1995. The decrease
was due to the Bank Insurance Fund (BIF Fund) of the FDIC meeting the legally
mandated reserve level in the second quarter of 1995 and the resultant decrease
in deposit premiums from $.23 to $.04 per $100 of deposits effective June 1,
1995 (the rate was reduced to zero effective January 1, 1996, subject to a
$2,000 per bank minimum). The current rate, which is the lowest rate presently
available to any bank, is available because the Bank is classified as "well
capitalized" by the FDIC. Of the total $141,000 assessment paid in 1995,
$116,000 was paid into the BIF Fund and $34,000 was paid into the FDIC Savings
Association Insurance Fund (SAIF Fund), relating the Bank's 1992 acquisition of
the Greenville savings and loan branch. Assessment rates relating to the SAIF
Fund remained at $.23 per $100 of deposits, but are expected to decrease, the
extent to which is uncertain at this time, when the Thrift Charter Convergence
Act of 1995 is enacted into law. As part of the Thrift
<PAGE> 6
Charter Convergence Act, as currently proposed, the Bank will be required to
pay a one-time recapitalization fee of approximately $90,000. The Act is
expected to be enacted into law as part of the federal budget process in 1996.
Furniture and equipment expense and printing and supplies increased in 1995
primarily due to the opening of the two supermarket branches. Of the $208,000
increase in "Other expenses - other" for 1995 compared to 1994, $47,000 was
incurred for increased advertising and $43,000 related to the write-off of a
receivable for the reimbursement of costs incurred for environmental remediation
on property foreclosed on and disposed of in prior years. The remaining
difference is attributable to a number of items which are not individually
significant.
INCOME TAXES
The effective federal income tax rate for 1995 was 22.7% which is comparable to
the 23.9% effective rate for 1994. The $10,000 increase in federal income
taxes for 1995 is attributable to increased pre-tax earnings offset by
increased tax-exempt interest income.
EARNING ASSETS
At December 31, 1995, earning assets were $141,995,000 compared to $133,844,000
at December 31, 1994. Increases were realized in the loan and investment
portfolios of $9,244,000 and $607,000, respectively, while federal funds sold
decreased by $1,700,000. Federal funds sold levels vary day to day based upon
short-term funding needs.
The net increase in loans outstanding is due to a combination of increases and
decreases in the individual loan categories. Real estate loans secured by
nonfarm nonresidential properties increased $7,911,000 and commercial and
industrial loans increased $3,146,000. Real estate loans secured by farmland,
multi-family residential properties and construction and land development
declined by $3,457,000 as a result of the change in the Bank's customer base.
Consumer loans increased $1,404,000 primarily due to increased financing needs
relating to improved automobile sales.
Overall, average earning assets for 1995 were $137,685,000 compared to
$135,422,000 for 1994. Average loans increased by $6,257,000 from $97,918,000
in 1994 to $104,175,000 in 1995 for the reasons discussed above relating to
year-end balances. Average investment securities decreased $4,180,000 as a
result of the need to fund loan growth as discussed above, and the increased
average federal funds sold of $186,000.
INTEREST-BEARING LIABILITIES
Interest bearing liabilities include interest-bearing deposits and short-term
borrowings (securities sold under repurchase agreements and demand notes issued
to the U.S. Treasury). Interest-bearing deposits include regular savings, NOW
accounts, money market checking and certificates of deposit. Interest-bearing
deposit accounts are primarily used as funding sources for loans and investment
securities.
At December 31, 1995, interest-bearing liabilities totaled $119,565,000, a
$6,375,000, or 5.6%, increase from the $113,190,000 balance at December 31,
1994. Average interest-bearing liabilities for 1995 totaled $116,530,000, a
$1,000,000, or 0.9%, increase compared to the 1994 average amount of
$115,530,000. The increase in year-end interest-bearing liabilities is the
result of increased borrowings under agreements to repurchase securities sold
of $2,576,000 or 94.4% and interest-bearing deposits of $3,887,000 or 3.5%.
These fluctuations are a direct result of the
<PAGE> 7
need to fund loan growth as part of the Bank's growth plan. Average
interest-bearing demand and savings accounts decreased $8,127,000, or
12.0%, from $67,490,000 in 1994 to $59,363,000 in 1995. Average balances of
time certificates of deposit increased $4,993,000, or 10.7%, from $46,583,000
in 1994 to $51,576,000 in 1995 and average short-term borrowings increased
$4,134,000, or 283.7%, from $1,457,000 to $5,591,000. In an effort to provide
funding for increased loan demand and to offset the loss of core deposits, the
Bank offered higher rates on time certificates of deposit and increased
short-term borrowings. This, in turn, caused some internal shifting from lower
to higher earning accounts.
ASSET/LIABILITY MANAGEMENT
The goal of the asset/liability management process is to manage the structure
of the balance sheet to provide the maximum level of net interest income while
maintaining predetermined parameters of liquidity and risk and to minimize the
effects of interest rate fluctuations. The responsibility for this process
rests with the Asset and Liability Committee. The Committee meets monthly to
monitor investments, funding sources and overall interest sensitivity and risk.
Liquidity management involves proper planning to meet anticipated funding needs
at reasonable costs and to assess the potential loss of funding sources. The
Committee considers the marketability of assets, the sources of stable funding
and the level of unfunded commitments. The primary liquidity goal is to meet
the cash flow requirements of deposit customers and the loan requests of the
local community. At December 31, 1995, Commercial National's net liquidity
ratio was 25.4% compared to 28.3% at December 31, 1994. The liquidity ratio is
the relationship of net liquid assets to total deposits and other borrowed
funds. Net liquid assets are comprised of investment securities that are not
pledged, federal funds sold, commercial paper and cash and due from banks less
the Federal Reserve requirement. Included as internal sources of funds are all
deposit accounts, the note option program of the U.S. Treasury and securities
sold under repurchase agreements. An additional source of liquidity has been
established through previously authorized federal funds borrowing agreements
with two correspondent banks. The federal funds borrowing source has not been
utilized during the current or previous five years.
While Commercial National's portfolio of investment securities would be
accessible in the event of a significant unexpected demand for funds, it is
management's opinion that Commercial National has the ability to hold all
investment securities until maturity and there is no intent to otherwise
dispose of any securities in the foreseeable future. Commercial National
follows SFAS No. 115, Accounting for Certain Investments In Debt and Equity
Securities. Under this statement, Commercial National can identify, at date of
purchase, securities as "available-for-sale." Such securities may be sold in
the future to meet Commercial National's investment objectives of quality,
liquidity and yield and to avoid significant market value deterioration. Net
unrealized gains and losses on available-for-sale securities are reported in a
separate component of shareholders' equity, net of tax. There were no
securities identified as available-for-sale at December 31, 1995 and there were
no sales of securities during the year. At December 31, 1995, gross unrealized
gains and losses on held-to-maturity securities were $452,000 and $121,000,
respectively.
The Asset and Liability Committee reviews the maturity schedules of all earning
asset and interest bearing liability portfolios on a monthly basis. It is
management's goal to limit interest rate risk through the matching of
maturities or the repricing of assets and liabilities. The matching of earning
asset maturities to interest-bearing liabilities considers time frames from one
day through the final maturity date of each portfolio. The matching process
defined above is used to direct certain sources of funds into specific uses,
over similar maturity distributions.
<PAGE> 8
The table below illustrates Commercial National's static gap position as of
December 31, 1995. Although the static gap sensitivity varies from time frame
to time frame, management has the ability to adjust rates on deposit accounts
in an effort to achieve a neutral interest sensitivity position within the
intermediate term.
