<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
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, No 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, 2000: $30,157,731
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, 2000: 3,203,413 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to security holders for the year
ended December 31, 1999, are incorporated by reference in Part II and Part IV.
Portions of the registrant's proxy statement for its April 25, 2000, annual
shareholders meeting are incorporated by reference in Part III.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
Commercial National Financial Corporation (the "Corporation" or "registrant"), a
bank holding company, was incorporated in Michigan on December 30, 1987. On May
31, 1988, the Corporation acquired all of the stock of Commercial National Bank,
a national banking association chartered in 1962. On December 30, 1992,
Commercial National Bank converted to a state-chartered bank under the name
Commercial Bank (the "Bank").
The Bank's business is concentrated in a single industry segment - commercial
banking. The Bank provides a full range of banking services to individuals,
agricultural businesses, commercial businesses and light industries located in
its service area. The Bank maintains a diversified loan portfolio, including
loans to individuals for home mortgages, automobiles and personal expenditures,
and loans to business enterprises for current operations and expansion. The Bank
offers a variety of deposit vehicles, including checking, savings, money market,
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 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 80.14% of the Corporation's total revenues in 1999, 76.45% in
1998, and 80.00% in 1997. Interest on investment securities accounted for 10.91%
of the Corporation's total revenues in 1999, 11.27% in 1998, and 9.89% in 1997.
At December 31, 1999, 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 entities 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 regulators' authority
1
<PAGE> 3
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
to 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.
Enacted late in 1999, the Gramm-Leach-Bliley Act ("Gramm-Leach-Bliley"),
broadens the scope of financial services that banks may offer to consumers,
essentially removing the barriers erected during the Depression that separated
banks and securities firms, closes the loophole which permitted commercial
enterprises to own and operate a thrift institution, and provides some new
consumer protections with respect to privacy issues and ATM usage fees.
Gramm-Leach-Bliley permits affiliations between banks, securities firms and
insurance companies (which affiliations were previously prohibited under the
Glass-Steagall Act). Under Gramm-Leach-Bliley, a bank holding company may
qualify as a financial holding company and thereby offer expanded range of
financial oriented products and services which products and services may not be
offered by bank holding companies. To qualify as a financial holding company, a
bank holding company's subsidiary depository institutions must be well-managed,
well-capitalized and have received a "satisfactory" rating on its oversight by
the Securities and Exchange Commission of bank holding companies engaged in
certain activities, and reaffirms that insurance activities are to be regulated
on the state level. States, however, may not prevent depository institutions and
their affiliates from engaging in insurance activities. Commercial enterprises
are no longer able to establish or acquire a thrift institution and thereby
become a unitary thrift holding company. Thrift institutions may only be
established or acquired by financial organizations. Gramm-Leach-Bliley provides
new consumer protections with respect to the transfer and use of a consumer's
nonpublic personal information and generally enables financial institution
customers to "opt-out" of the dissemination of their personal financial
information to unaffiliated third parties. ATM operators who charge a fee to
non-customers for use of its ATM must disclose the fee on a sign placed on the
ATM and before the transaction is made as a part of the on-screen display or by
a paper notice issued by the machine.
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, 2008, subject to 2
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.
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.
2
<PAGE> 4
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, 1999, 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, 1999, 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 Discussion and Analysis and
Results of Operations" of the registrant's annual report to shareholders for the
year ended December 31, 1999, 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, 1999, is here incorporated by reference to Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes and report of independent auditors' included in
the registrant's annual report to shareholders for the year ended December 31,
1999, are here incorporated by reference to Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
3
<PAGE> 5
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 25, 2000, 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 25, 2000, 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 25, 2000, 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 25, 2000, annual meeting
of shareholders is here incorporated by reference.
4
<PAGE> 6
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 report of
independent auditor of the Corporation and its subsidiary are filed as part of
this report:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income for each of the three years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for each of the
three years ended December 31, 1999, 1998 and 1997
Consolidated Statements of
Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
The financial statements, notes to financial statements, and report of
independent auditor for the years ended December 31, 1999, 1998 and 1997 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, 1999. With the exception of the portions of the
registrant's annual report to shareholders for the year ended December 31, 1999
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:
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<S> <C>
3(a) Restated Articles of Incorporation. Previously filed as an
exhibit to the registrant's Form S-4 filed January 22,
1988. Here incorporated by reference.
3(b) Bylaws. Previously filed as an exhibit to the registrant's
Form S-4 filed January 22, 1988. Here incorporated by
reference.
