<PAGE> 1
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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, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File 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 13, 1998: $24,695,061
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 13, 1998: 959,396 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to security holders for the year
ended December 31, 1997, are incorporated by reference in Part II and Part IV.
Portions of the registrant's proxy statement for its April 28, 1998, annual
shareholders meeting are incorporated by reference in Part III.
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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
mid-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 79.69% of the Corporation's total revenues in 1997, 79.82%
in 1996 and 78.05% in 1995. Interest on investment securities accounted for
9.85% of the Corporation's total revenues in 1997, 13.03% in 1996 and 13.95% in
1995.
At December 31, 1997, 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 non-bank 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. The Bank ranks second in deposit
size when compared to the total deposits of the branches located in the market
the Bank serves. The Bank does not believe that its ability to compete for
loans and deposits is affected by the rank among its competitors.
Banks and bank holding companies are extensively regulated. The Bank is
chartered as a state bank under Michigan law and is supervised, examined and
regulated by the Michigan Financial Institutions Bureau and the Federal Deposit
Insurance Corporation ("FDIC"). The business activities of the registrant are
limited to banking and to other activities determined by the Board of Governors
of the Federal Reserve System to be closely related to banking. Deposits of
the Bank are insured by the FDIC to the extent provided by law.
Commercial banks are subject to a number of federal and state laws and
regulations that have a material impact on their business. These include,
among others, state usury laws, state laws relating to fiduciaries, the Truth
in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, the Expedited Funds Availability Act, the Community Reinvestment Act,
electronic funds transfer laws, redlining laws, antitrust laws, environmental
laws and privacy laws. The policies of the Federal Reserve System, and other
authorities, may materially affect the growth and distribution of loans,
investments and deposits and interest rates on deposits and loans.
The FDIC Improvement Act of 1991 (the "FDIC Improvement Act"), revised
sections of the Federal Deposit Insurance Act affecting bank regulation,
deposit insurance and provisions for the funding of the bank insurance fund.
The FDIC Improvement Act also revised bank regulatory structures embodied in
several other federal banking statutes, links the bank
1
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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.
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ITEM 2. PROPERTIES.
The Bank currently conducts business from seven banking offices. 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, 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 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.
The Bank previously operated two supermarket branches located in Ashcraft
Supermarkets in Alma and Midland, Michigan. The Alma supermarket branch was
leased pursuant to a five year lease beginning June 1, 1995 with two five year
renewals. The Midland supermarket branch was leased pursuant to a five year
lease beginning January 1, 1996 with two five year renewals. During 1997, the
Bank elected to close both supermarket branches. The termination of the
leases with Ashcraft involved a lease termination payment deemed by the Bank to
be reasonable compared to normal market practice.
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.
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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, 1997, 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,
1997, 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,
1997, is here incorporated by reference to Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the heading "Quantitative and Qualitative
Disclosures About Market Risk" of the registrant's annual report to
shareholders for the year ended December 31, 1997, 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,
1997, are here incorporated by reference to Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
4
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
registrant's definitive Proxy Statement for its April 28, 1998, annual meeting
of shareholders is here incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Compensation of Executive
Officers" and "Compensation of Directors" in the registrant's definitive Proxy
Statement for its April 28, 1998, 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 28, 1998, 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 28, 1998, annual meeting
of shareholders is here incorporated by reference.
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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' reports of the Corporation and its
subsidiary are filed as part of this report:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income for each of the three years
ended December 31, 1997
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997
Notes to Consolidated Financial Statements
The financial statements, notes to financial statements, and
independent auditors' reports for the years ended December 31, 1997 and
1996, 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, 1997. With the exception of the portions of the
registrant's annual report to shareholders for the year ended December 31, 1997
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. Previously
filed as an exhibit to the registrant's Form 10-K for
the year ended December 31, 1995. Here incorporated
by reference.*
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.
6
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10(g) Branch Lease for Alma Supermarket Branch.
Previously filed as an exhibit to the registrant's Form
10-K for the year ended December 31, 1995. Here
incorporated by reference.
10(h) Branch Lease for Midland Supermarket Branch.
Previously filed as an exhibit to the registrant's Form
10-K for the year ended December 31, 1995. Here
incorporated by reference.
13 Incorporated portions from 1997 Annual Report to
Shareholders.
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 Consents of Independent Certified Public Accountants.
27 Financial Data Schedule.
The registrant will furnish a copy of any exhibit listed above to any
shareholder of the registrant without charge upon written request to Patrick
Duffy, Commercial National Financial Corporation, 101 North Pine River Street,
Ithaca, Michigan 48847.
(b) Reports on Form 8-K.
On November 18, 1997 Commercial National Financial Corporation
filed form 8-k for item 5 indicating that the board of directors
of Commercial National Financial Corporation had appointed Mr.
Jeffrey S. Barker as President and Chief Executive Officer of
CNFC and Commercial Bank.
(c) Exhibits.
See Item 14(a)(3)
(d) Financial Statement Schedules.
There are no financial statement schedules required to be filed
with this report.
7
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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 25, 1998 By: /s/ Jeffrey S. Barker
------------------------------------
Jeffrey S. Barker
President and Chief Executive Officer
8
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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.
March 25, 1998 /s/ Jeffrey S. Barker
---------------------------------------------
Jeffrey S. Barker
Director, President and Chief Executive Officer
(Principal Executive Officer)
March 25, 1998 /s/ Richard F. Abbott
---------------------------------------------
Richard F. Abbott
Director
March 25, 1998 /s/ Jefferson P. Arnold
---------------------------------------------
Jefferson P. Arnold
Director
March 25, 1998 /s/ Don J. Dewey
---------------------------------------------
Don J. Dewey
Director
March 25, 1998 /s/ David A. Ferguson
---------------------------------------------
David A. Ferguson
Director
March 25, 1998 /s/ Kenneth R. Luneack
---------------------------------------------
Kenneth R. Luneack
Director
March 25, 1998 /s/ Kim C. Newson
---------------------------------------------
Kim C. Newson
Director
March 25, 1998 /s/ Howard D. Poindexter
---------------------------------------------
Howard D. Poindexter
Director
March 25, 1998 /s/ Scott E. Sheldon
---------------------------------------------
Scott E. Sheldon
Director
March 25, 1998 /s/ Russell M. Simmet
---------------------------------------------
Russell M. Simmet
Director
March 25, 1998 /s/ Joseph B. Simon
---------------------------------------------
Joseph B. Simon
Director
March 25, 1998 /s/ Patrick G. Duffy
---------------------------------------------
Patrick G. Duffy
(Principal Financial and Accounting Officer)
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\ INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Page
- ------ ------- ----
<S> <C> <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. Previously filed as an exhibit to the *
registrant's Form 10-K for the year ended December 31, 1995. Here incorporated
by reference.
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) Branch Lease for Alma Supermarket Branch. Previously filed as an exhibit *
to the registrant's Form 10-K for the year ended December 31, 1995. Here
incorporated by reference.
10(h) Branch Lease for Midland Supermarket Branch. Previously filed as an *
exhibit to the registrant's Form 10-K for the year ended December 31, 1995.
Here incorporated by reference.
13 Incorporated Portions from 1997 Annual Report to Shareholders. 12
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 Consents of Independent Certified Public Accountants. 13
27 Financial Data Schedule. 14
</TABLE>
- ----------------------
*This exhibit is filed by incorporation by reference to a prior filing.
10
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EXHIBIT 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT FINANCIAL RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 7,354 $ 6,979 $ 6,870 $ 6,450 $ 5,973
Provision for loan losses (395) (230) (250) (230) (105)
Noninterest income 1,099 683 665 718 836
Noninterest expense (5,867) (5,684) (5,126) (4,925) (4,860)
--------- --------- --------- --------- ---------
Income before income tax expense 2,191 1,748 2,159 2,013 1,844
Income tax expense (499) (316) (491) (481) (429)
--------- --------- --------- --------- ---------
Net income $ 1,692 $ 1,432 $ 1,668 $ 1,532 $ 1,415
========= ========= ========= ========= =========
AT YEAR END
Total assets $ 172,405 $ 166,190 $ 151,075 $ 142,875 $ 144,239
Net loans 122,458 120,501 107,611 98,525 100,637
Total deposits 133,947 133,017 129,701 125,090 129,259
FHLB advances 13,000 10,000 - - -
Shareholders' equity 16,883 15,496 14,643 13,458 12,282
FINANCIAL RATIOS
Return on average assets 1.03% 0.92% 1.15% 1.07% 1.00%
Return on average shareholders' equity 10.49 9.41 11.73 11.76 12.58
Average shareholders' equity
to average assets 9.81 9.76 9.79 9.12 7.93
Allowance for loan losses to loans 1.66 1.49 1.53 1.51 1.34
Tier 1 leverage 10.26 9.43 9.43 9.24 8.43
Total risk-based capital 14.73 14.29 14.29 15.23 13.73
Dividend pay-out 69.23 68.37 49.56 47.41 47.20
PER SHARE DATA
Basic earnings $ 1.80 $ 1.57 $ 1.87 $ 1.76 $ 1.67
Diluted earnings 1.80 1.57 1.87 1.76 1.67
Dividends declared 1.24 1.08 .92 .84 .84
Book value, end of year 17.69 16.90 16.30 15.28 14.35
</TABLE>
All per share data adjusted to reflect stock splits and stock dividends.
3.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides further information about the financial
condition and results of operations of Commercial National Financial
Corporation. It should be read in conjunction with the consolidated financial
statements included elsewhere in this Annual Report.
BUSINESS OF COMMERCIAL NATIONAL FINANCIAL CORPORATION
Commercial National Financial Corporation (the Corporation or Commercial), 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 products, including checking, savings, money
market and individual retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the mid-Michigan
communities in which the Bank is located and the areas immediately surrounding
these communities. The Bank serves these markets through seven offices located
in or 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 79.69% of the Corporation's total revenue in 1997, 79.82%
in 1996, and 78.05% in 1995. Interest on investment securities accounted for
9.85% of the Corporation's total revenues in 1997, 13.03% in 1996 and 13.95% in
1995.
1997 HIGHLIGHTS
Net income for the year ended December 31, 1997 was $1,692,110, 18.18% or
$260,358 more than the $1,431,752 earned in the year ended December 31, 1996.
Basic earnings per share increased to $1.80 in 1997 from $1.57 in 1996. The
return on average equity improved to 10.49% from 9.41%. The return on average
assets improved to 1.03% in 1997 from .92% in 1996. The primary reasons for the
improved earnings are as follows: a $375,000 or 5.37% increase in net interest
income, a $416,000 or 60.89% increase in noninterest income, and limiting
noninterest expense to a $182,000 or 3.2% increase. Negatively impacting 1997
earnings were a $547,000 charge to close two supermarket branches, a $165,000
increase in the provision for loan losses and a $184,000 increase in income tax
expense.
4.
<PAGE> 3
The increase in net interest income was the result of an $8.9 million increase
in average earning assets offset by a nine basis point decrease in net interest
margin. The noninterest income increase was the result of improved volume and
pricing of mortgage loan sales and restructured deposit account service charges
and fees. The small increase in noninterest expense occurred despite $547,000
in expenses associated with closing two supermarket branches and expenses
associated with severance packages paid in conjunction with a management
restructuring. Without the branch closing expense, noninterest expense
decreased $365,000 or 6.41% compared to 1996.