<TABLE>
<CAPTION>
0-30 31-90 91-365 Over 1 Total
days days days year
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Loans (1) $ 41,888 $ 2,505 $ 23,446 $ 41,440 $ 109,279
Investment securities (2) - 2,000 7,599 20,267 29,886
Federal funds sold and
other investments (3) 2,850 - - - 2,850
----------- ----------- ----------- ---------- ----------
Total interest - earning assets 44,738 4,505 31,045 61,707 141,995
Savings and time deposits and
other interest-bearing
liabilities (4) 71,373 7,790 18,185 16,351 113,699
----------- ----------- ----------- ---------- ----------
Asset (liability) gap $ (26,635) $ (3,285) $ 12,860 $ 45,356 $ 28,296
=========== =========== =========== ========== ==========
Cumulative gap $ (26,635) $ (29,920) $ (17,060) $ 28,296 $ 28,296
Cumulative gap as a percentage of:
Earning assets (18.76%) (21.07%) (12.01%) 19.93% 19.93%
Total assets (17.63%) (19.80%) (11.29%) 18.73% 18.73%
=========== =========== =========== ========== ==========
</TABLE>
(1) Fixed rate loans are considered to be repriced after time periods
determined by statistical analysis of the Bank's repayment history by loan
category.
(2) Investment securities, which are all fixed rate securities, are
considered repriced only at maturity.
(3) Federal funds sold and other investments include daily overnight sales of
excess cash balances at correspondent banks, federal funds sold on a term
basis with a guaranteed rate and certificates of deposits purchased at
correspondent banks.
(4) Savings and time deposits and other interest-bearing liabilities include
(a) savings deposits, Super NOW accounts and money market accounts, which
are fluctuating interest accounts, (b) time certificates and repurchase
agreements, which include fixed rate instruments repriced at maturity and
instruments that are rate adjustable by the customer, (c) Michigan
Agricultural Certificates of Deposit, deposits by the state of Michigan
intended to assist the local agricultural community, which are
noninterest-bearing and are either renewed or repaid at maturity, and (d)
demand notes to the U.S. Treasury placed with the Bank under the treasury
tax and loan note option program, which are paid a variable interest rate.
The primary cash requirement of Commercial National is for the payment of
dividends to shareholders. Dividends are paid upstream by the Bank, when
declared, and are dependent upon the level of net income performance and
federal and state banking laws (Note 15).
<PAGE> 9
CAPITAL MANAGEMENT
Management believes that a strong capital position is paramount to its
continued profitability and continued depositor and investor confidence. It
also enables Commercial National flexibility to take advantage of expansion
opportunities and to accommodate larger commercial loan customers. Regulators
have established "risk based" capital guidelines for banks and bank holding
companies. Under the guidelines, minimum capital levels are based on the
perceived risk in asset categories and certain off-balance-sheet items, such as
loan commitments and standby letters of credit. The guidelines define Tier 1
capital and Tier 2 capital. Tier 1 capital includes common shareholders'
equity and qualifying preferred equity, less goodwill. Tier 2 capital includes
the allowance for loan losses, subordinated and other qualifying long-term
debt, and preferred stock not qualifying for Tier 1 capital. Tier 2 capital
may not exceed Tier 1 capital. As of December 31, 1995, banks and bank holding
companies are required to have ratios of Tier 1 capital to risk weighted assets
of 4% and total capital (Tier 1 plus Tier 2) of 8%. At December 31, 1995,
Commercial National had capital ratios well above regulatory guidelines.
The following table compares Commercial National's capital ratios at December
31, 1995 with regulatory capital guidelines:
<TABLE>
<CAPTION>
(Dollars in thousands) Tier 1 Tier 1 Total risk-based
capital to capital to capital to
total assets risk-weighted assets risk-weighted assets
<S> <C> <C> <C>
Capital balances, December 31, 1995 $ 13,843 $ 13,843 $ 15,161
Average assets and total risk-
weighted assets, December 31, 1995 $ 146,874 $106,131 $106,131
Capital ratios, December 31, 1995 9.43% 13.04% 14.29%
Regulatory capital ratios,
December 31, 1995 3.00% 4.00% 8.00%
Minimum well capitalized 4.00% 5.00% 10.00%
========== ======== ========
</TABLE>
Commercial National offers to its shareholders a dividend reinvestment plan
which allows for shares to be purchased at 95% of the current market value from
dividends earned. At December 31, 1995, approximately 31% of the current
shares outstanding and 50% of Commercial National shareholders were enrolled in
the dividend reinvestment plan.
Total cash dividends, when adjusted for a 5% stock dividend paid in November of
1995, were $1.02 per share for 1995 compared to $.92 for 1994. This represents
an increase of 10.9% over the 1994 dividend level. The book value per share,
at December 31, 1995, when adjusted for the 5% stock dividend paid in November
1995 increased to $17.97 from $16.85 at December 31, 1994, representing a 6.6%
increase.
<PAGE> 10
ANALYSIS OF 1994 TO 1993
EARNINGS PERFORMANCE
Commercial National reported net income of $1,532,000 in 1994, an increase of
$117,000, or 8.3%, over 1993 net income of $1,415,000. Return on average
shareholders' equity for 1994 was 11.8% compared to 12.6% for 1993. The 1994
return on average assets was 1.07% compared to 1.00% for 1993.
NET INTEREST INCOME
For the year ended December 31, 1994, total interest income was $10,334,000, an
increase of $61,000 from $10,273,000 for 1993. A decrease of $416,000 in total
interest expense from $4,300,000 in 1993 to $3,884,000 in 1994, significantly
contributed to the $477,000 improvement in net interest income from $5,973,000
in 1993 to $6,450,000 for 1994.
On a fully taxable-equivalent basis, total interest income increased by $67,000
from 1993 to 1994. This increase was nominal due to average outstanding
earning assets ($135,422,000 for 1994 and $134,837,000 for 1993) and average
interest rates (7.92% for 1994 and 7.90% for 1993) being fairly comparable for
both years. While average interest rates were comparable in total, the average
interest rate for loans increased from 8.44% in 1993 to 8.64% in 1994 due to
the general upward trend in market interest rates throughout 1994. This rate
increase was largely offset by a reduction in the average interest rate for
investment securities, from 7.32% in 1993 to 6.37% in 1994, largely due to the
continued maturity of older, higher-rate investments. Maturing investments
were replaced with others offering an overall lower yield.
The primary reason for the increase in net interest income relates to a
$416,000, or 9.7%, decrease in interest expense. Of the $416,000 decrease,
$94,000 resulted from a 1.7% reduction in average deposit and short-term
borrowing levels, and $322,000 resulted from a reduction in the average
interest rate paid on deposits and short-term borrowings from 3.66% in 1993 to
3.36% in 1994. The interest rate decrease included a reduction in the rate
paid on interest-bearing demand deposits and savings accounts, from 2.85% in
1993 to 2.54% in 1994, and a reduction in the rate paid on time certificates of
deposit from 4.80% in 1993 to 4.52% in 1994. Consistent with other financial
institutions, the Bank benefited from lower rates paid on savings accounts
throughout 1994 without significant market pressures to increase these rates
until late 1994 and early 1995. The Bank also benefited from the maturity of
older higher-rate certificates of deposit which were replaced with others
offering a lower rate. Market pressures to increase rates paid on time
certificates of deposit did not occur until late 1994 and early 1995.