10(a) 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(b) 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(c) 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(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, 1998. Here incorporated by reference.*
10(e) Change in Control Agreement. Previously filed as an
exhibit to the registrant's Form 10-K for the year ended
December 31, 1998. Here incorporated by reference.*
13 Incorporated Portions from 1999 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.
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
23 Consent of Certified Public Accountants.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
</TABLE>
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.
<TABLE>
<S> <C>
(b) Reports on Form 8-K.
No reports were filed for the fourth quarter of 1999.
(c) Exhibits.
See Item 14(a)(3)
(d) Financial Statement Schedules.
</TABLE>
There are no financial statement schedules required to be filed
with this report.
6
<PAGE> 8
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 24, 2000 By: /s/ Jeffrey S. Barker
--------------------------------------
Jeffrey S. Barker
President and Chief Executive Officer
7
<PAGE> 9
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
March 24, 2000 /s/ Jeffrey S. Barker
-----------------------------------------------
Jeffrey S. Barker
Director, President and Chief Executive Officer
(Principal Executive Officer)
March 24, 2000 /s/ Richard F. Abbott
-----------------------------------------------
Richard F. Abbott
Director
March 24, 2000 /s/ Jefferson P. Arnold
-----------------------------------------------
Jefferson P. Arnold
Director
March 24, 2000 /s/ Don J. Dewey
-----------------------------------------------
Don J. Dewey
Director
March 24, 2000 /s/ David A. Ferguson
-----------------------------------------------
David A. Ferguson
Director
March 24, 2000 /s/ Kenneth R. Luneack
-----------------------------------------------
Kenneth R. Luneack
Director
March 24, 2000 /s/ Kim C. Newson
-----------------------------------------------
Kim C. Newson
Director
March 24, 2000 /s/ Howard D. Poindexter
-----------------------------------------------
Howard D. Poindexter
Director
March 24, 2000 /s/ Scott E. Sheldon
-----------------------------------------------
Scott E. Sheldon
Director
March 24, 2000 /s/ Patrick G. Duffy
-----------------------------------------------
Patrick G. Duffy
Director
(Principal Financial and Accounting Officer)
</TABLE>
8
<PAGE> 10
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) 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(b) 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(c) 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(d) Amendment to 1991 Stock Option Plan. Previously filed as an *
exhibit to registrant's Form 10-K for the year ended December
31, 1999. Here incorporated by reference.
10(e) Change in Control Agreement. Previously filed as an exhibit to *
registrant's Form 10-K for the year ended December 31, 1999.
Here incorporated by reference.
13 Incorporated Portions from 1999 Annual Report to Shareholders. 10
21 Subsidiary of Registrant. Previously filed as an exhibit to *
the registrant's Form S-4 filed January 22, 1988. Here
incorporated by reference.
23 Consent of Independent Certified Public Accountants. 11
27 Financial Data Schedule. 13
</TABLE>
- ------------------
*This exhibit is filed by incorporation by reference to a prior filing.
9
<PAGE> 1
EXHIBIT 13
INCORPORATED PORTIONS FROM 1999 ANNUAL REPORT TO SHAREHOLDERS
10
<PAGE> 2
CONTENTS
Report from the President............................................ 2 - 3
Selected Financial Data.............................................. 4
Business of Commercial National Financial Corporation................ 5
Management's Discussion and Analysis................................. 5 - 16
Report of Independent Auditors....................................... 17
Management's Responsibility for Financial Statements................. 18
Consolidated Balance Sheets.......................................... 19
Consolidated Statements of Income.................................... 20
Consolidated Statements of Changes in Shareholders' Equity........... 21
Consolidated Statements of Cash Flows................................ 22
Notes to Consolidated Financial Statements........................... 23 - 35
Common Stock and Dividend Information................................ 36
Directors and Officers............................................... 37 - 39
Locations, Transfer Agent and Market Makers.......................... 40
COVER
Commercial lending at the Bank extends beyond traditional funding of local
business and industries. The cover is a composite of Gratiot County golf courses
whose operations and facilities were enhanced through Commercial Bank's help.