Total assets increased to $172.4 million in 1997 from $166.2 million in
1996. This represents a $6.2 million or 3.74% increase. Federal funds sold,
securities and loans all contributed to the $8.9 million or 6.02% increase in
average earning assets. Year end nonearning assets decreased $2.4 million
primarily due to the write-off of fixed assets and reduced cash requirements
related to the supermarket branch closings.
NET INTEREST INCOME
The largest component of Commercial's operating income is net interest income.
Net interest income is the difference between interest and fees earned on
earning assets and the interest paid on deposits and other borrowings. A
number of factors influence net interest income. These factors include:
changes in volume and mix of interest-earning assets and interest-bearing
liabilities, governmental monetary and fiscal policies, national and local
market interest rates and customer preference. Net interest income on a tax
equivalent basis was $7.8 million in 1997, an increase of $311,000 or 4.15%.
Tax equivalent net interest income increased $191,000 or 2.61% in 1996 compared
to 1995. Commercial's annual increases were primarily the result of an
increased volume of earning assets.
Net interest margin is net interest income (fully tax equivalent) divided by
average earning assets. The net interest margin has decreased from 5.31% to
5.09% to 5.00% in 1995, 1996 and 1997, respectively. Commercial continues to
experience competitive pressures on loan and deposit product pricing. This
pressure has negatively impacted the Bank's interest margin. During 1995 and
1996, the Bank engaged in several practices which negatively impacted the
margin. These included the aggressive pricing of indirect automobile lending
and shortening the average life of the U.S. Treasury and Agency securities to
meet short term liquidity needs. The general drop in interest rates and
flattening of the yield curve in the fourth quarter of 1997 has made it
difficult to replace maturing investment securities and indirect auto paper
with comparable or higher yielding investments. We foresee this difficulty of
replacing maturing investments with comparable yields continuing during the
first half of 1998.
5.
<PAGE> 4
The following tables set forth the weighted-average effective interest rate
earned by the Corporation on its loan and investment portfolios, the
weighted-average effective cost of the Corporation's deposits and other
interest-bearing liabilities, the net interest rate spread of the Corporation,
and the net interest margin on weighted-average interest-earning assets for the
periods shown.
<TABLE>
<CAPTION>
Years ended December 31
----------1 9 9 7--------------- --------------1 9 9 6---------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------------ ------------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2) $124,710 $ 11,352 9.10% $114,034 $ 10,471 9.18%
Investment securities
Taxable 11,689 668 5.71 15,317 956 6.24
Tax-exempt (2) 13,462 1,098 8.16 13,861 1,105 7.97
Federal funds sold 5,046 275 5.45 3,418 186 5.44
Federal Home Loan Bank stock 1,315 105 7.98 724 57 7.87
-------- -------- -------- --------
Total interest-earning assets 156,222 13,498 8.64 147,354 12,775 8.67
Non-earning assets:
Cash and due from banks 4,828 4,703
Premises and equipment, net 3,658 3,827
Other assets 1,650 1,689
Allowance for loan losses (1,932) (1,764)
-------- --------
Total assets $164,426 $155,809
======== ========
Interest-bearing liabilities:
Interest-bearing deposits
Interest-bearing demand $37,408 1,016 2.72 $ 35,033 923 2.63
Savings 21,944 579 2.64 24,061 650 2.70
Time 55,468 3,079 5.55 54,944 3,092 5.63
Securities sold under agreements
to repurchase 5,777 305 5.28 5,911 294 4.97
U.S. Treasury demand notes 557 30 5.39 569 35 6.15
Federal Home Loan Bank advances 11,225 680 6.06 5,063 283 5.59
-------- -------- -------- --------
Total interest-bearing liabilities 132,379 5,689 4.30 125,581 5,277 4.20
Noninterest-bearing liabilities:
Noninterest-bearing demand 14,798 13,928
Other liabilities 1,111 1,092
Shareholders' equity 16,138 15,208
-------- --------
Total liabilities and
shareholders' equity $164,426 $155,809
======== ========
Net interest income/interest rate
spread $ 7,809 4.34% $ 7,498 4.47%
======== ======= ======== ======
Net interest margin (3) 5.00% 5.09%
======= ======
</TABLE>
(1) Average outstanding balances include non-accruing loans. Interest on
loans receivable includes fees. The inclusion of nonaccrual loans and
fees does not have material effect on either the average outstanding
balance or the average yield.
(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%.
(3) Net interest earnings divided by average interest-earning assets.
6.
<PAGE> 5
The following table sets forth an analysis of interest differential, including
the effect of volume and rate changes on interest income and expense for the
periods indicated. For purposes of these tables, changes in interest due to
volume and rate were determined as follows:
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>
<CAPTION>
Years ended December 31,
1 9 9 7 1 9 9 6
---------------------- ------------
------------------Compared to 1996--------------- -----------Compared to 1995-----
Net Amount Amount Net Amount Amount
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 receivable (1) (2) $ 881 $ 973 $ (92) $ 715 $ 908 $ (193)
Investment securities:
Taxable (288) (212) (76) (175) (161) (14)
Tax-exempt (2) (7) (32) 25 217 301 (84)
Federal funds sold 89 89 - (126) (112) (14)
Federal Home Loan Bank stock 48 47 1 57 57
---------- ---------- ---------- --------- ----------- ------
Total interest income 723 865 (142) 688 993 (305)
Interest expense:
Interest-bearing deposits
Interest-bearing demand 93 64 29 31 46 (15)
Savings (71) (56) (15) (105) (56) (49)
Time (13) 29 (42) 275 188 87
Securities sold under
agreements to repurchase 11 (7) 18 21 52 (31)
U.S. Treasury demand notes (5) (1) (4) (8) (6) (2)
Federal Home Loan Bank
advances 397 371 26 283 283 -
---------- ---------- ---------- --------- ----------- ------
Total interest expense 412 400 12 497 507 (10)
---------- ---------- ---------- --------- ----------- ------
Net interest income $ 311 $ 465 $ (154) $ 191 $ 486 $ (295)
========== ========== ========== ========= =========== ======
</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%.
7.
<PAGE> 6
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount added to the allowance for loan
losses to absorb losses that are currently anticipated. The loan loss
provision is based on historical loss experience and such other factors which,
in management's judgment, deserve current recognition in maintaining an
adequate allowance for loan losses. The provision for loan losses was $395,000
in 1997 compared to $230,000 and $250,000 in 1996 and 1995, respectively. The
provision was increased during 1997 to maintain an allowance for loan losses to
total loan ratio above 1.50%. The allowance for loan losses to total loan
ratio was 1.66%, 1.49% and 1.53% for 1997, 1996 and 1995 respectively. Several
large loan payoffs received in the fourth quarter of 1997 also helped improve
the allowance for loan losses to total loan ratio.
NONINTEREST INCOME
Noninterest income was $1,099,000 for the year ended December 31, 1997. This
represents a $416,000 or 60.89% increase over 1996. In 1996, noninterest income
increased $19,000 or 2.81% compared to 1995. The increase in noninterest income
is primarily attributed to three factors: a general increase in service
charges on deposit accounts, the addition of several new deposit account
service charges, increased gains on sales of mortgage loans sold to the Federal
Home Loan Mortgage Corporation (Freddie Mac) and the addition of gains on sales
of government guaranteed loans.
The increase in other deposit related service charges and fees merely aligned
the Bank's service charge structure with local competitors. The new deposit
fees included activity charges on high-volume low-balance corporate
accounts, and the surcharging for foreign ATM transactions. The improvement in
Freddie Mac loan sale gains was the result of better pricing of mortgage
products and increased origination volume. The Bank also tested the secondary
market for government guaranteed commercial loans. These sales were conducted
to identify an additional source of liquidity and fee income. The following
table identifies the major sources of noninterest income and the change for
1997, 1996 and 1995.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Service charge and fees $ 429 $ 292 $ 213
Net gains on sales of mortgage loans 178 21 23
Net gains on sales of government
guaranteed loans 42 - -
Other 450 370 429
-------- -------- --------
Total noninterest income $ 1,099 $ 683 $ 665
======== ======== ========
</TABLE>
8.
<PAGE> 7
NONINTEREST EXPENSE
In the second quarter of 1997, management began the process of restructuring
the Bank to improve overall efficiency and performance. Part of this process
included the review of branch performance, reduction of full time equivalents
and the instituting of tighter controls over overhead costs. Noninterest
expense increased $182,000 or 3.20% over 1996. This small increase in
noninterest expense occurred despite $547,000 in expenses associated with
closing two supermarket branches and expenses associated with severance
packages paid in conjunction with a management restructuring. Without the
branch closing expense, noninterest expense decreased $365,000 or 6.41%
compared to 1996.
Full time equivalents (FTE's) were reduced from 95 at December 31, 1996 to 69
at December 31, 1997. This reduction was the result of a general staff
reduction and hiring freeze, and the closing of two supermarket branches.
Management intends to maintain staffing levels below 75 FTE's. This reduction
helped decrease salaries and employee benefits expense as a percentage of
average assets to 1.53% from 1.84% in 1996 and 1.76% in 1995. This reduction
would have been greater without the severance packages paid.
In the second quarter of 1997, the Corporation recorded a one time charge
associated with closing two supermarket branches located in Alma and Midland
Michigan. Approximately $487,000 of the $547,000 charge related to the
disposal of leasehold improvements deemed to have negligible residual value.
The branches had not demonstrated an ability to generate a sufficient volume of
loans or attract deposits sufficient to warrant continued operation. The
closing of the two branches helped reduce full time equivalents and related
salary and benefit costs, occupancy costs, other insurance, advertising and
other expenses.
Management also reviewed other fixed assets for impairment. As a result of
this review, approximately $40,000 in fixed assets were deemed impaired and
disposed of or written off. This review also caused management to reduce the
estimated useful life of several technology related assets. The effect of the
useful life changes occurred in the fourth quarter of 1997 and is reflected in
the increase of $127,000 or 21.34% increase in 1997 furniture and equipment
expense over 1996. The $197,000 or 49.11% increase in 1996 furniture and
equipment expense over 1995, related to the increased cost of maintaining a
large investment in imaging equipment, computers, laser printers and other
technology related assets. The effects of these changes in useful lives will
also negatively impact depreciation expense by approximately $39,000 per
quarter in 1998.
9.