While market interest rates increased dramatically in 1994 as demonstrated by
the increase in the prime rate from 6.0% at December 31, 1993 to 8.5% at
December 31, 1994, the Bank's net interest margin increased from 4.71% in 1993
to 5.05% in 1994 and the interest spread increased from 4.24% in 1993 to 4.56%
in 1994.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses for 1994 was $230,000, an increase of $125,000
over the 1993 provision of $105,000. While the Bank experienced net recoveries
of $12,000 in 1993, net charge offs in 1994 amounted to $90,000, a change of
$102,000. This change was largely attributable to two credits, amounting to
$148,000, charged off in 1994. The 1994 net charge off position compared to
1993, combined with the overall increase in the allowance for loan losses as a
percent of outstanding loans, as discussed below, required the $125,000
increase in the 1994 provision.
<PAGE> 11
At December 31, 1994, the allowance for loan losses amounted to $1,510,000 or
1.51% of total loans outstanding, compared to $1,370,000 or 1.34% of total
loans at December 31, 1993. As indicated above, the $140,000 increase in the
allowance for loan losses from 1993 to 1994 (compared to a $117,000 increase
from 1992 to 1993) is attributable to the current year provision of $230,000,
offset by net charge offs of $90,000. The allowance for loan losses at
December 31, 1994, represented 234.5% of total non-accrual, past due and
restructured loans, compared to 198.9% at December 31, 1993. While the level
of non-accrual, past due and restructure loans decreased from the prior year,
the allowance for loan losses was increased in 1994 to a level comparable to
the Bank's peer group considering historical net charge offs for the Bank and
the industry as a whole.
OTHER INCOME
Total income from service charges on deposit accounts was $302,000 for 1994
compared to $321,000 for 1993. The decrease from 1993 is primarily due to the
reduction of the Bank's per item overdraft fee.
Other income - other was $416,000 for 1994, a $98,000, or 19.1%, reduction from
the 1993 level of $514,000. Of this decrease, $79,000 relates to income
generated from new and refinanced loans sold. This decrease was expected as
long-term interest rates rose and mortgage refinancing activity subsided. The
majority of refinanced loans are immediately sold in the secondary market;
consequently, the related loan fees are recognized currently in income. Fees,
gain on sale of loans and interest earned prior to sale declined $124,000, or
59.4%, from 1993. Mortgage servicing income, however, increased $45,000, or
48.5%, as a result of the full year effect of the servicing rights acquired
from the significant refinancing activity in 1993. The total amount of loans
serviced for secondary market investors amounted to $26,329,000 at December 31,
1994, an increase of $5,301,000, or 25.2%, over the $21,028,000 level at
December 31, 1993.
No other individual component of this category is significant during 1994 or
1993.
OTHER EXPENSES
Salaries and employee benefits, totaling $2,572,000 for 1994, remained
consistent with the 1993 amount of $2,579,000, changing only slightly due to
employee changes at different salary levels.
In addition to the above, beginning in 1994, salaries and wages relating to
building maintenance employees were classified as "Salaries and wages" compared
to the 1993 inclusion of these expenses in "Net occupancy expense." This
amounted to $55,000 in 1993 and is the principal reason for the $50,000
decrease in net occupancy expense from 1993 to 1994.
The FDIC assessment increased 2.5% during 1994 compared to 1993 due to slight
volume increases in deposits on the assessment dates. The rate paid by the
Bank for FDIC premiums equaled $.23 per $100 of deposits during 1994 and 1993.
Of the total $291,000 assessment paid in 1994, $256,000 was paid into the BIF
Fund and $35,000 was paid into the SAIF Fund.
Of the $110,000 increase in "Other expenses - other" for 1994 compared to 1993,
$88,000 was incurred for supplies, training and consulting services relating to
the Bank's computer hardware and software conversion in late 1994.
<PAGE> 12
INCOME TAXES
The effective federal income tax rate for 1994 was 23.9% which is comparable to
the 23.3% effective rate for 1993. The $52,000 increase in federal income
taxes for 1994 is attributable to increased pre-tax earnings.
EARNING ASSETS
At December 31, 1994, earning assets were $133,844,000 compared to $136,297,000
at December 31, 1993. Decreases were realized in the loan portfolio and
federal funds sold of $1,972,000 and $500,000, respectively, while investment
security levels were comparable for the two years. Federal funds sold levels
vary day-to-day based upon short-term funding needs.
The net decrease in loans outstanding is due to a combination of increases and
decreases in the individual loan categories. Commercial loans increased
$8,585,000. Of this amount, $6,930,000 relates to the 1994 classification of
commercial loans secured by real estate as commercial loans rather than real
estate mortgage loans, as done in prior years. This loan type could previously
only be processed on the Bank's mortgage loan computer software. The Bank's
computer hardware and software conversion in late 1994 allowed the Bank to more
easily maintain and account for loans by loan type. The remaining $1,655,000,
or 3.1%, increase is due to normal loan demand.
After consideration of the $6,930,000 reclassification discussed above, real
estate mortgage loans decreased $5,336,000, or 14.6%. This decrease is
consistent with the $7,032,000, or 16.2%, decrease in real estate mortgage
loans from 1992 to 1993. These decreases relate primarily to the significant
residential real estate refinancings and associated competition for related
fees. A large portion of these loans, previously carried as outstanding loans
by the Bank, were refinanced and sold into the secondary market. The Bank
continues to service many of these loans, resulting in increased servicing
fees. As previously discussed, the total amount of loans serviced for
secondary market investors at December 31, 1994 increased $5,301,000, or 25.2%,
from the December 31, 1993 level.
Consumer loans increased $1,708,000, or 13.5%, primarily due to increased
financing needs relating to improved automobile sales.
Overall, average earning assets for 1994 were $135,422,000 compared to
$134,837,000 for 1993. Average loans decreased by $1,659,000 from $99,577,000
in 1993 to $97,918,000 in 1994 for the reasons discussed above relating to
year-end balances. Average investment securities increased $4,747,000,
absorbing the reduced overall Bank-owned loan demand, as discussed above, and
the reduced average federal funds borrowings of $2,503,000.
INTEREST-BEARING LIABILITIES
At December 31, 1994, interest-bearing liabilities totaled $113,190,000, a
$4,610,000, or 3.9%, decrease from the $117,800,000 balance at December 31,
1993. Average interest-bearing liabilities for 1994 totaled $115,530,000, a
$1,969,000, or 1.7%, decrease compared to the 1993 average amount of
$117,499,000. These fluctuations are not significant considering the
fluctuation in rates paid on deposits during the two years. With the decrease
in rates paid on deposits during the past few years, banks have faced an
increased challenge in maintaining deposits in all classifications, including
demand, savings and time. Average interest-bearing demand and savings accounts
were comparable in 1994 and 1993, at $67,490,000 and $67,252,000, respectively.
Average balances of time certificates of deposit decreased from
<PAGE> 13
$48,709,000 in 1993 to $46,583,000 in 1994 as higher rate certificates matured
and customers deferred renewing at lower rates. Balances increased toward the
end of 1994, ending at $47,184,000, a slight increase over year-end 1993
balance of $46,557,000.
While the level of short-term borrowings fluctuate throughout the year, average
1994 balances of $1,457,000 were comparable to 1993 average balances of
$1,538,000. The balance of repurchase agreements at December 31, 1994 is up
significantly over year-end 1993 due to a new daily investment program by a
Bank customer whereby balances have been averaging $2,500,000.