Photos by Wheeler Portrait Studio
Report by E&S Graphics
<PAGE> 3
[PHOTO]
To Our Shareholders:
Commercial National Financial Corporation had a very successful year. Net income
reached a record $2,731,000, up 6.7% over last year. Return on average assets
remained steady at 1.47%, again higher than our peers, while return on average
shareholders' equity improved to 14.7% from 14.4%. Strong loan growth and
continued improvement in operating efficiency contributed significantly to the
1999 earnings increase. Competition for deposits remains very intense,
consequently, funding for future asset growth will likely compress our margins.
Diluted earnings per share rose 7.5% to 86 cents per share compared to 80 cents
per share last year. More importantly, dividends per share continue to rise,
more than doubling over the past five years. Cash dividends of 55 cents per
share declared during 1999 represent an increase of 17% over last year's 47
cents per share. The market price for CNFC shares closed at $13.00 for year-end
1999, an increase of 9.2% over a year ago. Recent trades in the $14.00 per share
range also reflect a doubling in price over the past five years. All per share
information reflects both the 3:1 stock split declared in August 1999 and the 5%
stock dividend paid during November 1999. This is the ninth consecutive year
that the stock dividend has been paid, and coupled with the recent stock split,
liquidity for our shares should improve. Additionally, we continue to repurchase
outstanding shares of our stock in an effort to deploy some of our excess
capital and increase earnings per share. Through the end of 1999 we have
reacquired and retired just over 118,000 shares.
The 12.2% increase in total loans over last year was the most significant
component in our improved earnings. Net interest income was up by a similar
percentage as a result of the increased volume and improved margins. Net
interest margin increased from 4.80% during 1998 to 4.94% this past year. Loan
quality remains very high. One business loan was placed on non-accrual during
1999; however, we are working with the customer to resolve their financial
difficulties. All other loans past due more than 30 days at the end of 1999
totaled only $281,000 or .18% of total loans. The allowance for loan losses
increased to 1.83% of total loans at December 31, 1999; which compares well to
our peers.
"...DIVIDENDS PER SHARE CONTINUE TO RISE, MORE THAN DOUBLING OVER THE PAST FIVE
YEARS."
Jeffrey S. Barker
During 1999, we invested a considerable amount of time and financial resources
installing a wide area computer network to support our new automated teller
platform system. Now that the new teller system is fully operational, customers
should notice improved service at all teller stations and customer service desks
throughout the bank. The new system allows us faster customer identification,
provides improved receipts and account detail, as well as the ability to
generate complete account statements on demand. This investment will enhance
both the accuracy and efficiency that all our customers expect and deserve.
Two new officers joined the bank this past year. Tamera Fisher is the new Branch
Supervisor in our St. Louis office. Tammy is well known throughout Gratiot
County, having spent many years with Central Michigan Newspapers, most recently
as General Manager in the Alma office. Jason Williams, Vice President Commercial
Loans, brought his commercial lending experience from LaSalle Bank in Chicago to
our Greenville office. Jason is a graduate of Michigan State University and a
Western
2
<PAGE> 4
Michigan area native. I am very happy these two talented people are now part of
a terrific Commercial Bank team.
Our staff is anchored by a group of employees whose experience and dedication is
sincerely appreciated by both management and our customers. The employee group
pictured later in this report represents over 350 years of banking experience
with Commercial Bank. Their seniority ranges from fifteen years to over thirty.
Our people really do make the difference at Commercial Bank.
In contrast to the good things that happened within the Company during 1999, I
must also report the untimely passing of Mr. Russell M. Simmet. Russ became a
member of the Board of Directors in August 1976. We will all miss his support
and leadership which helped guide the Bank through the difficult 1980s to
achieve its historically best years most recently.
Thank you for your continued support. We are looking forward to another very
successful year at Commercial Bank.