<PAGE> 8
Printing, postage and supplies expense decreased by $125,000 or 28.76% as a
result of better ordering practices, improved inventory management and a
general decrease in the need for supplies due to the closing of the two
branches and the general staff reduction.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Salaries $2,057,875 $2,282,844 $2,067,142
Employee benefits 458,821 582,747 499,733
Occupancy 264,329 288,689 282,869
Furniture and equipment 724,884 597,391 400,633
Credit card processing 127,931 109,492 110,496
FDIC insurance 9,925 125,619 149,509
Other taxes 86,802 82,006 111,399
Printing and supplies 213,599 341,825 220,543
Postage 96,119 92,902 83,516
Telephone 109,688 120,599 102,457
Advertising 64,530 69,061 88,148
Other insurance 44,337 55,669 65,067
Branch closing costs 546,614 - -
Professional fees 214,636 219,615 208,190
Other expenses 846,538 716,099 735,998
---------- ---------- ----------
Total noninterest expense $5,866,628 $5,684,558 $5,125,700
========== ========== ==========
Key Ratios
Efficiency Ratio 65.88 69.48 64.22
========== ========== ==========
Noninterest expense as percentage
of average assets 3.57% 3.65% 3.52%
========== ========== ==========
Salaries and employee benefits as a
percentage of average assets 1.53% 1.84% 1.76%
========== ========== ==========
</TABLE>
INCOME TAX EXPENSE
Commercial's income tax expense was $500,000 in 1997 compared to $316,000 in
1996 and $491,000 in 1995. The increase from 1996 to 1997 was primarily the
result of increased income before income tax, and a reduction of tax-exempt
interest income. The statutory federal tax rate during 1997, 1996 and 1995 was
34%. The Corporation's effective tax rate was lower than the statutory rate in
all three years, primarily due to tax-exempt interest income. The reduction in
tax-exempt income in relation to taxable income caused the effective tax rate
to increase to 22.80% in 1997 from 18.08% in 1996. The effective tax rate in
1995 was 22.74%.
10.
<PAGE> 9
INVESTMENT PORTFOLIO
The Bank's Asset/Liability Management Committee (Committee) is responsible for
developing investment guidelines and strategies. The Committee relies on the
expertise of an investment advisor to select appropriate investments for the
portfolio. The Committee does not invest in derivative securities. Commercial
holds no securities considered to be impaired at December 31, 1997. As of
December 31, 1997, the aggregate book value of investment securities issued by
the State of Michigan and all its political subdivisions totaled $9.5 million
with an aggregate market value of $9.9 million.
During 1997, the Committee elected to identify securities purchased as
available for sale. The available for sale classification will allow
management more flexibility in managing interest rate risk and liquidity.
Under most interest rate environments, management will be able to lengthen the
maturities of securities to improve yields without sacrificing liquidity.
Previous management identified all securities as held to maturity, and as a
result, structured most to mature within two years. The difference in the two
approaches is demonstrated in the tables below. All U.S. Government Treasury
and agency securities in the held to maturity category mature within two years.
This has the effect of increasing the Bank's volatility to sudden shifts in
market interest rates. The U.S. Government Treasury and agency securities
identified as available for sale are laddered to mature more evenly over ten
years. This should improve the predictability of the performance of the
investment portfolio. The Committee has also attempted to increase the dollars
invested in securities to provide additional liquidity and collateral to be
used for various pledging requirements.
Management is currently faced with the challenge of replacing maturing
securities in a low rate environment with a particular flat yield curve. The
high percentage of securities maturing during 1998 will make it difficult to
maintain the current yield on the investment portfolio.
The book value of investment securities, as of the dates indicated, are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------1 9 9 7------- --------1 9 9 6------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
--------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries $ 1,999 $ 3,981 $ - $ 6,997
U.S. Government agencies 5,034 2,016 - 4,176
State and municipals - 12,417 - 14,160
Other securities 1,403 1,969 - -
--------- -------- -------- --------
Total $ 8,436 $ 20,383 $ - $ 25,333
========= ======== ======== ========
</TABLE>
11.
<PAGE> 10
The following table shows, by class of maturities as of December 31, 1997, the
amounts and weighted-average yields by maturity period:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------------------------------- MATURING----------------------------------------
Within After One But After Five But After
One Within Five Within Ten Ten
Year Years Years Years Total
(Dollars in thousands)
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------- ----- ------- ------- ----------- --------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 1,999 5.92% $ - - $ - - $ - - $ 1,999 5.92%
US. Government
agencies 1,990 5.64 2,008 6.01 1,036 6.00% - - 5,034 5.86
Other securities 995 6.12 408 6.18 - - - - 1,403 6.14
--------- ------- ----------- ------ --------
Total $ 4,984 5.85 $ 2,416 6.04 $ 1,036 6.00 $ - - $ 8,436 5.92
========= ======= =========== ====== ========
HELD TO MATURITY
U.S. Treasuries $ 3,981 7.12% $ - - $ - - $ - - $ 3,981 7.12%
US. Government
agencies 1,013 7.23 1,003 5.80% - - - - 2,016 6.52
State and
municipal (1) 1,223 6.63 5,432 5.43 5,582 5.30% 180 6.33% 12,417 5.50
Other securities 1,969 5.86 - - - - - - 1,969 5.86
--------- ------- ----------- ------ --------
Total $ 8,186 6.76 $ 6,435 5.49 $ 5,582 5.30 $ 180 6.33 $ 20,383 5.95
========= ======= =========== ====== ========
</TABLE>
(1) Yields on tax-exempt securities are not computed on a fully
taxable-equivalent basis.
LOAN PORTFOLIO
Commercial's management understands that credit risk is a fundamental element
of its business. Conservative lending philosophies supported by comprehensive
policies and administrative functions help the Bank's lenders adhere to strict
credit underwriting standards. Lending efforts are concentrated primarily in
the Michigan communities in which Commercial's branches are located and are
focused on maintaining a diversified loan portfolio of commercial, real estate
and consumer loans. The Bank has no foreign loans and exposures to any single
borrower, as well as industry concentrations, are continually monitored by
management.
Total loans increased $2.2 million or 1.80% from year-end 1996 to 1997.
Commercial, real estate-construction and real estate-mortgage all increased
during 1997 as a result of strong demand and a stable economy. Commercial,
financial and agricultural loans increased $1.4 million or 2.17% in 1997. Real
estate-construction and real estate-mortgage loans increased $2.0 million or
52.71% and $1.9 million or 5.68% in 1997, respectively. The relatively low
interest rate environment experienced throughout 1997 made it advantageous to
sell the majority of all fixed rate loans originated during the year to the
secondary market. The Bank originated approximately $11.0 million of mortgage
loans for sale to the secondary market in 1997, which compared to approximately
$4.2 million in 1996.
12.
<PAGE> 11
Consumer and other loans decreased $3.2 million or 16.54%. Previous management
aggressively priced and marketed indirect automobile paper. This lead to
strong growth in the consumer loan portfolio in prior years. An analysis of
the quality and profitability of the indirect paper in the second quarter of
1997 resulted in the conclusion that the indirect market was both not very
profitable and posed unnecessary underwriting risk to the Bank. The Bank's
exit from this market was the contributing factor to the decline in the
consumer and other loan totals. The Bank has also reduced lending authorities
and tightened credit underwriting standards to maintain credit quality. The
following table presents the amount of loans outstanding by loan type:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 67,606 $ 66,170
Real estate - construction 5,864 3,840
Real estate - mortgage 35,144 33,256
Consumer and other 15,907 19,059
-------- --------
Total loans $124,521 $122,325
======== ========
</TABLE>
The following table shows the maturity of loans (excluding real estate-mortgage
and consumer and other loans) outstanding at December 31, 1997. Also provided
are the amounts due after one year classified according to their sensitivity to
changes in interest rates.
<TABLE>
<CAPTION>
Due Due
Due After One After Five
Within But Within But Within
One Year Five Years Ten Years Total
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 20,060 $ 32,355 $ 15,191 $67,606
Real estate - construction 3,472 1,420 972 5,864
-------- ---------- ---------- -------
Total $ 23,532 $ 33,775 $ 16,163 $73,470
======== ========== ========== =======
Loans due after one year:
Fixed rate $ 27,998
Floating or adjustable rate 21,940
----------
Total $ 49,938
==========
</TABLE>
13.
<PAGE> 12
ASSET QUALITY
Management believes that a conservative credit culture is critical to
successful Bank performance. Through Officer and Director Loan Committees,
management reviews and monitors the quality of the various loan portfolios.
Low interest rates and a strong local economy have contributed to an ideal
lending environment. Management has also taken steps to reduce credit risk
during 1997 by exiting the indirect automobile market and by restructuring
credit authorities. The following table summarizes nonaccrual, past due and
restructured loans:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ - $ -
Accruing loans past due 90 days or more - 82
Other real estate owned - 55
Restructured loans $ 15 60
----------- -----------
Total nonperforming assets $ 15 $ 197
=========== ===========
Total nonperforming assets as a percentage of total loans .01% .16%
=========== ===========
</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, 1997, the Bank had $1,902,000 in domestic loans for which
payments are presently current, but the borrowers are experiencing financial
difficulties. Those loans are subject to ongoing management attention and
their classification is reviewed on a regular basis.
As of December 31, 1997, there were no concentrations of loans exceeding 10% of
total loans.
14.
<PAGE> 13
ALLOWANCE FOR LOAN LOSSES
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>
Years ended December 31,
1997 1996
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Loans
Amount of loans outstanding at end of year $ 124,521 $ $122,325
============ ============
Daily average of loans outstanding for the year $ 124,710 $ 114,034
============ ============
Balance of allowance for loan losses at beginning of year $ 1,824 $ 1,669
Loans charged off:
Commercial, financial and agricultural (44) (33)
Real estate - mortgage - (27)
Consumer and other (234) (115)
------------ ------------
Total loans charged off (278) (175)
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 50 68
Real estate - mortgage 9 10
Consumer and other 64 22
------------ ------------
Total recoveries 123 100
------------ ------------
Net charge-offs (155) (75)
Provision for loan losses (1) 395 230
------------ ------------
Allowance at end of period $2,064 $1,824
============ ============
Ratio of net charge-offs during period
to average loans outstanding during the period .12% .07%
============ ============
Ratio of allowance for loan losses to
loans outstanding at end of period 1.66% 1.49%
============ ============
</TABLE>
(1) The provision for loan losses charged to expense is based on loan loss
experience and 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.
15.
<PAGE> 14
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 as follows:
<TABLE>
<CAPTION>
December 31,
1 9 9 7 1 9 9 6
---------------------- ---------------------
Percent Percent
of Loans of Loans
to Total to Total
Allowance Loans Allowance Loans
--------- ----------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 704 54.29% $ 713 54.09%
Real estate - construction - 4.71 - 3.14
Real estate - mortgage 89 28.22 72 27.19
Consumer and other 512 12.78 413 15.58
Unallocated 759 - 626 -
--------- ----------- ----------- --------
Total $ 2,064 100.00% $ 1,824 100.00%
========= =========== =========== ========
</TABLE>
LIQUIDITY
Liquidity is generally defined as the ability to meet cash flow needs of
customers for loans and deposit withdrawals. To meet cash flow requirements,
sufficient resources of liquid funds must be available. These sources include
short-term investments, repayments of loans, maturities and calls securities,
sales of assets, growth in deposits and other liabilities and Bank profits. At
December 31, 1997, the Bank had $9.6 million in federal funds sold and $8.4
million in securities classified as available for sale. The Bank also has $2
million of additional borrowing capacity at the Federal Home Loan Bank and $3
million of borrowing capacity with correspondent banks. In addition, during
1997, the Bank generated $3.1 million in cash from operating activities. All
of these sources are available to meet cash flow needs of loan and deposit
customers.
The Corporation also needs cash to pay dividends to its shareholders. The
primary source of cash is the dividends paid to the parent by the Bank.