<PAGE> 14
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of earnings
Interest income $ 11,650 $ 10,334 $ 10,273 $ 10,453 $ 11,205
Interest expense 4,780 3,884 4,300 4,691 5,853
---------- ---------- ---------- ---------- ----------
Net interest income 6,870 6,450 5,973 5,762 5,352
Provision for loan losses 250 230 105 170 205
Other income 665 718 836 730 613
Other expenses 5,126 4,925 4,860 4,622 4,420
---------- ---------- ---------- ---------- ----------
Income before federal income
taxes 2,159 2,013 1,844 1,700 1,340
Federal income tax expense 491 481 429 397 310
---------- ---------- ---------- ---------- ----------
Net income $ 1,668 $ 1,532 $ 1,415 $ 1,303 $ 1,030
========== ========== ========== ========== ==========
Net income per share (1) $2.06 $1.94 $1.84 $1.74 $1.39
========== ========== ========== ========== ==========
Balance sheet data
Total assets $ 151,075 $ 142,875 $ 144,239 $ 146,546 $ 124,557
Investment securities 29,866 29,259 29,240 27,433 24,747
Loans, net 107,611 98,525 100,637 97,440 83,689
Deposits 129,701 125,090 129,259 127,689 105,443
Shareholders' equity 14,643 13,458 12,282 10,962 10,169
Dividends per share (1) $1.02 $.92 $.92 $.87 $.83
Average shares outstanding (1) 808,032 787,676 769,298 746,933 739,507
</TABLE>
(1) As adjusted to reflect the 5% stock dividends paid each year.
<PAGE> 15
Independent Auditors' Report
To the Board of Directors and Shareholders
Commercial National Financial Corporation
Ithaca, Michigan
We have audited the accompanying consolidated balance sheets of Commercial
National Financial Corporation and subsidiary as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commercial National
Financial Corporation and subsidiary at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
January 17, 1996
-2-
<PAGE> 16
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
=========================================
<TABLE>
December 31,
----------------------------------
ASSETS 1995 1994
---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks (Note 2) $ 5,725,357 $ 5,548,701
Federal funds sold 2,850,000 4,550,000
--------------- ---------------
Total cash and cash equivalents 8,575,357 10,098,701
--------------- ---------------
Investment securities (Note 3):
Held-to-maturity (estimated market value of $29,761,363
and $29,500,099) 29,429,704 29,258,601
Other (estimated market value of $436,500) 436,500 -
--------------- ---------------
Total investment securities 29,866,204 29,258,601
--------------- ---------------
Loans (Notes 4 and 5):
Commercial and agricultural 68,703,505 61,457,575
Real estate mortgage 25,535,384 24,223,111
Consumer and other 15,040,187 14,354,506
--------------- ---------------
Total loans 109,279,076 100,035,192
Allowance for loan losses (1,668,555) (1,509,800)
--------------- ---------------
Net loans 107,610,521 98,525,392
Property and equipment, net (Note 6) 3,327,967 2,516,359
Accrued interest and other assets (Note 12) 1,694,524 2,475,453
--------------- ---------------
$ 151,074,573 $ 142,874,506
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 16,001,930 $ 15,278,150
Interest-bearing demand 33,445,813 34,857,406
Savings 24,832,993 27,770,087
Time (Note 8) 55,420,543 47,184,483
--------------- ---------------
Total deposits 129,701,279 125,090,126
Securities sold under repurchase agreements (Note 3) 5,305,435 2,729,043
Demand notes issued to U.S. Treasury 559,991 649,121
Accrued interest and other liabilities 865,180 948,299
--------------- ---------------
TOTAL LIABILITIES 136,431,885 129,416,589
Commitments and contingent liabilities (Notes 7, 11 and 13)
SHAREHOLDERS' EQUITY (Notes 10 and 15):
Common stock, $1.00 par value; 1,750,000 shares authorized,
shares issued and outstanding 814,684 and 760,827 814,684 760,827
Surplus 11,624,723 10,366,225
Retained earnings 2,203,281 2,330,865
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 14,642,688 13,457,917
--------------- ---------------
$ 151,074,573 $ 142,874,506
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 17
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
=========================================
<TABLE>
Year ended December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,612,355 $ 8,342,142 $ 8,302,675
Interest on investment securities:
U.S. Treasury securities 617,436 440,707 233,690
Obligations of other U.S. Government
agencies and corporations 513,838 810,141 955,953
Obligations of states and political
subdivisions - tax-exempt 586,065 528,728 543,454
Interest on federal funds sold 320,709 211,930 237,285
------------ ------------ ------------
Total interest income 11,650,403 10,333,648 10,273,057
------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits (Note 8) 4,464,310 3,819,551 4,254,885
Interest on short-term borrowings 316,245 64,361 45,237
------------ ------------ ------------
Total interest expense 4,780,555 3,883,912 4,300,122
------------ ------------ ------------
Net interest income 6,869,848 6,449,736 5,972,935
PROVISION FOR LOAN LOSSES (Note 5) 250,000 230,000 105,000
------------ ------------ ------------
Net interest income after
provision for loan losses 6,619,848 6,219,736 5,867,935
------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 212,759 302,688 321,846
Other 451,917 415,688 514,466
------------ ------------ ------------
Total other income 664,676 718,376 836,312
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 18
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
=========================================
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
OTHER EXPENSES:
Salaries and wages $ 2,067,142 $ 1,965,966 $ 1,955,187
Employee benefits (Note 11) 499,733 606,347 624,179
Net occupancy expense 282,869 265,710 315,577
Furniture and equipment expense 400,633 333,689 325,520
FDIC assessment 149,509 290,777 283,607
Printing and supplies 220,543 165,415 168,447
Other 1,505,271 1,297,215 1,187,509
----------- ----------- ------------
Total other expenses 5,125,700 4,925,119 4,860,026
----------- ----------- ------------
Income before federal
income taxes 2,158,824 2,012,993 1,844,221
FEDERAL INCOME TAXES (Note 12) 491,000 481,000 429,000
----------- ----------- ------------
NET INCOME $ 1,667,824 $ 1,531,993 $ 1,415,221
=========== =========== ============
PER SHARE INFORMATION:
Net income $ 2.06 $ 1.94 $ 1.84
=========== =========== ============
Dividends $ 1.02 $ .92 $ .87
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 19
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===============================================
<TABLE>
<CAPTION>
Common Retained Securities
stock Surplus earnings valuation Total
---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE at January 1, 1993 $ 640,209 $ 7,819,286 $ 2,502,861 $ - $ 10,962,356
Net income - - 1,415,221 - 1,415,221
Cash dividends, $.87 per share - - (667,990) - (667,990)
Stock issued in payment of 5% stock
dividend 33,053 776,815 (814,838) - (4,970)
Stock issued under dividend
reinvestment program 9,230 191,810 - - 201,040
Stock issued under stock option plans 22,418 333,292 - - 355,710
Repurchase of 899 shares (899) (20,003) - - (20,902)
Change in securities valuation - - - 41,159 41,159
---------- ------------ ------------ --------- ------------
BALANCE at December 31, 1993 704,011 9,101,200 2,435,254 41,159 12,281,624
Net income - - 1,531,993 - 1,531,993
Cash dividends, $.92 per share - - (726,406) - (726,406)
Stock issued in payment of 5% stock
dividend 35,986 870,511 (909,976) - (3,479)
Stock issued under dividend
reinvestment program 9,965 226,313 - - 236,278
Stock issued under stock option plans 10,985 171,131 - - 182,116
Repurchase of 120 shares (120) (2,930) - - (3,050)
Change in securities valuation - - - (41,159) (41,159)
---------- ------------ ------------ ---------- ------------
BALANCE at December 31, 1994 760,827 10,366,225 2,330,865 - 13,457,917
Net income - - 1,667,824 - 1,667,824
Cash dividends, $1.02 per share - - (826,530) - (826,530)
Stock issued under dividend
reinvestment program 11,612 264,183 - - 275,795
Stock issued in payment of 5% stock
dividend 38,623 926,970 (968,878) - (3,285)
Stock issued under stock option plans 3,633 67,600 - - 71,233
Repurchase of 11 shares (11) (255) - - (266)
---------- ------------ ------------ --------- ------------
BALANCE at December 31, 1995 $ 814,684 $ 11,624,723 $ 2,203,281 $ - $ 14,642,688
========== ============ ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE> 20
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
=========================================
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,667,824 $ 1,531,993 $ 1,415,221
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses 250,000 230,000 105,000
Provision for depreciation, amortization and