Regards,
Jeffrey S. Barker
President and CEO
[PHOTO]
IN MEMORIAM
RUSSELL M. SIMMET
BOARD OF DIRECTORS
1976-1999
3
<PAGE> 5
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
(In thousands except financial ratios and per share data)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 8,416 $ 7,559 $ 7,354 $ 6,979 $ 6,870
Provision for loan losses (360) (360) (395) (230) (250)
Noninterest income 1,099 1,355 1,042 683 665
Noninterest expense (5,347) (5,070) (5,810) (5,684) (5,126)
----------------------------------------------------------------------------------------------------------------
Income before income tax expense 3,808 3,484 2,191 1,748 2,159
Income tax expense (1,077) (924) (499) (316) (491)
----------------------------------------------------------------------------------------------------------------
Net income $ 2,731 $ 2,560 $ 1,692 $ 1,432 $ 1,668
================================================================================================================
AT YEAR END
Total assets $ 191,022 $ 181,096 $ 172,405 $166,190 $ 51,075
Net loans 149,675 133,526 122,458 120,501 107,611
Total deposits 147,204 141,175 133,947 133,017 129,701
FHLB advances 16,500 11,500 13,000 10,000 -
Shareholders' equity 18,965 17,660 16,883 15,496 14,643
FINANCIAL RATIOS
Return on average assets 1.47% 1.47% 1.03% 0.92% 1.15%
Return on average shareholders' equity 14.67 14.39 10.49 9.41 11.73
Average shareholders' equity to average assets 10.04 10.19 9.81 9.76 9.79
Allowance for loan losses to loans 1.83 1.73 1.66 1.49 1.53
Tier 1 leverage capital ratio 9.98 9.92 10.26 9.43 9.43
Total risk-based capital ratio 14.27 14.26 14.73 14.29 14.29
Dividend pay-out 63.37 57.68 69.23 68.37 49.56
PER SHARE DATA(1)
Basic earnings(2) $ .86 $ .81 $ .54 $ .48 $ .57
Diluted earnings(2) .86 .80 .54 .47 .57
Dividends declared .55 .47 .37 .33 .28
Book value, end of year 5.95 5.64 5.34 5.10 4.92
</TABLE>
(1) All per share data adjusted to reflect stock splits and stock dividends.
(2) Restated to reflect adoption of SFAS No. 128 on December 31, 1997.
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
The following discussion provides 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).
On July 16, 1997, the Bank acquired an inactive insurance agency, Commercial
National Financial Services Incorporated (the Agency). The Agency in turn
purchased a minority interest in Michigan Bankers Title of Northern Michigan,
LLC (the Title Agency). Except for the investment in the Title Agency, the
Agency is inactive. The investment in the Title Agency and the related dividends
earned during 1999 are not material.
Business is concentrated primarily in a single industry segment - commercial
banking. Commercial provides a full range of banking services to individuals,
agricultural businesses, commercial businesses and industries located in its
service area. Commercial 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. Commercial
offers a variety of deposit products, including checking, savings, money market,
individual retirement accounts and certificates of deposit.
The principal markets for 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 locations in or near
these communities. Commercial does not have any material foreign assets or
income.
The principal source of revenue for Commercial is interest and fees on loans. On
a consolidated basis, interest and fees on loans accounted for 80.14% total
revenue in 1999, 76.45% in 1998, and 80.00% in 1997. Interest on investment
securities accounted for 10.91% of total revenue in 1999, 11.27% in 1998, and
9.89% in 1997.
- --------------------------------------------------------------------------------
1999 HIGHLIGHTS
- --------------------------------------------------------------------------------
Net income for the year ended December 31, 1999 was $2,731,000, 6.7% or $171,000
more than the $2,560,000 earned during the year ended December 31, 1998. Basic
earnings per share increased to $.86 in 1999 from $.81 in 1998. The return on
average equity improved to 14.67% from 14.39%. The return on average assets
remained unchanged at 1.47% compared to 1998.
The primary reasons for the improved earnings are as follows: a $858,000 or
11.35% increase in net interest income offset by a $256,000 or 18.89% decrease
in noninterest income, and a $277,000 or 5.46% increase in non-interest expense.
Total assets increased to $191.0 million in 1999 from $181.1 million in 1998.
This represents a $9.9 million or 5.47% increase. Net loans increased $16.1
million while the majority of other asset categories decreased or remained
substantially unchanged from the prior year.