Management believes that cash from operations is sufficient to supply the cash
needed to continue paying a reasonable dividend.
CAPITAL RESOURCES
At December 31, 1997, the capital of the Corporation totaled $16.9 million.
Management monitors the capital levels of the Corporation and the Bank to
provide for current and future business opportunities and to meet regulatory
guidelines for "well capitalized" institutions. "Well capitalized"
institutions are eligible for reduced FDIC premiums, and also enjoy other
reduced regulatory restrictions. At December 31, 1997, the Corporation and the
Bank exceeded all regulatory minimum capital requirements and are considered to
be "well capitalized".
16.
<PAGE> 15
ASSET LIABILITY MANAGEMENT
Asset liability management involves developing, implementing and monitoring
strategies to maintain sufficient liquidity, maximize net interest income and
minimize the impact that significant fluctuations in market interest rates
would have on earnings. Commercial's Asset/Liability Committee is responsible
for managing the process. One method of gauging sensitivity is by completing a
static gap analysis. Commercial's static gap position at December 31, 1997 is
illustrated in the following table:
<TABLE>
<CAPTION>
0-90 days 91-365 days 1-5 years Over 5 years Total
--------- ----------- -------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 9,600 $ - $ - $ - $ 9,600
Securities 4,978 8,192 8,852 6,798 28,820
Loans receivable 46,288 16,493 46,683 15,057 124,521
Federal Home Loan Bank stock 1,391 - - - 1,391
--------- ----------- -------------- ------------ ---------
Total interest-earning assets 62,257 24,685 55,535 21,855 164,332
INTEREST-BEARING LIABILITIES:
Demand deposits 37,234 - - - 37,234
Savings deposits 20,366 - - - 20,366
Time deposits 10,766 25,920 21,992 567 59,245
Securities sold under agreements
to repurchase 4,152 - - - 4,152
U.S. Treasury demand notes 2,753 - - - 2,753
Federal Home Loan Bank advances 1,000 4,000 8,000 - 13,000
--------- ----------- -------------- ------------ ---------
Total interest-bearing liabilities 76,271 29,920 29,991 567 136,749
--------- ----------- -------------- ------------ ---------
Asset (liability) gap $ (14,014) $ (5,235) $ 25,544 $ 21,288 $ 27,583
========= =========== ============== ============ =========
Cumulative asset (liability) gap $ (14,014) $ (19,249) $ 6,295 $ 27,583
========= =========== ============== ============
</TABLE>
As shown, Commercial had a $19.2 million cumulative liability gap position
within the one year timeframe. This implies that if interest rates drop, the
Bank has the potential to earn more net interest income. However, there are
limitations to the static gap model. Demand and savings accounts are shown to
reprice within 90 days. Experience has shown that these categories are
relatively insensitive to changes in interest rates. The static gap also does
not consider the timing or magnitude of non-contractual repricing. For
example, in a falling rate environment, loan customers will refinance existing
loans at lower rates without regard for the contractual maturity of the loan
agreement. Taking into account the effect of interest rate sensitivity and
other factors, management believes that the Bank's margin is exposed to
decreases in interest rates. Margin has decreased since 1995 from 5.31% to
5.09% in 1996 to 5.00% in 1997. A goal of the Asset/Liability Committee is to
reduce the exposure to decreasing interest rates.
17.
<PAGE> 16
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commercial's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Corporation's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. The
Corporation has a limited exposure to commodity prices related to agricultural
loans. Any impacts that changes in foreign exchange rate and commodity prices
would have on interest rates are assumed to be insignificant.
Interest rate risk (IRR) is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be
an important source of profitability and stockholder value; however, excessive
levels of IRR could pose a significant threat to the Corporation's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Corporation's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Corporation seeks to ensure that appropriate
policies, procedures, management information systems and internal controls are
in place to maintain IRR at prudent levels with consistency and continuity.
Evaluating the quantitative level of IRR exposure requires the Corporation to
assess the existing and potential future effects of changes in interest rates
on its consolidated financial condition, including capital adequacy, earnings,
liquidity, and, where appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency
Policy Statement on IRR effective June 26, 1996. The policy statement provides
guidance to examiners and bankers on sound practices for managing IRR, which
will form the basis for ongoing evaluation of the adequacy of IRR management at
supervised institutions. The policy statement also outlines fundamental
elements of sound management that have been identified in prior Federal Reserve
guidance and discusses the importance of these elements in the context of
managing IRR. Specifically, the guidance emphasizes the need for active board
of director and senior management oversight and a comprehensive risk management
process that effectively identifies, measures and controls IRR.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it
cannot adapt to interest rate changes. For example, assume that an
institution's assets carry intermediate or long term fixed rates and that those
assets are funded with short-term liabilities. If market interest rates rise
by the time the short-term liabilities must be refinanced, the increase in the
institution's interest expense on its liabilities may not be sufficiently
offset if assets continue to earn at the long-term fixed rates. Accordingly,
an institution's profits could decrease on existing assets because the
institution will either have lower net interest income or possibly, net
interest expense. Similar risks exist when assets are subject to contractual
interest rate ceilings, or rate sensitive assets are funded by longer-term,
fixed-rate liabilities in a decreasing rate environment.
18.
<PAGE> 17
Various techniques might be used by an institution to minimize IRR. One
approach used by the Corporation is to periodically analyze its assets and
liabilities and make future financing and investment decisions based on payment
streams, interest rates, contractual maturities, and estimated sensitivity to
actual or potential changes in market interest rates. Such activities fall
under the broad definition of asset/liability management. The Corporation's
primary asset/liability management technique is the measurement of its
asset/liability gap. That is, the difference between the cash flow amounts of
interest-sensitive assets and liabilities that will be refinanced or repriced
during a given period. For example, if the asset amount to be repriced exceeds
the corresponding liability amount for a certain day, month, year, or longer
period, the institution is in an asset-sensitive gap position. In this
situation, net interest income would increase if market interest rates rose or
decrease if market interest rates fell. If, alternatively, more liabilities
than assets will reprice, the institution is in a liability-sensitive position.
Accordingly, net income would decline when rates rose and increase when rates
fell. Also, these examples generally differ in magnitude for assets and
liabilities.
Several ways an institution can manage IRR include: selling existing assets or
repaying certain liabilities; matching repricing periods for new assets and
liabilities, for example, by shortening terms of new loans or investments and
hedging existing assets, liabilities, or anticipated transactions. An
institution might also invest in more complex financial instruments intended to
hedge or otherwise change IRR. Interest rate swaps, futures contracts, options
on futures, and other such derivative financial instruments are often used for
this purpose. Because these instruments are sensitive to interest rate
changes, they require management's expertise to be effective. The Corporation
has not purchased derivative financial instruments in the past and does not
presently intend to purchase such instruments.
Financial institutions are also subject to repayment risk in falling rate
environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refinance its obligations at new,
lower rates. Prepayments of assets carrying higher rates reduce the
Corporation's interest income and overall asset yields. Certain portions of an
institution's liabilities may be short-term or due on demand, while most of its
assets may be invested in long-term loans or investments. Accordingly, the
Corporation seeks to have in place sources of cash to meet short-term demands.
These funds can be obtained by increasing deposits, borrowing or selling
assets. Also, Federal Home Loan Bank advances and short-term borrowings
provide additional sources of liquidity for the Corporation.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. The Corporation had no derivative financial instruments, or trading
portfolio, as of that date. The expected maturity date values for loans
receivable, mortgage-backed securities and investment securities were
calculated without adjusting the instrument's contractual maturity date for
expectations of prepayments. Expected maturity date values for
interest-bearing core deposits were not based upon estimates of the period over
which the deposits would be outstanding, but rather the opportunity for
repricing.
19.
<PAGE> 18
<TABLE>
<CAPTION>
Principal/Notional Amount Maturing in:
Fair
Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
---- ---- ---- ---- ---- ---------- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Federal funds sold $ 9,600 $ - $ - $ - $ - $ - $ 9,600 $ 9,600
Average interest rate 5.75% - - - - - 5.75%
Fixed interest rate
securities 13,170 3,175 2,770 1,285 1,665 6,755 28,820 29,283
Average interest rate 6.19% 7.15% 6.97% 7.14% 7.01% 5.65% 6.33%
FHLB stock 1,391 - - - - - 1,391 1,391
Average interest rate 8.07% - - - - - 8.07%
Fixed interest rate loans 11,338 8,140 15,027 13,174 10,201 14,982 72,862 73,018
Average interest rate 10.06% 9.24% 9.32% 8.22% 8.51% 8.02% 8.85%
Variable interest rate loans 17,776 2,554 4,447 4,852 5,477 16,553 51,659 51,659
Average interest rate 9.13% 9.78% 9.69% 9.57% 9.45% 8.84% 9.19%
RATE SENSITIVE LIABILITIES
Interest-bearing demand 37,234 - - - - - 37,234 37,234
Average interest rate 2.72% - - - - - 2.72%
Savings 20,366 - - - - - 20,366 20,366
Average interest rate 2.64% - - - - - 2.64%
Time deposits 36,686 15,338 3,615 1,837 1,202 567 59,245 59,414
Average interest rate 5.03% 5.01% 5.22% 5.33% 4.64% 5.30% 5.04%
Variable interest rate
securities sold under
agreements to repurchase 4,152 - - - - - 4,152 4,152
Average interest rate 5.29% - - - - - 5.29%
Variable interest rate U.S.
Treasury demand notes 2,753 - - - - - 2,753 2,753
Average interest rate 5.27% - - - - - 5.27%
Fixed interest rate FHLB
advances 4,000 3,000 4,000 1,000 - - 12,000 11,968
Average interest rate 6.01% 6.19% 6.35% 6.59% - - 6.22%
Variable interest rate FHLB
advances 1,000 - - - - - 1,000 1,000
Average interest rate 5.35% - - - - - 5.35%
</TABLE>
YEAR 2000 ISSUES
Commercial is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Year 2000 will
affect virtually every computer operation in some way by the rollover of the
two digit value used to represent the year to 00. The issue is whether
computer software will properly recognize the date-sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system failure.
20.
<PAGE> 19
Commercial recognizes the need to ensure that its operation will not be
adversely impacted by Year 2000 software failures. Commercial has established
a process for evaluating and managing risks associated with this issue. This
process includes the formation of a Technology Committee comprised of
management and independent members of the Board of Directors to ensure that
progress is made in identifying noncompliant systems and developing appropriate
responses to correct the deficiencies. Management is in the process of
obtaining software and hardware vendor representation that their computer
systems are Year 2000 compliant and is planning to test for compliance. We
anticipate that all major computer systems will be compliant by December 31,
1998. The financial impact to Commercial of preparing for the Year 2000 cannot
be accurately estimated as of December 31, 1997.
FORWARD LOOKING STATEMENTS
This discussion and analysis of financial condition and results of operations
and other sections of this Annual Report contain forward looking statements
that are based on management's beliefs, assumptions, current expectations,
estimates and projections about the financial services industry, the economy
and about the Corporation itself. Words such as "anticipates", "believes",
"estimates", "expects", "forecasts", "foresee", "intends", "is likely",
"plans", "product", "projects", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to predict
with regard to timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed or
forecasted in such forward looking statements. Furthermore, Commercial
undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulations;
changes in tax laws; changes in prices, levies and assessments; the impact of
technology, governmental and regulatory policy changes; the outcome of pending
and future litigation and contingencies; trends in customer behavior as well as
their ability to repay loans and changes of the national and local economies.