accretion 481,748 739,405 764,090
Loss on sale of property and equipment - - 2,547
Deferred federal income taxes 8,000 (30,000) (16,000)
Changes in operating assets and liabilities:
Accrued interest and other assets 696,158 133,092 (105,916)
Accrued interest and other liabilities (112,865) 4,785 (296,877)
----------- ----------- -----------
Net cash from operating activities 2,990,865 2,609,275 1,868,065
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity (14,950,610) (19,068,224) (8,613,395)
Proceeds from maturities of investment securities
held-to-maturity 14,260,000 15,625,000 6,400,000
Proceeds from maturities of investment securities
available-for-sale - 3,000,000 -
Proceeds from sale of investment securities - - 195,100
Net (increase) decrease in loans (9,374,501) 1,799,433 (3,481,646)
Capital expenditures (1,094,207) (451,672) (340,264)
Proceeds from sale of property and equipment - - 23,007
----------- ----------- -----------
Net cash from (for) investing
activities (11,159,318) 904,537 (5,817,198)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE> 21
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Continued)
=========================================
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 4,611,153 $ (4,168,625) $ 1,569,333
Net increase (decrease) in short-term borrowings 2,487,262 1,609,017 (4,914,126)
Proceeds from sale of common stock 347,028 418,394 556,750
Dividends paid and fractional shares (800,068) (715,680) (657,009)
Repurchased shares (266) (3,050) (20,902)
----------- ------------ ------------
Net cash from (for) financing
activities 6,645,109 (2,859,944) (3,465,954)
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,523,344) 653,868 (7,415,087)
CASH AND CASH EQUIVALENTS,
at beginning of year 10,098,701 9,444,833 16,859,920
----------- ------------ ------------
CASH AND CASH EQUIVALENTS,
at end of year $ 8,575,357 $ 10,098,701 $ 9,444,833
=========== ============ ============
Cash paid during the year for:
Interest $ 4,683,824 $ 3,871,809 $ 4,397,274
Federal income taxes, net of refunds $ 279,527 $ 523,000 $ 647,401
</TABLE>
See accompanying notes to consolidated financial statements.
-8-
<PAGE> 22
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Commercial National Financial
Corporation (Commercial National) and its wholly-owned subsidiary, Commercial
Bank (Bank), conform to generally accepted accounting principles and to general
practice within the banking industry. The following describes the significant
accounting and reporting policies which are employed in the preparation of the
consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Commercial
National and the Bank. Upon consolidation, all significant intercompany
accounts and transactions are eliminated.
Nature of Operations
Commercial National is a one-bank holding company which conducts no
direct business activities. All business activities are performed by the
Bank.
The Bank provides a full range of banking services to individuals,
agricultural businesses, commercial businesses and light industries
located in its service area. It 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, 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.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include amounts
due from banks and federal funds sold.
-9-
<PAGE> 23
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Investment Securities
Investment securities are classified as "held-to-maturity,"
"available-for-sale," "trading," or "other." Held-to-maturity
securities, for which Commercial National has the positive intent and
ability to hold to maturity, are stated at cost adjusted for amortization
of premiums and accretion of discounts. Available-for-sale securities,
which may be sold in the future to meet Commercial National's investment
objectives of quality, liquidity and yield and to avoid significant
market value deterioration, are adjusted to fair value each reporting
period. Net unrealized gains and losses on available-for-sale securities
are reported in a separate component of shareholders' equity, net of tax,
until realized. Commercial National does not hold any available-for-sale
or trading securities. Other securities consist of restricted Federal
Home Loan Bank stock.
The adjusted cost of each specific security sold is used to compute
realized gains and losses on all security transactions.
Interest Income and Fees on Loans
Interest on loans is included in income based upon the principal balance
outstanding. The accrual of interest is discontinued if the
collectibility of principal or interest is considered doubtful or
whenever payment of principal or interest is 90 days or more past due,
unless the loan is both well secured and in the process of collection.
When the accrual of interest is discontinued, the balance of interest
accrued but not collected is eliminated from income. For impaired loans
that are on non-accrual status, cash payments received are generally
applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a non-accrual loan may be
recognized as interest income to the extent allowed by the loan contract,
assuming management expects to fully collect the remaining principal
balance of the loan. Loan origination and commitment fees and their
related lending costs are not considered material.
Allowance for Loan Losses
Management's determination of the adequacy of the allowance for loan
losses is based upon a continuing review of the loan portfolio which
includes past loan loss experience, current economic conditions, loan
volume, composition of the loan portfolio and additional factors. For
federal income tax purposes, the maximum deduction allowable under
current tax law is taken.
Management believes that the allowance for loan losses is adequate to
absorb potential losses in the loan portfolio. While management uses
available information to recognize losses on loans, future additions to
the allowance may be necessary based on changes in economic conditions
and borrowing circumstances.
-10-
<PAGE> 24
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Allowance for Loan Losses (Cont'd.)
Effective January 1, 1995, Commercial National adopted Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures
(collectively referred to as "SFAS No. 114").
Under SFAS No. 114, a loan is considered to be impaired when it is
probable that Commercial National will be unable to collect all principal
and interest amounts according to the contractual terms of the loan
agreement. The allowance for loan losses related to loans identified as
impaired is primarily based on the excess of the loan's current
outstanding principal balance over the estimated fair market value of the
related collateral. For impaired loans that are not collateral
dependent, the allowance for loan losses is recorded at the amount by
which the outstanding recorded principal balance exceeds the current best
estimate of the future cash flows on the loan, discounted at the loan's
effective interest rate. Prior to 1995, the allowance for loan losses
for loans which would have qualified as impaired under SFAS No. 114 was
primarily based upon the estimated fair market value of the related
collateral. The effect of adopting SFAS No. 114 was immaterial to the
1995 operating results of Commercial National. Prior consolidated
financial statements have not been restated to apply the provisions of
SFAS No. 114.
Sale and Servicing of Mortgage Loans
The Bank originates mortgage loans which it sells into the secondary
market while retaining the servicing. Such loan balances, amounting to
approximately $27,493,000 and $26,329,000 at December 31, 1995 and 1994,
respectively, are not included in the accompanying consolidated balance
sheets. Mortgage loans held for sale are valued at the lower of cost or
market, calculated on the aggregate loan balance.
In May 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 122, Accounting for Mortgage Servicing Rights. SFAS No. 122 amends
SFAS No. 65, Accounting for Certain Mortgage Banking Activities, to
require that an asset be recognized for the rights to service mortgage
loans, including those rights created by the origination of mortgage
loans which are sold or securitized with the servicing rights retained by
the loan originator. The servicing rights, which are required to be
periodically evaluated for impairment based on their fair value, are
amortized against servicing income over the period of estimated net
servicing income. SFAS No. 122 is required to be adopted prospectively
beginning January 1, 1996. While management has not fully analyzed the
impact of SFAS No. 122, its adoption is expected to be immaterial to the
operations and financial position of Commercial National.