5
<PAGE> 7
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Average Balance Sheet and Analysis of Net Interest Income
<TABLE>
<CAPTION>
Years ended December 31,
----------------1 9 9 9------------- ---------------1 9 9 8------------
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) $ 143,026 $ 12,253 8.57% $ 128,312 $ 11,385 8.87%
Investment securities
Taxable 17,808 1,017 5.71 16,048 935 5.83
Tax-exempt (2) 12,331 974 7.90 13,716 1,111 8.10
Federal funds sold and
Other interest bearing deposits 3,881 151 3.89 7,389 352 4.76
Federal Home Loan Bank stock 1,391 111 7.98 1,391 111 7.98
----------------------- -----------------------
Total interest-earning assets 178,437 14,506 8.13 166,856 13,894 8.33
Non-earning assets:
Cash and due from banks 4,905 5,089
Premises and equipment, net 2,827 2,968
Other assets 1,836 1,896
Allowance for loan losses (2,588) (2,205)
---------- ---------
Total assets $ 185,417 $ 174,604
========== =========
Interest-bearing liabilities:
Interest-bearing deposits
Interest-bearing demand $ 25,075 425 1.70 $ 23,200 477 2.06
Savings 41,168 1,048 2.55 37,855 1,062 2.81
Time 58,941 3,017 5.12 58,454 3,239 5.54
Securities sold under agreements
to repurchase 6,649 316 4.75 5,842 296 5.07
U.S. Treasury demand notes and
Federal funds purchased 646 31 4.80 456 24 5.26
Federal Home Loan Bank advances 14,670 863 5.88 12,849 790 6.15
----------------------- -----------------------
Total interest-bearing liabilities 147,149 5,700 3.87 138,656 5,888 4.25
Noninterest-bearing liabilities:
Noninterest-bearing demand 18,623 16,945
Other liabilities 1,027 1,209
Shareholders' equity 18,618 17,794
----------- ---------
Total liabilities and shareholders' equity $ 185,417 $ 174,604
=========== =========
Net interest income/interest rate spread $ 8,806 4.26% $ 8,006 4.08%
========= ==== ========== ====
Net interest margin (3) 4.94% 4.80%
==== ====
</TABLE>
(1) Average outstanding balances include non-accruing loans. Interest on loans
receivable include fees. The inclusion of non-accruing 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 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-earnings assets.
6
<PAGE> 8
The following table analyzes the effect of volume and rate changes on interest
income and expense for the periods indicated.
<TABLE>
<CAPTION>
Years ended December 31,
1 9 9 9 1 9 9 8
-----------COMPARED TO 1998---------- -----------Compared to 1997----------
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) $ 868 $ 1,261 $ (393) $ 33 $ 320 $ (287)
Investment securities:
Taxable 82 100 (18) 267 254 13
Tax-exempt (2) (137) (109) (28) 12 26 (14)
Federal funds sold and
Other interest bearing deposits (201) (136) (65) 77 49 28
Federal Home Loan Bank stock - - - 6 6 -
----------------------------------------------------------------------------------------------------------------
Total interest income 612 1,116 (504) 395 655 (260)
Interest expense:
Interest-bearing deposits
Interest-bearing demand (52) 32 (84) (9) 31 (40)
Savings (14) 84 (98) (47) 7 (54)
Time (222) 25 (247) 161 165 (4)
Securities sold under
agreements to repurchase 20 38 (18) (10) 3 (13)
U.S. Treasury demand notes and
Federal funds purchased 7 9 (2) (6) (5) (1)
Federal Home Loan Bank advances 73 107 (34) 110 100 10
-----------------------------------------------------------------------------------------------------------------
Total interest expense (188) 295 (483) 199 301 (102)
----------------------------------------------------------------------------------------------------------------
Net interest income $ 800 $ 821 $ (21) $ 196 $ 354 $ (158)
================================================================================================================
</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 balance.
(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) 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 allocated to volume and
rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
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,
government monetary and fiscal policies, national and local market interest
rates and customer preference.
Net interest income on a tax equivalent basis was $8.8 million in 1999, an
increase of $800,000 or 10.0%. Tax-equivalent net interest income increased
$196,000 or 2.5% in 1998 compared to 1997. Commercial's 1999 increase in net
interest income was the result of an increase in earning assets.
Net interest margin is net interest income (fully tax equivalent) divided by
average earning assets. Net interest margin increased to 4.94% from 4.80% in
1998. During 1999, the Federal Reserve increased the discount rate by 25 basis
point increments three times. As a result, Commercial's prime lending rate
increased from 7.75% at December 31, 1998 to 8.50% at December 31, 1999.
Commercial experiences an immediate and short-term benefit to net interest
income from the increase in prime.
Local deposit rates have also increased, however, these rates appear to be less
sensitive to a general increase in market rates. Offsetting the benefit of
increased loan and investment interest rates are increased costs associated with
replacing maturing Federal Home Loan Bank (FHLB) advances and attracting
out-of-market certificates of deposit.
7
<PAGE> 9
The interest rates on these funding sources are sensitive to changes in market
interest rates. These sources, therefore, have become more expensive during the
second half of 1999. During the first half of 1999, Commercial was able to renew
maturing FHLB advances at a less expensive cost, however, this trend reversed
during the second half of 1999. Commercial then renewed maturing FHLB advances
with short-term advances. These two factors assisted Commercial in reducing the
cost of FHLB advances from 6.15% to 5.88%.