These are representative of the Future Factors that could cause a difference
between an ultimate actual outcome and a preceding forward-looking statement.
21.
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Commercial National Financial Corporation
Ithaca, Michigan
We have audited the accompanying consolidated balance sheets of Commercial
National Financial Corporation as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The consolidated financial
statements of Commercial National Corporation as of and for the year ended
December 31, 1995, were audited by other auditors whose report dated January
17, 1996, expressed an unqualified opinion on those statements.
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 financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall 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 as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 6, 1998
22.
<PAGE> 21
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,576,724 $ 6,550,844
Federal funds sold 9,600,000 6,600,000
------------ ------------
Total cash and cash equivalents 15,176,724 13,150,844
Securities available for sale 8,436,349 -
Securities held to maturity (fair value
$20,847,000 - 1997; $25,484,000 - 1996) 20,383,446 25,333,185
Federal Home Loan Bank stock, at cost 1,391,300 1,262,400
Loans receivable, net of allowance for loan losses
$2,063,668 - 1997; $1,824,080 - 1996 122,457,789 120,501,244
Premises and equipment, net 3,188,743 4,047,374
Accrued interest receivable and other assets 1,370,472 1,895,302
------------ ------------
Total assets $172,404,823 $166,190,349
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 17,102,386 $ 17,110,034
Interest-bearing demand 37,233,745 36,009,919
Savings 20,365,980 21,379,089
Time 59,244,780 58,517,780
------------ ------------
Total deposits 133,946,891 133,016,822
Securities sold under agreements to repurchase 4,151,844 5,602,246
U.S. Treasury demand notes 2,753,486 941,968
Federal Home Loan Bank advances 13,000,000 10,000,000
Accrued expenses and other liabilities 1,669,460 1,133,650
------------ ------------
Total liabilities 155,521,681 150,694,686
Shareholders' equity
Common stock, $1 par value: 1,750,000 shares
authorized; shares issued and outstanding
1997 - 954,322 and 1996 - 872,982 954,322 872,982
Additional paid-in capital 15,277,539 13,123,259
Retained earnings 647,697 1,499,422
Net unrealized gain on securities available
for sale, net of tax 3,584 -
------------ ------------
Total shareholders' equity 16,883,142 15,495,663
------------ ------------
Total liabilities and shareholders' equity $172,404,823 $166,190,349
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
23.
<PAGE> 22
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $11,269,750 $10,328,228 $ 9,612,355
Taxable securities 667,930 956,006 1,131,274
Nontaxable securities 725,491 729,396 586,065
Federal funds sold 274,965 185,564 320,709
Federal Home Loan Bank stock dividends 105,098 56,982 -
----------- ----------- -----------
Total interest and dividend income 13,043,234 12,256,176 11,650,403
Interest expense
Deposits 4,674,419 4,665,374 4,464,310
Securities sold under agreements to repurchase 305,330 293,689 278,230
Federal Home Loan Bank advances 680,023 283,428 -
Other 29,504 34,715 38,015
----------- ----------- -----------
Total interest expense 5,689,276 5,277,206 4,780,555
----------- ----------- -----------
NET INTEREST INCOME 7,353,958 6,978,970 6,869,848
Provision for loan losses 395,000 230,000 250,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,958,958 6,748,970 6,619,848
Noninterest income
Service charges and fees 429,349 291,903 212,759
Net gains on loan sales 219,935 21,307 23,364
Other 450,146 370,130 428,553
----------- ----------- -----------
Total noninterest income 1,099,430 683,340 664,676
Noninterest expense
Salaries and employee benefits 2,516,696 2,865,591 2,566,875
Occupancy and equipment 989,213 886,080 683,502
FDIC insurance 9,925 125,619 149,509
Branch closing costs 546,614 - -
Printing, postage and supplies 309,718 434,727 304,059
Professional and outside services 214,636 219,615 208,190
Other 1,279,826 1,152,926 1,213,565
----------- ----------- -----------
Total noninterest expense 5,866,628 5,684,558 5,125,700
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 2,191,760 1,747,752 2,158,824
Income tax expense 499,650 316,000 491,000
----------- ----------- -----------
NET INCOME $ 1,692,110 $ 1,431,752 $ 1,667,824
=========== =========== ===========
Per share information
Basic earnings $ 1.80 $ 1.57 $ 1.87
Diluted earnings $ 1.80 $ 1.57 $ 1.87
Dividends declared $ 1.24 $ 1.08 $ .92
</TABLE>
See accompanying notes to consolidated financial statements.
24.
<PAGE> 23
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain on
Securities
Additional Available Total
Common Paid-in Retained For Sale, Shareholders'
Stock Capital Earnings Net of Tax Equity
--------- ------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 760,827 $ 10,366,225 $ 2,330,865 $ - $ 13,457,917
Net income - - 1,667,824 - 1,667,824
Cash dividends declared,
$.92 per share - - (826,530) - (826,530)
Stock issued in payment of 5%
stock dividend 38,623 926,970 (968,878) - (3,285)
Stock issued under dividend
reinvestment program 11,612 264,183 - - 275,795
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
Net income - - 1,431,752 - 1,431,752
Cash dividends declared,
$1.08 per share - - (978,958) - (978,958)
Stock issued in payment of 5%
stock dividend 41,457 1,111,867 (1,156,653) - (3,329)
Stock issued under dividend
reinvestment program 11,852 284,678 - - 296,530
Stock issued under stock
option plans 4,995 102,149 - - 107,144
Repurchase of 6 shares (6) (158) - - (164)
---------- ------------ ----------- ---------- ---------------
BALANCE AT DECEMBER 31, 1996 872,982 13,123,259 1,499,422 - 15,495,663
Net income - - 1,692,110 - 1,692,110
Cash dividends declared,
$1.24 per share - - (1,171,442) - (1,171,442)
Stock issued in payment of 5%
stock dividend 45,246 1,323,423 (1,372,393) - (3,724)
Stock issued under dividend
reinvestment program 14,839 375,900 - - 390,739
Stock issued under stock option
plans 21,255 454,957 - - 476,212
Net change in unrealized gain on
securities available for sale, net
of tax - - - 3,584 3,584
---------- ------------ ----------- ---------- ---------------
BALANCE AT DECEMBER 31, 1997 $ 954,322 $ 15,277,539 $ 647,697 $ 3,584 $ 16,883,142
========== ============ =========== ========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
25.
<PAGE> 24
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,692,110 $ 1,431,752 $ 1,667,824
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan losses 395,000 230,000 250,000
Net gains on loan sales (219,935) (21,307) (23,364)
Originations of loans held for sale (11,069,099) (4,164,440) (4,916,388)
Proceeds from sales of loans held for sale 10,898,784 4,185,747 4,939,752
Depreciation, amortization and accretion 404,668 579,699 481,748
Deferred federal income taxes (12,846) (10,000) 8,000
Net change in accrued interest receivable
and other assets 501,060 (229,718) 696,158
Net change in accrued expenses and
other liabilities 482,802 225,963 (112,865)
------------ ------------ ------------
Net cash from operating activities 3,072,544 2,227,696 2,990,865
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (8,422,708) - -
Purchases of securities held to maturity (4,454,227) (6,433,248) (14,514,110)
Proceeds from maturities of
securities held to maturity 9,560,000 10,430,000 14,260,000
Purchases of Federal Home Loan Bank
stock (128,900) (825,900) (436,500)
Net change in loans (1,980,964) (13,120,723) (9,374,501)
Purchases of premises and equipment, net 344,157 (1,159,833) (1,094,207)
------------ ------------ ------------
Net cash from investing activities (5,082,642) (11,109,704) (11,159,318)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 930,069 3,315,543 4,611,153
Net change in securities sold
under agreements to repurchase (1,450,402) 296,811 2,576,392
Net change in U.S. Treasury demand notes 1,811,518 381,977 (89,130)
Proceeds from Federal Home Loan Bank
advances 7,000,000 10,000,000 -
Repayment of Federal Home Loan Bank
advances (4,000,000) - -
Dividends paid and fractional shares (1,122,158) (940,346) (800,068)
Proceeds from sale of common stock 866,951 403,674 347,028
Repurchase of shares of common stock - (164) (266)
------------ ------------ ------------
Net cash from financing activities 4,035,978 13,457,495 6,645,109
------------ ------------ ------------
Net change in cash and cash equivalents 2,025,880 4,575,487 (1,523,344)
Cash and cash equivalents, at beginning of year 13,150,844 8,575,357 10,098,701
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 15,176,724 $ 13,150,844 $ 8,575,357
============ ============ ============
Cash paid during the year for
Interest $ 5,624,266 $ 5,448,854 $ 4,683,824
Federal income taxes 469,250 286,455 279,527
</TABLE>
See accompanying notes to consolidated financial statements.
26.
<PAGE> 25
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Commercial National Financial
Corporation (the Corporation) and its wholly-owned subsidiary, Commercial Bank
(the Bank) (together referred to as the Corporation), 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 the Corporation and the Bank. Intercompany accounts and
transactions are eliminated in consolidation.
Nature of Operations and Concentrations of Credit Risk: The Corporation 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 products, 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 seven offices located
in Gratiot and Montcalm Counties in Michigan.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided, and
future results could differ. The allowance for loan losses and fair values of
securities and other financial instruments are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand
deposits with other financial institutions and federal funds sold. Cash flows
are reported, net, for customer loan and deposit transactions, securities sold
under agreements to repurchase with original maturities of 90 days or less and
U.S. Treasury demand notes.
(Continued)
27.
<PAGE> 26
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might
be sold before maturity. Securities available for sale are carried at fair
value, with net unrealized holding gains and losses reported separately in
shareholders' equity, net of tax. Trading securities are bought principally
for sale in the near term, and are reported at fair value with unrealized gains
and losses included in earnings. Securities are written down to fair value
when a decline in fair value is not temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premiums and discounts, is included in earnings.
Loans Held for Sale: Loans held for sale are reported at the lower of cost or
market value in the aggregate. Net unrealized losses are recorded in a
valuation allowance by charges to income.
Loans Receivable: Loans receivable are reported at the principal balance
outstanding, net of unearned interest, deferred loan fees and costs, and an
allowance for loan losses. Interest income is reported on the interest method
and includes amortization of net deferred loan fees and costs over the loan
term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days, unless the loan is both well secured
and in the process of collection. Payments received on such loans are reported
as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan
losses and decreased by charge-offs less recoveries. Estimating the risk of
loss and the amount of loss on any loan is necessarily subjective.
Accordingly, management estimates the allowance balance required based on past
loan loss experience, known and inherent risks in the portfolio, information
about specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. A problem loan is charged-off by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage and consumer loans and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not
be collected according to the original terms of the loan.
(Continued)
28.
<PAGE> 27
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using a combination of
straight-line and accelerated methods with useful lives ranging from 10 to 40
years for buildings and improvements, and 3 to 10 years for furniture and
equipment. These assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur, and major improvements are capitalized.