-11-
<PAGE> 25
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the assets by
the straight-line method. Accelerated and straight-line methods are used
for income tax reporting purposes as permitted by the Internal Revenue
Code.
Other Real Estate
Other real estate, which is included in other assets, is carried at the
lower of cost or fair value minus estimated costs to sell the property.
When the property is acquired through foreclosure, any excess of the
related loan balance over fair value is charged to the allowance for loan
losses. Subsequent write-downs, losses upon sale, and expenses related
to maintenance of properties are charged to other operating expense.
Stock Options
Commercial National applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its two fixed
stock-based compensation plans. Accordingly, no compensation cost is
recognized for the plans.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 allows companies to continue to account for
their stock option plans in accordance with APB Opinion 25 but encourages
the adoption of a new accounting method to record compensation expense
based on the estimated fair value of employee stock options. Companies
electing not to follow the new fair value based method are required to
provide expanded footnote disclosures, including pro forma net income and
earnings per share, determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted prospectively beginning
January 1, 1996. Management intends to continue to account for its stock
option plans in accordance with APB Opinion 25 and provide supplemental
disclosures as required by SFAS No. 123, beginning in 1996.
Advertising Costs
All advertising costs, amounting to $88,148 and $40,964 in 1995 and 1994,
respectively, are expensed in the period in which they are incurred.
-12-
<PAGE> 26
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Income Taxes
Commercial National and the Bank file a consolidated income tax return.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The effect
on deferred income taxes of a change in tax laws or rates is recognized
in income in the period that includes the enactment date.
Per Share Data
Net income per share is computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during
each year and is retroactively adjusted for stock dividends. The number
of shares used to calculate net income per share was 808,032, 787,676 and
769,298 for 1995, 1994 and 1993, respectively.
Cash dividends per share are based on the number of shares outstanding at
date of declaration, retroactively adjusted for stock dividends.
NOTE 2 - CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances in the form of
cash and balances due from the Federal Reserve Bank. During 1995 and 1994,
these average reserves were approximately $991,000 and $950,000, respectively.
-13-
<PAGE> 27
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and estimated market
value of investment securities at December 31, are as follows:
<TABLE>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1995
HELD-TO-MATURITY
U.S. Treasury securities $ 9,518,339 $ 74,454 $ 205 $ 9,592,588
Obligations of other U.S. Government
agencies and corporations 6,288,087 46,674 - 6,334,761
Obligations of states and political
subdivisions 13,623,278 331,121 120,385 13,834,014
------------- ---------- ---------- -------------
Total held-to-maturity securities 29,429,704 452,249 120,590 29,761,363
Other - Federal Home Loan Bank stock
(restricted) 436,500 - - 436,500
------------- ---------- ---------- -------------
Total investment securities $ 29,866,204 $ 452,249 $ 120,590 $ 30,197,863
============= ========== ========== =============
1994
HELD-TO-MATURITY
U.S. Treasury securities $ 9,485,678 $ 737 $ 72,429 $ 9,413,986
Obligations of other U.S. Government
agencies and corporations 10,566,950 6,710 68,661 10,504,999
Obligations of states and political
subdivisions 9,205,973 379,116 3,975 9,581,114
------------- ---------- ---------- -------------
Total held-to-maturity securities $ 29,258,601 $ 386,563 $ 145,065 $ 29,500,099
============= ========== ========== =============
</TABLE>
-14-
<PAGE> 28
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 3 - INVESTMENT SECURITIES (Cont'd.)
The amortized cost, estimated market values and contractual maturities of
held-to-maturity securities at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due within one year $ 9,598,858 $ 9,662,412 $ 14,295,842 $ 14,231,595
Due after one year,
within five years 11,481,125 11,630,411 9,465,645 9,501,222
Due after five years,
within ten years 7,587,882 7,668,256 4,588,907 4,787,686
Due after ten years 761,839 800,284 908,207 979,596
------------- ------------- ------------- -------------
Total held-to-maturity
securities $ 29,429,704 $ 29,761,363 $ 29,258,601 $ 29,500,099
============= ============= ============= =============
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Proceeds from the sale of Federal Reserve Bank stock during 1993 was
$195,100, resulting in no gain or loss. There were no sales of investment
securities during 1995 and 1994.
Investment securities with par value of approximately $9,820,000 and
$11,080,000 at December 31, 1995 and 1994, respectively, were pledged to secure
public deposits and for other purposes, as required by law. In addition,
$8,000,000 and $3,500,000 of investment securities were pledged against
repurchase agreements at December 31, 1995 and 1994, respectively.
Except as indicated below, total investment in securities of any state
(including all its political subdivisions) was less than 10% of shareholders'
equity at December 31, 1995 and 1994. At December 31, 1995 and 1994, the
amortized cost of investment securities issued by the state of Michigan and all
its political subdivisions totaled $9,726,408 and $5,576,293, respectively,
with an estimated market value of $9,834,067 and $5,833,036, respectively.
-15-
<PAGE> 29
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 4 - LOANS TO RELATED PARTIES
Certain directors and executive officers of the Bank, including their
immediate families and the companies of which they are principal owners, were
loan customers of the Bank during 1995 and 1994. Loans to such customers are
made in the ordinary course of business at the Bank's normal credit terms,
including interest rates and collateralization, and do not represent more than
a normal risk of collection. Loan transactions with these customers were as
follows:
<TABLE>
Year ended December 31,
-------------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Balance at beginning of year $ 3,737,000 $ 3,382,000
New loans 11,542,000 14,161,000
Repayments (11,473,000) (13,806,000)
--------------- ---------------
Balance at end of year $ 3,806,000 $ 3,737,000
=============== ===============
</TABLE>
NOTE 5 - LOANS
The following summarizes loans outstanding at December 31, according to
type:
<TABLE>
<S> <C> <C>
1995 1994
-------------- --------------
Real estate:
Secured by single family residential properties $ 30,288,224 $ 29,806,226
Secured by nonfarm nonresidential properties 36,490,195 28,579,177
Secured by farmland 3,005,249 4,084,250
Secured by multi-family residential properties 4,352,142 4,732,252
Construction and land development 2,072,386 4,070,201
Loans to individuals for household, family and other
personal expenditures:
Installment loans 12,998,384 11,612,632
Credit card and related plans 715,133 697,106
Commercial and industrial 12,256,429 9,110,253
Loans to farmers 1,553,330 1,868,005
Tax exempt 5,532,493 5,436,843
Other 15,111 38,247
-------------- --------------
109,279,076 100,035,192
Less allowance for loan losses 1,668,555 1,509,800
-------------- --------------
Net loans $ 107,610,521 $ 98,525,392
============== ==============
</TABLE>
-16-
<PAGE> 30
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 5 - LOANS (Cont'd.)
The following table summarizes the changes in the allowance for loan
losses for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
------------- ------------ ------------
Balance at beginning of year $ 1,509,800 $ 1,370,154 $ 1,253,573
Provision charged to operations 250,000 230,000 105,000
Recoveries 97,322 130,313 189,943
Loans charged off (188,567) (220,667) (178,362)
------------ ------------ ------------
Balance at end of year $ 1,668,555 $ 1,509,800 $ 1,370,154
============ ============ ============
</TABLE>
The following summarizes information about impaired loans as of and for
the year ended December 31, 1995:
<TABLE>
<S> <C>
Impaired loans with a specific allowance for loan losses $ 169,643
Impaired loans with no specific allowance for loan losses 134,969
----------
Total impaired loans $ 304,612
----------
Total allowance for loan losses related to impaired loans $ 60,907
----------
Average balance of impaired loans for the year $ 295,491
==========
Interest income on impaired loans for the year - recorded on
a cash basis $ 19,202
==========
</TABLE>
Nonaccrual loans amounted to approximately $178,000 and $14,000 at
December 31, 1995 and 1994, respectively.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, are summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
1995 1994
------------ ------------
Land $ 310,689 $ 310,689
Buildings and improvements 2,491,413 2,340,586
Furniture and equipment 3,612,465 2,895,190
------------ ------------
6,414,567 5,546,465
Less accumulated depreciation 3,086,600 3,030,106
------------ ------------
Net book value $ 3,327,967 $ 2,516,359
============ ============
</TABLE>
Depreciation expense amounted to $281,339, $226,384, and $227,400 in 1995,
1994 and 1993, respectively.