- --------------------------------------------------------------------------------
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, loan growth 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 $360,000 in 1999 and 1998, and $395,000 in
1997. The provision was higher during 1997 in recognition of weaknesses in the
indirect auto loan portfolio. Those weaknesses have since been addressed, and
the Bank no longer participates in the indirect auto loan market. The allowance
for loan losses to total loan ratio was 1.83%, 1.73%, and 1.66% for 1999, 1998,
and 1997.
The loan portfolio continued to perform well during 1999. Net recoveries during
1999 were $88,000 compared to net charge-offs of $80,000 and $155,000 in 1998
and 1997.
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Noninterest income was $1,099,000 for the year ended December 31, 1999 a
$256,000 or 18.89% decrease compared to the year ended December 31, 1998.
The largest contributing factor to the 1999 decrease in noninterest income was a
$194,000 reduction in net gains on mortgage loan sales. The increase in interest
rates during 1999 eliminated the mortgage refinancing business. Mortgage volume
is being generated almost exclusively from purchase money transactions.
Commercial has also elected to permanently portfolio a larger portion of
mortgage loans originated during 1999.
Noninterest income was $1,355,000 for the year ended December 31, 1998. This
represented a $313,000 or 30.04% increase over 1997. Commercial benefited from a
full year's effect of deposit fee increases instituted during the second quarter
of 1997.
The low interest rate environment experienced in 1998 contributed to a heavy
volume of mortgage loan refinancing. Net gain on mortgage loan sales increased
$205,000 or 115.17% compared to 1997. A receivable financing program implemented
during 1997 also contributed to the 1998 increase in fee income.
The following table identifies the major sources of noninterest income.
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
- --------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service charge and fees $ 470 $ 485 $ 429
Net gains on mortgage loan sales 189 383 178
Receivable financing fees 197 224 66
Net gains on government
guaranteed loan sales 1 12 42
Gain on sale of securities 2 13 -
Other 240 238 327
- --------------------------------------------------------------
Total noninterest income $ 1,099 $ 1,355 $ 1,042
==============================================================
</TABLE>
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Noninterest expense increased $277,000 or 5.46% compared to 1998. Through a
combination of increased net interest income and cost control, Commercial's
efficiency improved to 53.99% from 54.16%.
Salary expense increased $170,000 or 8.26% compared to 1998. The increase
reflects a tight labor market creating pressure on salaries for all positions
and skill levels. Full time equivalents (FTE's) increased slightly to 72 at
December 31, 1999 compared to 71 in 1998 and 69 in 1997. Salary
8
<PAGE> 10
expense for 1998 reflects a full year's benefit from a general staff reduction
that occurred early in 1997.
Management sold the Bank's credit card portfolio in the first quarter of 1998
and the merchant VISA program during the fourth quarter of 1997. This eliminated
credit card expense in 1999 and reduced 1998 credit card processing fees by
$97,000 or 75.78%.
Other taxes, consisting primarily of Michigan Single Business Tax, increased in
1999 as a result of increased earnings.
Professional fees increased $60,000 or 23.90% during 1999. Computer consulting
costs related to Y2K, and supporting new networks and other technology projects
were the primary causes for the increase.
Noninterest expense in 1998 decreased $740,000 or 12.74% compared to 1997. After
adjusting for the $547,000 related to the 1997 branch closings, 1998 noninterest
expense decreased $193,000 or 3.67%.
In the second quarter of 1997, management restructured the Bank to improve
efficiency and performance. Part of this process included: reviewing branch
performance, reducing full time equivalents and instituting tighter controls
over overhead costs.
This process concluded with a general staff reduction, and the closing of two
supermarket branches. The corresponding reduction in FTE's helped decrease
salaries and employee benefits expense as a percentage of average assets to
1.46% in 1998 from 1.53% in 1997.
During 1998, Commercial contracted with third parties for independent loan
review and compliance testing. The Bank also utilized the services of third
parties to assist with the assessment and remediation of Y2K related systems. As
a result, professional fees increased $36,000 or 16.74% in 1998 compared to
1997.