Servicing Rights: Effective January 1, 1996, the Corporation adopted Statement
of Financial Accounting Standards (SFAS) No. 122, Accounting for Mortgage
Servicing Rights. Prior to adopting SFAS No. 122, servicing rights were
recorded only for purchased rights to service mortgage loans. Subsequent to
adopting the standard, servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights
are expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily,
as to geographic and prepayment characteristics. Any impairment of a grouping
is reported as a valuation allowance. The effect of adopting this standard was
not material to the consolidated financial statements.
Excess servicing receivable is reported when a loan sale results in servicing
in excess of normal amounts and is expensed over the life of the servicing on
the interest method.
Other Real Estate Owned: Real estate properties acquired in collection of a
loan receivable are recorded at fair value at acquisition. Any reduction to
fair value from the carrying value of the related loan is accounted for as a
loan loss. After acquisition, a valuation allowance reduces the reported
amount to the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the valuation
allowance are reported in other expense. Other real estate owned amounted to
$0 and $55,000 at December 31, 1997 and 1996, respectively.
Goodwill and Identified Intangibles: Goodwill is the excess of purchase price
over identified net assets in business acquisitions. Goodwill is expensed on
the straight-line method over no more than 25 years. Identified intangibles
represent the value of depositor relationships purchased and are expensed on
accelerated methods over 10 years. Goodwill and identified intangibles are
assessed for impairment based on estimated undiscounted cash flows, and written
down if necessary. Goodwill and identified intangibles amounted to $25,841 and
$65,723 at December 31, 1997 and 1996, respectively.
Securities Sold Under Agreements to Repurchase: All of these liabilities
represent amounts advanced by various customers and are secured by securities
owned, as they are not covered by general deposit insurance.
(Continued)
29.
<PAGE> 28
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Benefits: A benefit plan with 401(k) features cover substantially all
employees. The plan allows participant compensation deferrals. The amount of
any Corporation matching contribution is based solely on the discretion of the
board of directors. Historically, the Corporation has matched up to 6% of such
deferrals at 100%.
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date. Proforma disclosures of
net income and earnings per share are provided as if the option's fair value
had been recorded using an option pricing model.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Earnings and Dividends Per Share: Basic and diluted earnings per common share
are computed under a new accounting standard, SFAS No. 128, effective beginning
with the quarter ended December 31, 1997. All prior earnings per common share
amounts have been restated to be comparable. Basic earnings per common share
is based on net income divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share shows the
dilutive effect of any additional potential common shares. Earnings and
dividends per common share are restated for all stock splits and stock
dividends, including the 5% stock dividends paid in November 1997, 1996 and
1995.
Stock Dividends: Dividends issued in stock are reported by transferring the
market value of the stock issued from retained earnings to common stock and
additional paid-in capital. Fractional shares are paid in cash for all stock
dividends.
Financial Instruments with Off-Balance-Sheet Risk: The Corporation, in the
normal course of business, makes commitments to make loans which are not
recorded in the financial statements. A summary of these commitments is
disclosed in Note 12.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing
on-and off-balance-sheet financial instruments does not include the value of
anticipated future business or values of assets and liabilities not considered
financial instruments.
Reclassifications: Some items in the prior year financial statements have been
reclassified to conform with the current year presentation.
(Continued)
30.
<PAGE> 29
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 2 - SECURITIES
The amortized cost and fair value of securities are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
----
U.S. Treasuries $1,995,580 $ 3,482 $ - $1,999,062
U.S. Government agencies 5,029,062 7,902 (2,519) 5,034,445
Other securities 1,406,277 1,294 (4,729) 1,402,842
---------- ---------- ---------- ----------
$8,430,919 $ 12,678 $ (7,248) $8,436,349
========== ========== ========== ==========
</TABLE>
There were no securities classified as available for sale for the year end
1996.
<TABLE>
<CAPTION>
HELD TO MATURITY
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997
----
U.S. Treasuries $ 3,980,642 $ 15,358 $ - $ 3,996,000
U.S. Government agencies 2,015,945 777 (9,722) 2,007,000
State and municipal 12,417,335 463,665 - 12,881,000
Other securities 1,969,524 - (6,524) 1,963,000
----------- ---------- ---------- -----------
$20,383,446 $ 479,800 $ (16,246) $20,847,000
=========== ========== ========== ===========
1996
----
U.S. Treasuries $ 6,997,191 $ 9,452 $ (5,643) $ 7,001,000
U.S. Government agencies 4,175,955 9,471 (4,426) 4,181,000
State and municipal 14,160,039 254,530 (112,569) 14,302,000
----------- ---------- ---------- -----------
$25,333,185 $ 273,453 $ (122,638) $25,484,000
=========== ========== ========== ===========
</TABLE>
(Continued)
31.
<PAGE> 30
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of debt securities at year-end 1997, by
contractual maturity, are shown below.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $4,987,621 $4,983,855 $ 8,186,268 $ 8,214,000
Due from one to five years 2,407,740 2,416,844 6,434,995 6,601,000
Due from five to ten years 1,035,558 1,035,650 5,582,183 5,839,000
Due after ten years 180,000 193,000
---------- ---------- ----------- -----------
$8,430,919 $8,436,349 $20,383,446 $20,847,000
========== ========== =========== ===========
</TABLE>
There were no sales of securities during 1997, 1996 and 1995.
Securities having an amortized cost of approximately $15,198,000 and $8,340,000
at year-end 1997 and 1996 were pledged to secure public deposits, securities
sold under agreements to repurchase and U.S. Treasury demand notes.
Except as indicated, total securities of any state (including all its political
subdivisions) were less than 10% of shareholders' equity. At year-end 1997 and
1996, the amortized cost of securities issued by the state of Michigan and all
its political subdivisions totaled $9,546,094 and $10,315,598 with an estimated
market value of $9,933,000 and $10,316,000, respectively.
NOTE 3 - LOANS RECEIVABLE
<TABLE>
<CAPTION>
Year end loans receivable are as follows:
1997 1996
------------ ------------
<S> <C> <C>
Real estate
Secured by single family residential properties $ 35,144,378 $ 33,255,859
Secured by non-farm nonresidential properties 40,745,864 40,514,036
Secured by farmland 4,740,489 3,919,705
Secured by multi-family residential properties 5,509,556 7,568,156
Construction and land development 5,864,433 3,840,276
Consumer
Installment loans 15,172,025 18,169,809
Credit card and related plans 734,634 889,544
Commercial 16,610,078 14,167,939
------------ ------------
124,521,457 122,325,324
Allowance for loan losses (2,063,668) (1,824,080)
------------ ------------
$122,457,789 $120,501,244
============ ============
</TABLE>
Loans held for sale, included in real estate - secured by single family
residential properties, were $390,000 and $-0- at year end 1997 and 1996.
(Continued)
32.
<PAGE> 31
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 3 - LOANS RECEIVABLE (Continued)
Certain directors and executive officers of the Corporation, including
associates of such persons, were loan customers of the Corporation during 1997
and 1996. A summary of aggregate related party loan activity for loans
aggregating $60,000 or more to any related party is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Balance at beginning of year $ 3,998,000 $ 3,806,000
New loans 12,859,000 9,189,000
Repayments (12,725,000) (8,882,000)
Other changes, net 17,000 (115,000)
------------ -----------
Balance at end of year $ 4,149,000 $ 3,998,000
============ ===========
</TABLE>
Other changes include adjustments for persons included in one reporting period
that are not reported in the other reporting period.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning balance $1,824,080 $1,668,555 $1,509,800
Loan charge-offs (278,129) (175,051) (188,567)
Loan recoveries 122,717 100,576 97,322
---------- ---------- ----------
Net loan charge-offs (155,412) (74,475) (91,245)
Provision for loan losses 395,000 230,000 250,000
---------- ---------- ----------
Ending balance $2,063,668 $1,824,080 $1,668,555
========== ========== ==========
<CAPTION>
Impaired loans were as follows:
1997 1996
---------- ----------
<S> <C> <C>
Year-end loans with no allowance for loan losses allocated $ - $ 23,252
Year-end loans with allowance for loan losses allocated - 53,379
---------- ----------
Total impaired loans $ - $ 76,631
========== ==========
</TABLE>
(Continued)
33.
<PAGE> 32
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Amount of the allowance allocated $ - $ 36,606
Average balance of impaired loans during the year 60,580 163,405
Interest income recognized during impairment 2,542 8,544
Cash-basis interest income recognized 5,574 26,592
</TABLE>
At year end 1997 and 1996, there were no nonaccrual loans.
NOTE 5 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These loans
totaled $31,689,000 and $27,533,000 at year-end 1997 and 1996. Related escrow
deposit balances were approximately $(20,000) and $(9,000) at year end 1997 and
1996.
NOTE 6 - PREMISES AND EQUIPMENT, NET
Year end premises and equipment, net are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ 310,689 $ 310,689
Buildings and improvements 2,889,651 2,504,057
Furniture and equipment 3,455,082 4,614,840
----------- -----------
Total cost 6,655,422 7,429,586
Less accumulated depreciation (3,466,679) (3,382,212)
----------- -----------
$ 3,188,743 $ 4,047,374
=========== ===========
</TABLE>
Depreciation expense was $514,474, $431,784 and $281,339 in 1997, 1996 and
1995, respectively.
(Continued)
34.
<PAGE> 33
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 7 - DEPOSITS
At year end 1997, stated maturities of time deposits were as follows, for the
years ending December 31:
<TABLE>
<S> <C>
1998 $36,686,016
1999 15,337,605
2000 3,614,588
2001 1,837,158
2002 1,202,117
Thereafter 567,296
-----------
$59,244,780
===========
</TABLE>
Time deposits in denominations of $100,000 or more were $13,930,000 and
$14,578,000 at year end 1997 and 1996. At year end 1997, stated maturities of
time deposits in denominations of $100,000 or more were as follows:
<TABLE>
<S> <C>
In 3 months or less $ 3,074,000
Over 3 through 6 months 3,924,000
Over 6 through 12 months 3,355,000
Over 12 months 3,577,000
-----------
$13,930,000
===========
</TABLE>
Related party deposits were $1,522,000 and $1,046,000 at year end 1997 and
1996.
NOTE 8 - BORROWINGS
Securities Sold Under Agreements to Repurchase
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Amount outstanding at year end $4,154,844 $5,602,246
Weighted average interest rate at year end 5.29% 4.93%
Average daily balance during the year $5,777,000 $5,911,000
Weighted average interest rate during the year 5.28% 4.97%
Maximum month end balance during the year $8,987,000 $7,801,000
</TABLE>
(Continued)
35.
<PAGE> 34
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 8 - BORROWINGS (Continued)
Federal Home Loan Bank Advances
Federal Home Loan Bank advances totaled $13,000,000 at year-end 1997. A
majority of the advances have fixed interest rates ranging from 4.99% to 6.67%.
Advances with variable rates are based on the 3-month LIBOR rate less 3 basis
points. Pursuant to collateral agreements with the Federal Home Loan Bank, in
addition to Federal Home Loan Bank stock, advances are secured under a blanket
lien arrangement by qualified 1-to-4 family mortgage loans and U.S. Government
agency securities with a carrying value of approximately $31,155,000 at
year-end 1997.