-17-
<PAGE> 31
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 7 - OPERATING LEASES
The Bank leases certain branch facilities under lease agreements expiring
through 2013, with optional renewal periods through 2028. Two of the leases
are with a company owned by a related party. Rental expenses on these
operating leases totaled $21,474 and $15,814 in 1995 and 1994, respectively,
including $5,650 in 1995 paid to the related party. Future minimum lease
payments under noncancelable operating leases for the years ending December 31,
excluding optional renewal periods, are as follows:
<TABLE>
<S> <C>
1996 $ 32,134
1997 32,134
1998 28,734
1999 21,934
2000 14,414
Thereafter 30,407
----------
$ 159,757
==========
</TABLE>
NOTE 8 - TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 or more were $10,526,992 and
$6,221,573 at December 31, 1995 and 1994, respectively. Interest expense on
these deposits was $508,314, $233,999 and $148,468 for the years ended December
31, 1995, 1994 and 1993, respectively.
NOTE 9 - FHLB ADVANCES PAYABLE
Effective in January 1996, the Bank has the ability to borrow up to
$10,000,000 from the Federal Home Loan Bank of Indianapolis (FHLB) in
accordance with the terms of an "Advance, Pledge and Security Agreement."
NOTE 10 - STOCK OPTIONS AND DIVIDEND REINVESTMENT PROGRAM
At December 31, 1995, 5,408 shares of common stock were reserved in
connection with the 1991 and 1989 stock option plans under which options may be
granted to certain directors and key employees at the fair market value of the
stock on the date of grant.
At December 31, 1995, options were outstanding under the plans to purchase
a total of 21,626 shares at between $16.24 and $23.80 per share. Outstanding
options have the following expiration dates: June 1, 1996 (2,464 shares), June
1, 1997 (2,718 shares), April 22, 1999 (3,307 shares), June 1, 1999 (2,232
shares), June 1, 2000 (1,821 shares), September 29, 2000 (7,349 shares) and
January 4, 2003 (1,735 shares). Options become exercisable at various future
dates following the grant date. Options were exercisable to purchase 10,624
shares at December 31, 1995. During 1995, options were granted to purchase
11,032 shares at an average price of $23.80 and options were exercised to
purchase 3,764 shares at an average price of $18.91.
-18-
<PAGE> 32
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 10 - STOCK OPTIONS AND DIVIDEND REINVESTMENT PROGRAM (Cont'd.)
Under a dividend reinvestment program authorized in 1989, 70,000 shares of
common stock were reserved. At December 31, 1995, 18,914 shares were reserved
and unissued under the dividend reinvestment plan.
NOTE 11 - RETIREMENT PLAN
The Bank has an employee retirement and savings investment plan under
section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. The Bank is the plan's trustee. Contributions of approximately
$94,000, $98,000 and $98,000 in 1995, 1994 and 1993, respectively, as
determined by the Bank's board of directors, were funded as provided.
NOTE 12 - FEDERAL INCOME TAXES
Federal income tax expense consists of the following components:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Current $ 483,000 $ 511,000 $ 445,000
Deferred 8,000 (30,000) (16,000)
---------- ----------- -----------
Total $ 491,000 $ 481,000 $ 429,000
========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to the net
deferred income tax asset, included in other assets, at December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Allowance for loan losses $ 192,000 $ 138,000
Accumulated depreciation (166,000) (109,000)
Other (6,000) (1,000)
------------ ------------
Net deferred income tax asset $ 20,000 $ 28,000
============ ============
</TABLE>
-19-
<PAGE> 33
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 12 - FEDERAL INCOME TAXES (Cont'd.)
Federal income tax expense differed from the amount computed by applying
the statutory rate of 34% to income before federal income taxes as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax $ 734,000 $ 684,000 $ 627,000
Increase (decrease) in tax resulting from:
Tax-exempt interest income (262,000) (233,000) (226,000)
Goodwill amortization 14,000 14,000 14,000
Other, net 5,000 16,000 14,000
------------ ------------ ------------
$ 491,000 $ 481,000 $ 429,000
============ ============ ============
</TABLE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit. The instruments involve, to varying degrees, elements of credit risk
in excess of the amounts recognized in the consolidated balance sheets. The
contract amount of these instruments reflects the extent of involvement the
Bank has in these financial instruments.
The Bank's exposure to credit loss, in the event of the nonperformance by
the other party to the financial instruments for loan commitments to extend
credit and letters of credit, is represented by the contractual amounts of
these instruments.
Financial instruments whose contract amount represents credit risk at
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Commitments to extend credit $ 16,641,131 $ 15,223,726
Standby letters of credit 936,652 60,800
------------- -------------
Total $ 17,577,783 $ 15,284,526
============= =============
</TABLE>
-20-
<PAGE> 34
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Cont'd.)
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if necessary, is based on management's credit assessment of the customer.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and existing income-producing commercial
properties.
Letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. At December 31,
1995, the Bank has six letters of credit which expire at various dates through
February 9, 2000.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheets, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of Commercial National.
The following methods and assumptions are used by the Bank in estimating
the fair value disclosures.
Cash and Cash Equivalents
Recorded book value approximates fair value.
Investment Securities
Fair value is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
-21-
<PAGE> 35
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
Loans
Fair values are estimated using discounted cash flows, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Deposits
The fair value of demand deposits and savings deposits is the amount
payable on demand at the reporting date as currently recorded in the
consolidated balance sheets. The fair value of time deposits is estimated
using discounted cash flows, using interest rates currently offered for
deposits of similar remaining maturities.
Securities Sold Under Repurchase Agreements and Demand Notes Issued to
U.S. Treasury
Recorded book value approximates fair value due to the relatively short
period between origination and expected repayment of those instruments.
Off-Balance Sheet Financial Instruments (Credit Commitments)
Fair value is based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing. The fair value of those commitments
is nominal.
The estimated fair values of Commercial National's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
---------------------------
FINANCIAL ASSETS Carrying Fair
value value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 8,575 $ 8,575
Investment securities 29,866 30,198
Loans, net of allowance 107,611 109,783
---------- ----------
Total financial assets $ 146,052 $ 148,556
========== ==========
</TABLE>
-22-
<PAGE> 36
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
<TABLE>
<CAPTION>
December 31, 1995
---------------------------
FINANCIAL LIABILITIES Carrying Fair
value value
---------- ----------
<S> <C> <C>
Demand and savings deposit $ 74,281 $ 74,281
Time deposits 55,420 55,930
Securities sold under repurchase agreements 5,305 5,305
Demand notes issued to U.S. Treasury 560 560
---------- ----------
Total financial liabilities $ 135,566 $ 136,076
========== ==========
</TABLE>
NOTE 15 - DIVIDENDS TO PARENT COMPANY
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends and loans that a bank could pay to its parent
company. Of the $13,887,793 in banking subsidiary net assets, $5,397,313 is
available for dividends to the parent company in 1996 (before considering 1996
net income), and the remaining $8,490,480 is restricted based on minimum risk
based capital requirements now in effect.