At year end 1997, scheduled principal reductions on these advances were as
follows for the years ending December 31:
<TABLE>
<S> <C>
1998 $ 5,000,000
1999 3,000,000
2000 4,000,000
2001 1,000,000
-----------
$13,000,000
===========
</TABLE>
NOTE 9 - EMPLOYEE BENEFITS
401(k) Plan: The Corporation maintains a 401(k) salary reduction plan under
which participants may make deferrals up to 15% of compensation. The
Corporation's annual contribution to the plan is based solely on the discretion
of the Corporation's board of directors. Historically, the Corporation has
matched 100% of the elective deferrals on the first 6% of the participants
compensation. Employee contributions are vested immediately and the
Corporation's matching contributions are vested after six years. The plan
covers substantially all employees of the Corporation. Contributions
attributable to the plan were approximately $72,000, $92,000 and $94,000 in
1997, 1996 and 1995. Expense related to the plan was approximately $51,000,
$113,000 and $98,000 in 1997, 1996 and 1995.
Stock Option Plans: SFAS No. 123, Accounting for Stock-Based Compensation,
which became effective for 1996, requires proforma disclosures for companies
that do not adopt its fair value accounting method for stock-based employee
compensation. Accordingly, the following proforma information presents net
income and basic and diluted earnings per share had the fair value method been
used to measure compensation cost for stock option plans. The exercise price
of options granted is equivalent to the market value of underlying stock at the
grant date. Accordingly, no compensation cost was actually recognized for
stock options in 1997, 1996 and 1995.
(Continued)
36.
<PAGE> 35
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 9 - EMPLOYEE BENEFITS (Continued)
The fair value of options granted during 1997, 1996 and 1995 is estimated using
the following weighted-average information: risk-free interest rate of 6.0%,
6.15% and 6.0%, respectively, expected life of 4.0, 3.9 and 4.3 years,
respectively, expected dividends of 4.0%, 4.0% and 4.2% per year, respectively,
and nominal expected stock price volatility.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income as reported $1,692,110 $1,431,752 $1,667,824
Proforma net income 1,674,677 1,420,533 1,663,403
Basic earnings per share as reported $ 1.80 $ 1.57 $ 1.87
Proforma basic earnings per share 1.78 1.56 1.87
Diluted earnings per share as reported 1.80 1.57 1.87
Proforma diluted earnings per share 1.78 1.56 1.87
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 2 and 7 year periods, with
100% vesting occurring six months after grant date. At year end 1997, 8,133
shares were authorized for future grants. Information about option grants
follows.
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Options Price
---------- ---------
<S> <C> <C>
Outstanding, beginning of 1995 15,822 $17.76
Granted 12,159 21.59
Exercised (4,147) 17.18
----------
Outstanding, end of 1995 23,834 19.82
Granted 11,802 25.40
Exercised (5,503) 19.47
Forfeited (232) 21.59
----------
Outstanding, end of 1996 29,901 22.07
Granted 10,195 26.19
Exercised (22,150) 21.50
Forfeited (808) 23.92
----------
Outstanding, end of 1997 17,138 25.32
==========
</TABLE>
The weighted-average fair value of options granted in 1997, 1996 and 1995 was
$1.71, $2.02 and $3.89, respectively. At year end 1997, options outstanding
had a weighted-average remaining life of 4.08 years and a range of exercise
price from $21.59 to $26.19.
(Continued)
37.
<PAGE> 36
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Options exerciseable at year end are as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Options Price
---------- ---------
<S> <C> <C>
1995 15,734 $18.90
1996 18,099 19.91
1997 17,138 25.32
</TABLE>
NOTE 10 - FEDERAL INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- ---------
<S> <C> <C> <C>
Current $512,496 $ 326,000 $ 483,000
Deferred (12,846) (10,000) 8,000
-------- ---------- ---------
$499,650 $ 316,000 $ 491,000
======== ========== =========
</TABLE>
Income tax expense calculated at the statutory federal income tax rate of 34%
differs from actual income tax expense as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rates $ 745,000 $ 594,000 $ 734,000
Increase (decrease) from
Tax-exempt interest income (262,000) (299,000) (262,000)
Goodwill amortization 14,000 14,000 14,000
Other, net 2,650 7,000 5,000
--------- --------- ---------
$ 499,650 $ 316,000 $ 491,000
========= ========= =========
<CAPTION>
Year end deferred tax assets and liabilities consist of:
1997 1996
--------- ---------
<S> <C> <C>
Allowance for loan losses $ 326,000 $ 244,000
Accumulated depreciation (276,000) (259,000)
Alternative minimum tax - 43,000
Net unrealized gain on securities available for sale (1,846) -
Other (7,154) 2,000
--------- ---------
41,000 30,000
Valuation allowance - -
--------- ---------
Net deferred tax asset $ 41,000 $ 30,000
========= =========
</TABLE>
(Continued)
38.
<PAGE> 37
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 11 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations for the years ended is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $1,692,110 $1,431,752 $1,667,824
========== ========== ==========
Weighted-average common shares outstanding
for basic earnings per share 939,004 910,152 890,856
========== ========== ==========
Basic earnings per share $ 1.80 $ 1.57 $ 1.87
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders $1,692,110 $1,431,752 $1,667,824
========== ========== ==========
Weighted-average common shares outstanding
for basic earnings per share 939,004 910,152 890,856
Add: Dilutive effect of assumed exercise
of stock options 1,231 1,948 1,574
---------- ---------- ----------
Weighted-average common and dilutive
additional potential common shares outstanding 940,235 912,100 892,430
========== ========== ==========
Diluted earnings per share $ 1.80 $ 1.57 $ 1.87
========== ========== ==========
</TABLE>
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
At year end 1997 and 1996, cash reserve and clearing balance requirements of
$1,127,000 and $1,009,000 were required as deposits with the Federal Reserve or
as cash on hand. These balances do not earn interest.
(Continued)
39.
<PAGE> 38
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
The Corporation leases certain branch facilities under lease agreements
expiring through 2018, with optional renewal periods through 2028. During 1996
and 1995, two of the leases were with a related party. Both of the related
party leases were terminated during 1997 in conjunction with the closing of two
branches. Rental expense on all leases totaled $84,000, $32,000 and $21,000 in
1997, 1996 and 1995, including $68,000 in 1997, $16,000 in 1996 and $6,000 in
1995 paid to the related party. Included in the 1997 expense to the related
party were costs of $60,000 related to the termination of the leases. As of
year end 1997, there were no significant future rental commitments.
The Corporation is a party of financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers.
These financial instruments include commitments to make loans, unused lines of
credit and standby letters of credit. The Corporation's exposure to credit
loss in the event of non-performance by the other party to financial
instruments for commitments to make loans, unused lines of credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Corporation follows the same credit policy to make such
commitments as it uses for on-balance-sheet items. Since many commitments to
make loans expire without being used, the amount of commitments shown below do
not necessarily represent future cash commitments. No losses are anticipated
as a result of these transactions. Collateral obtained upon exercise of
commitments is determined using management's credit evaluation of the borrowers
and may include real estate, business assets, deposits and other items.
Commitments at year end are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $21,769,000 $23,568,000
Standby letters of credit 815,000 1,054,000
----------- -----------
$22,584,000 $24,622,000
=========== ===========
</TABLE>
(Continued)
40.
<PAGE> 39
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
value for cash and cash equivalents, Federal Home Loan Bank (FHLB) stock,
demand and savings deposits, securities sold under agreements to repurchase,
U.S. Treasury demand notes, and variable rate loans or deposits that reprice
frequently and fully. Securities fair values are based on quoted market prices
or, if no quotes are available, on the rate and term of the security and on
information about the issuer. For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent repricing or repricing limits,
the fair value is estimated by discounted cash flow analyses or underlying
collateral values, where applicable. The fair value of Federal Home Loan Bank
advances is based on currently available rates for similar financing. The fair
value of other financial instruments and off-balance-sheet items approximate
cost and are not considered significant to this presentation.
Financial instruments at year end are as follows, in thousands:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------- -------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 15,177 $ 15,177 $ 13,151 $ 13,151
Securities 28,820 29,283 25,333 25,484
FHLB stock 1,391 1,391 1,262 1,262
Loans, net of allowance 122,458 122,613 120,501 120,925
---------- ---------- ---------- ----------
$ 167,846 $ 168,464 $ 160,247 $ 160,822
========== ========== ========== ==========
FINANCIAL LIABILITIES
Demand and savings deposits $ (74,702) $ (74,702) $ (74,499) $ (74,499)
Time deposits (59,245) (59,414) (58,518) (59,316)
Securities sold under agreements
to repurchase (4,152) (4,152) (5,602) (5,602)
U.S. Treasury demand notes (2,753) (2,753) (942) (942)
Federal Home Loan Bank advances (13,000) (12,968) (10,000) (9,943)
---------- ---------- ---------- ----------
$ (153,852) $(153,989) $ (149,561) $ (150,302)
========== ========== ========== ==========
</TABLE>
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that if the Corporation had
disposed of such items at December 31, 1997 and 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at
December 31, 1997 and 1996 should not necessarily be considered to apply at
subsequent dates.
(Continued)
41.
<PAGE> 40
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
In addition, other assets and liabilities that are not defined as financial
instruments are not included in the above disclosures, such as property and
equipment. Also, non-financial instruments typically not recognized in
financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill and
similar items.
NOTE 14 - REGULATORY MATTERS
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative and qualitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is asset
growth and expansion, and plans for capital restoration are required.
(Continued)
42.
<PAGE> 41
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 14 - REGULATORY MATTERS (Continued)
Actual capital levels (in millions) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Capitalized
Minimum Required Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Regulations
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to risk weighted
assets)
Consolidated $18.4 14.7% $10.0 8.0% $12.5 10.0%
Bank 16.3 13.1 10.0 8.0 12.5 10.0
Tier 1 capital (to risk weighted
assets)
Consolidated 16.9 13.5 5.0 4.0 7.5 6.0
Bank 14.8 11.8 5.0 4.0 7.5 6.0
Tier 1 capital (to average assets)
Consolidated 16.9 10.3 6.6 4.0 8.2 5.0
Bank 14.8 8.6 6.8 4.0 8.6 5.0
1996
- ----
Total capital (to risk weighted
assets)
Consolidated $16.9 14.3% $9.5 8.0% $11.9 10.0%
Bank 15.6 13.2 9.5 8.0 11.9 10.0
Tier 1 capital (to risk weighted
assets)
Consolidated 15.4 13.0 4.7 4.0 7.1 6.0
Bank 14.2 11.9 4.7 4.0 7.1 6.0
Tier 1 capital (to average assets)
Consolidated 15.4 9.4 6.6 4.0 8.2 5.0
Bank 14.2 8.7 6.5 4.0 8.1 5.0
</TABLE>
The Corporation and Bank were categorized as well capitalized at year end 1997
and 1996.
NOTE 15 - PARENT CORPORATION CONDENSED FINANCIAL STATEMENTS
The Corporation's primary source of funds to pay dividends to shareholders is
the dividends it receives from the Bank. The Bank is subject to certain
restrictions on the amount of dividends it may declare without prior regulatory
approval. Accordingly, in 1998, the Bank may distribute to the Corporation, in
addition to 1998 net profits, approximately $2,200,000 in dividends without
prior approval from regulatory agencies.
(Continued)
43.
<PAGE> 42
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 15 - PARENT CORPORATION CONDENSED FINANCIAL STATEMENTS
(Continued)
Following are condensed parent corporation financial statements.
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 2,338,746 $ 1,067,629
Investment in subsidiary 14,814,179 14,266,764
Other 45,119 423,164
----------- -----------
Total assets $17,198,044 $15,757,557
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 314,902 $ 261,894
Shareholders' equity 16,883,142 15,495,663
----------- -----------
Total liabilities and shareholders' equity $17,198,044 $15,757,557
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest on securities $ 3,334 $ 12,019 $ -
Dividends from subsidiary 1,199,460 1,059,300 979,600
---------- ---------- ----------
Total income 1,202,794 1,071,319 979,600
Other expense 71,865 18,538 -
---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY 1,130,929 1,052,781 979,600
Income tax benefit 17,350 - -
Equity in undistributed net income of
subsidiary 543,831 378,971 688,224
---------- ---------- ----------
NET INCOME $1,692,110 $1,431,752 $1,667,824
========== ========== ==========
</TABLE>
(Continued)
44.
<PAGE> 43
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 15 - PARENT CORPORATION CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,692,110 $1,431,752 $1,667,824
Adjustment:
Equity in undistributed net
income of subsidiary (543,831) (378,971) (688,224)
Change in other assets 378,045 (358,283) -
----------- ---------- ----------
Net cash from operating activities 1,526,324 694,498 979,600
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid and fractional shares (1,122,158) (940,346) (800,068)
Proceeds from sale of common stock 866,951 403,674 347,028
Repurchased shares of common stock - (164) (266)
----------- ---------- ----------
Net cash for financing activities (255,207) (536,836) (453,306)
----------- ---------- ----------
Net change in cash and cash equivalents 1,271,117 157,662 526,294
Cash and cash equivalents at the
beginning of year 1,067,629 909,967 383,673
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,338,746 $1,067,629 $ 909,967
=========== ========== ==========
</TABLE>
NOTE 16 - IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, was issued in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996, and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
1997 consolidated financial statements and the impact of the complete adoption
in 1998 is also not expected to be material to the consolidated financial
statements.
(Continued)
45.
<PAGE> 44
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 16 - IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
Also, in June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown.
Comprehensive income is net income plus changes in net unrealized gains and
losses on securities available for sale, net of tax.
46.
<PAGE> 45
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Commercial National
Financial Corporation's consolidated financial statements and related
information appearing in this Annual Report. Management believes that the
consolidated financial statements fairly reflect the form and substance of
transactions and that the financial statements reasonably present Commercial
National Financial Corporation's financial position and results of operations
and were prepared in conformity with generally accepted accounting principles.
Management also has included in the Corporation's financial statements, amounts
that are based on estimates and judgments which it believes are reasonable
under the circumstances.
Commercial National Financial Corporation maintains a system of internal
controls designed to provide reasonable assurance that all assets are
safeguarded and financial records are reliable for preparing the consolidated
financial statements. The Corporation complies with laws and regulations
relating to safety and soundness which are designated by the FDIC and other
appropriate federal banking agencies. The selection and training of qualified
personnel and the establishment and communication of accounting and
administrative policies and procedures are elements of this control system.
The effectiveness of internal controls is monitored by a program of internal
audit and by independent certified public accountants. Management recognizes
that the cost of a system of internal controls should not exceed the benefits
derived and that there are inherent limitations to be considered in the
potential effectiveness of any system. Management believes that Commercial
National Financial Corporation's system provides the appropriate balance
between costs of controls and the related benefits.
The independent auditors have audited the Corporation's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of the reported operating
results and financial position. The Board of Directors of Commercial National
Financial Corporation has an Audit Committee composed of six non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
47.
<PAGE> 46
COMMON STOCK INFORMATION
There is no established public trading market for the Commercial National
Financial Corporation common stock, and there is no published information
concerning bid or ask quotations. There were, so far as the Corporation's
management knows, 51 sales involving a total of 50,895 shares of stock during
1997. 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 1997 and 1996 the price ranges of transactions reported
were:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
-------------------- --------------------
Shares Actual Price Shares Actual Price
Traded Range Traded Range
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
First Quarter 24,360 $24.05-27.62 6,300 $23.13-24.94
Second Quarter 11,130 24.76-29.29 4,600 24.49-28.11
Third Quarter 11,865 28.33-29.76 13,600 24.49-26.08
Fourth Quarter 3,540 27.14-32.00 2,700 24.76-26.67
</TABLE>
The above prices have been adjusted for the 5% stock dividends issued in
November 1997 and 1996. There were 954,322 common shares outstanding at
December 31, 1997. There were approximately 614 shareholders of record at
December 31, 1997.
DIVIDEND INFORMATION
The holders of the Commercial National Financial Corporation common stock are
entitled to dividends when, and if, declared by the Board of Directors of the
Corporation 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 eight years.
The following table sets forth the dividends per share declared during 1997 and
1996.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997 .29 .31 .31 .33
1996 .25 .27 .28 .28
</TABLE>
The above dividends per share have been adjusted for the 5% stock dividend
issued in November 1997 and 1996.
48.
<PAGE> 47
COMMERCIAL NATIONAL FINANCIAL CORPORATION
EXECUTIVE OFFICERS
Jeffrey S. Barker President and Chief Executive Officer
Patrick G. Duffy Vice President and Chief Financial Officer
BOARD OF DIRECTORS
Howard D. Poindexter Chairman of the Board, Manager of Poindexter Farms
Russell M. Simmet Vice Chairman of the Board and President, Simmet Insurance
Agency, Inc.
Richard F. Abbott Retired Executive Vice President of the Corporation and
Bank
Jefferson P. Arnold Attorney, Arnold Law Office
Jeffrey S. Barker President and CEO of the Corporation and Bank
Don J. Dewey President and Funeral Director, Dewey Funeral Homes, Inc.
David A. Ferguson Vice President, Ashcraft's Market, Inc.
Kenneth R. Luneack President, Ken Luneack Construction, Inc.
Kim C. Newson President, Alma Hardware Corporation
Scott E. Sheldon Owner, Kernen-Sheldon Agency and Shepherd Insurance Agency
Joseph B. Simon Chairman, Alma Iron and Metal Company, Inc.
COMMERCIAL BANK OFFICERS
Jeffrey S. Barker President and Chief Executive Officer
Patrick G. Duffy Vice President and Chief Financial Officer
Kevin D. Collison Vice President - Commercial Lending
Thomas D. Cooper Vice President - Middleton Office
Daniel E. Raleigh Vice President - Marketing and Branch Administration
Andrew P. Shafley Vice President - Senior Loan Officer
Janet M. Davison Assistant Vice President - Manager/Information Systems
Donna L. Kelley Assistant Vice President - St. Louis Office
Wendy M. Lombard Assistant Vice President - Mortgage Lending
Karen M. Taylor Assistant Vice President - Mortgage Lending
Carol L. Vallance Assistant Vice President - Customer Relations
Sheryl L. Allen Assistant Vice President - Human Resources
Rebecca A. Smith Administrative Assistant - Transfer Agent
49.
<PAGE> 48
COMMERCIAL NATIONAL FINANCIAL CORPORATION
COMMERCIAL BANK LOCATIONS
ALMA ITHACA MIDDLETON
301 North State St. *101 N. Pine River *101 North Newton Street
Ph. (517) 463-2185 Ph. (517) 875-4144 Ph. (517) 236-7236
Fax (517) 463-5996 Fax (517) 875-4534 Fax (517) 236-7732
ST. LOUIS
POMPEII *104 N. Mill Street
*119 West Center 105 E. Fulton Street Ph. (517) 681-5738
Ph. (517) 463-3120 Ph. (517) 838-2525 Fax (517) 681-3509
GREENVILLE
*101 North Lafayette Street
*1500 Wright Avenue Ph. (616) 754-7166
Ph. (517) 463-3901 Fax (616) 754-2118
* Denotes Bank locations with ATMs on site.
ATM SERVICE ALSO PROVIDED AT:
ITHACA SHELL FOOD MART - FULTON COUNTRY CORNERS - PUMP AND POUR CITGO IN OIL
CITY
CORPORATE HEADQUARTERS
COMMERCIAL NATIONAL FINANCIAL CORPORATION
101 North Pine River
Ithaca, Michigan 48847
Phone (517) 875-4144
Fax (517) 875-4534
INVESTMENT BROKER MARKET MAKERS
<TABLE>
<S> <C> <C> <C>
Everen Securities Stifel, Nicolaus & Co., Inc. McDonald & Company Roney & Company
William Kahl & Ann Cummins Peter Vanderschaaf Christopher Turner James Crawford
East Lansing, Michigan Grand Rapids, Michigan Grand Rapids, Michigan Flint, Michigan
1-800-292-1960 1-800-676-0477 1-800-548-6011 1-800-521-9767
</TABLE>
COMMERCIAL NATIONAL'S ANNUAL REPORT ON FORM 10-K IS AVAILABLE UPON WRITTEN
REQUEST WITHOUT CHARGE FROM PATRICK G. DUFFY, VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER, COMMERCIAL NATIONAL FINANCIAL CORPORATION, 101 NORTH PINE
RIVER, P.O. BOX 280, ITHACA, MICHIGAN 48847. TELEPHONE NUMBER (517) 875-4144.
50.
<PAGE> 1
EXHIBIT 23
[CROWE CHIZEK LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference and use of our report dated
February 6, 1998, which appears in Commercial National Financial Corporation's
annual report on Form 10-K for 1997, 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).
Crowe, Chizek and Company LLP
March 24, 1998
South Bend, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,577
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,436
<INVESTMENTS-CARRYING> 28,814
<INVESTMENTS-MARKET> 29,283
<LOANS> 124,521
<ALLOWANCE> 2,064
<TOTAL-ASSETS> 172,405
<DEPOSITS> 133,947
<SHORT-TERM> 6,905
<LIABILITIES-OTHER> 1,669
<LONG-TERM> 13,000
0
0
<COMMON> 954
<OTHER-SE> 15,929
<TOTAL-LIABILITIES-AND-EQUITY> 172,405
<INTEREST-LOAN> 11,270
<INTEREST-INVEST> 1,393
<INTEREST-OTHER> 380
<INTEREST-TOTAL> 13,043
<INTEREST-DEPOSIT> 4,674
<INTEREST-EXPENSE> 5,689
<INTEREST-INCOME-NET> 7,354
<LOAN-LOSSES> 395
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,867
<INCOME-PRETAX> 2,192
<INCOME-PRE-EXTRAORDINARY> 2,192
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,692
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 8.64
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 15
<LOANS-PROBLEM> 15
<ALLOWANCE-OPEN> 1,824
<CHARGE-OFFS> 278
<RECOVERIES> 123
<ALLOWANCE-CLOSE> 2,064
<ALLOWANCE-DOMESTIC> 1,305
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 759
</TABLE>