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
ASSETS 1995 1994
------------- -------------
<S> <C> <C>
Cash $ 909,967 $ 383,673
Investment in subsidiary 13,887,793 13,181,031
Other 64,881 83,420
------------- -------------
$ 14,862,641 $ 13,648,124
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
LIABILITIES:
Dividend payable $ 219,953 $ 190,207
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 814,684 760,827
Surplus 11,624,723 10,366,225
Retained earnings 2,203,281 2,330,865
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 14,642,688 13,457,917
------------- -------------
$ 14,862,641 $ 13,648,124
============= =============
</TABLE>
-23-
<PAGE> 37
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Cont'd.)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income - dividend income from subsidiary $ 979,600 $ - $ 535,000
------------ ------------ ------------
Net income before equity in undistributed net
income of subsidiary 979,600 - 535,000
Equity in undistributed net income of subsidiary 688,224 1,531,993 880,221
------------ ------------ ------------
Net income $ 1,667,824 $ 1,531,993 $ 1,415,221
============ ============ ============
Net income per share $ 2.06 $ 1.94 $ 1.84
============ ============ ============
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1995 1994 1993
------------- -------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,667,824 $ 1,531,993 $ 1,415,221
Adjustment to reconcile net income to net
cash from operating activities:
Equity in undistributed net income of
subsidiary (688,224) (1,531,993) (880,221)
------------ -------------- ------------
Net cash from operating
activities 979,600 - 535,000
------------ -------------- ------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock 347,028 418,394 556,750
Dividends paid and fractional shares (800,068) (715,680) (657,010)
Repurchased shares (266) (3,050) (20,902)
------------ -------------- ------------
Net cash for financing
activities (453,306) (300,336) (121,162)
------------ -------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 526,294 (300,336) 413,838
CASH AND CASH EQUIVALENTS,
at beginning of year 383,673 684,009 270,171
------------ -------------- ------------
CASH AND CASH EQUIVALENTS,
at end of year $ 909,967 $ 383,673 $ 684,009
============ ============== ============
</TABLE>
-24-
<PAGE> 38
COMMON STOCK INFORMATION
There is no established public trading market for Commercial National Financial
Corporation common stock, and there is no published information concerning bid
or ask quotations. There were, so far as Commercial National's management
knows, 12 sales involving a total of 19,400 shares of stock during 1995. The
price was reported to management for only some of these transactions, and
management is generally unable to confirm the prices which were reported.
During 1995 and 1994 the price ranges of transactions reported were:
<TABLE>
<CAPTION>
1995 1994
Shares Actual Price Shares Actual Price
Period Traded Range Traded Range
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 5,000 $24.00-$25.50 2,259 $24.50-$25.50
Second Quarter 700 $24.50-$25.50 4,402 $24.75-$26.00
Third Quarter 9,500 $24.75-$25.50 428 $24.50-$24.50
Fourth Quarter 4,200 $24.50-$26.00 972 $25.00-$25.00
</TABLE>
The above prices have not been adjusted for the 5% stock dividend issued in
November 1995 and 1994.
There were 814,685 shares outstanding on December 31, 1995, and there are
approximately 582 shareholders of record.
<PAGE> 39
DIVIDEND INFORMATION
The holders of Commercial National's common stock are entitled to dividends
when, and if declared by the board of directors of Commercial National out of
funds legally available for that purpose. The board of directors does not
declare dividends based on any predetermined dividend policy but has paid
regular quarterly cash dividends for the past six years. The following table
sets forth the dividends per share declared during 1995 and 1994.
<TABLE>
<CAPTION>
First Second Third Fourth
Year Quarter Quarter Quarter Quarter
----------------------------------------
<S> <C> <C> <C> <C>
1994 $.22 $.23 $.23 $.24
1995 $.24 $.26 $.26 $.27*
</TABLE>
*Dividends declared in December and paid in January.
Per share amounts have been adjusted retroactively to reflect the 5% stock
dividends issued in November of 1995 and 1994.
Commercial National's principal source of funds to pay cash dividends is the
earnings of the Bank. Consequently, cash dividends are dependent upon the
earnings, capital requirements, regulatory constraints and other factors
affecting the Bank. Based on projected earnings, management expects Commercial
National to declare and pay regular quarterly cash dividends on its common
shares in 1996.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 2
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Commercial National Financial Corporation
Ithaca, Michigan
We hereby consent to the incorporation by reference and use of our report dated
January 17, 1996, which appears in Commercial National Financial Corporation's
annual report on Form 10-K for 1995, in that corporation's previously filed
registration statements, as amended, for that corporation's 1989 Stock Option
Plan (Registration No. 33-30392), Dividend Reinvestment Plan (Registration No.
33-30239), and 1991 Stock Option Plan (Registration No. 33-39772 and 33-92666).
BDO SEIDMAN, LLP
March 25, 1996
Grand Rapids, Michigan
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> 2
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors of Commercial National Financial Corporation,
a Michigan corporation, hereby constitute and appoint Dean E. Milligan and
Richard F. Abbott, and each of them, the true and lawful agents and
attorneys-in-fact of the undersigned, with full power and authority in said
agents and attorneys-in-fact, and any one or more of them, to sign for the
undersigned and in their respective names as directors of Commercial National
Financial Corporation, the Form 10-K Annual Report to be filed with the
Securities and Exchange Commission, Washington, D.C., pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for fiscal year ended December 31,
1995, and any and all amendments thereto.
March 8, 1996 /s/ Jefferson P. Arnold
-----------------------------
Jefferson P. Arnold
Director
March 8, 1996 /s/ Don J. Dewey
-----------------------------
Don J. Dewey
Director
March 8, 1996 /s/ David A. Ferguson
-----------------------------
David A. Ferguson
Director
March 8, 1996 /s/ Kenneth R. Luneack
-----------------------------
Kenneth R. Luneack
Director
March 8, 1996 /s/ Kim C. Newson
-----------------------------
Kim C. Newson
Director
March 8, 1996 /s/ Howard D. Poindexter
-----------------------------
Howard D. Poindexter
Director
March 8, 1996 /s/ Scott E. Sheldon
-----------------------------
Scott E. Sheldon
Director
March 8, 1996 /s/ Russell M. Simmet
-----------------------------
Russell M. Simmet
Director
March 8, 1996 /s/ Joseph B. Simon
-----------------------------
Joseph B. Simon
Director
<PAGE> 3
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,725
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 29,867
<INVESTMENTS-MARKET> 30,198
<LOANS> 109,279
<ALLOWANCE> 1,669
<TOTAL-ASSETS> 151,075
<DEPOSITS> 129,701
<SHORT-TERM> 5,865
<LIABILITIES-OTHER> 865
<LONG-TERM> 0
0
0
<COMMON> 815
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 151,075
<INTEREST-LOAN> 9,612
<INTEREST-INVEST> 1,717
<INTEREST-OTHER> 321
<INTEREST-TOTAL> 11,650
<INTEREST-DEPOSIT> 4,464
<INTEREST-EXPENSE> 316
<INTEREST-INCOME-NET> 6,870
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,126
<INCOME-PRETAX> 2,159
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,668
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 8.20
<LOANS-NON> 178
<LOANS-PAST> 34
<LOANS-TROUBLED> 27
<LOANS-PROBLEM> 305
<ALLOWANCE-OPEN> 1,510
<CHARGE-OFFS> 188
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 1,669
<ALLOWANCE-DOMESTIC> 1,074
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 595
</TABLE>