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
- ----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Salaries $ 2,227 $ 2,057 $ 2,058
Employee benefits 521 501 459
Occupancy 305 278 264
Furniture and equipment 732 722 725
Credit card processing - 31 128
FDIC insurance 22 22 10
Other taxes 140 117 87
Printing and supplies 155 161 160
Postage 95 87 96
Telephone 117 113 110
Advertising 67 67 64
Other insurance 46 38 44
Branch closing costs - - 547
Professional fees 311 251 215
Other expenses 609 625 843
- ----------------------------------------------------------------
Total noninterest expense $ 5,347 $ 5,070 $ 5,810
================================================================
Efficiency Ratio 53.99% 54.16% 65.63%
================================================================
Noninterest expense as percentage
of average assets 2.88% 2.90% 3.53%
================================================================
Salaries and employee benefits as
a percentage of average assets 1.48% 1.46% 1.53%
================================================================
</TABLE>
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE
- --------------------------------------------------------------------------------
Commercial's income tax expense was $1,077,000 in 1999 compared to $924,000 in
1998 and $500,000 in 1997. The increase from 1997 through 1999 was primarily the
result of increased income before income tax and a decrease in tax-exempt
interest income in relation to total pretax income.
The statutory federal tax rate during 1999, 1998 and 1997 was 34%. Commercial'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 increased the effective tax rate to 28.28% in
1999, from 26.51% in 1998 and 22.80% in 1997.
9
<PAGE> 11
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
The following table shows, securities by classification as of December 31, 1999,
the amounts and weighted-average yields by maturity period:
<TABLE>
<CAPTION>
- --------------------------------------------------------------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>
AVAILABLE FOR SALE
U.S. Treasuries
and government
agencies $2,998,750 5.75% $10,407,938 5.83% $ - $ - $13,406,688 5.81%
State and municipal (1) 675,246 5.93% 1,406,777 6.17% 775,542 6.63% - 2,857,565 6.24%
Other securities - 1,482,500 5.87% - - 1,482,500 5.87%
- --------------------------------------------------------------------------------------------------------------------------------
Total $3,673,996 $13,297,215 $ 775,542 $ - $17,746,753
================================================================================================================================
HELD TO MATURITY
U.S. Treasuries
and government
agencies $ - $ - $ - $ - $ -
State and municipal (1) 855,522 7.83% 6,053,637 7.14% 1,904,827 7.86% - 8,813,986 7.36%
Other securities - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 855,522 $ 6,053,637 $ 1,904,827 $ - $ 8,813,986
================================================================================================================================
</TABLE>
(1) Yields on tax-exempt securities are computed on a fully taxable-equivalent
basis.
Commercial'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. Decisions to purchase securities and the maturity date selected are
coordinated with an overall plan to manage liquidity and interest rate exposure.
The Committee does not invest in derivative securities. Commercial holds no
impaired securities at December 31, 1999. As of December 31, 1999, the aggregate
book value of investment securities issued by the State of Michigan and all its
political subdivisions totaled $8.9 million with an aggregate market value of
$9.1 million.
The U.S. Treasury and government agency securities identified as available for
sale are laddered to mature over five years with a three year average life. The
goal is to reduce the volatility of the investment portfolio yield and still
provide a predictable source of liquidity.
The amortized cost of investment securities, as of the dates indicated, are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
AVAILABLE HELD TO AVAILABLE HELD TO
FOR SALE MATURITY FOR SALE MATURITY
- ------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries and
government agencies $ 13,586 $ - $ 13,663 $ 1,000
State and municipal 2,885 8,814 2,530 11,017
Other 1,506 - 902 -
- ------------------------------------------------------------------
Total $ 17,977 $ 8,814 $ 17,095 $ 12,017
==================================================================
</TABLE>
10
<PAGE> 12
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
- --------------------------------------------------------------------------------
Lending efforts are concentrated primarily in the Michigan communities in which
Commercial's branches are located. Commercial has no foreign loans.
Total loans increased $16.6 million or 12.2% from year-end 1998 to 1999.
Commercial, real estate-construction and real estate-mortgage all increased
during 1999 as a result of strong demand and a stable economy. Commercial,
financial and agricultural loans increased $9.8 million or 14.01%, real
estate-construction and real estate-mortgage loans increased $5.0 million or
45.01% and $4.1 million or 9.53%. However, the increase in interest rates has
reduced the mortgage refinance business. Commercial offers a variety of
non-conforming residential real estate products that have been well received by
individuals seeking to finance a residential purchase. As a result, we have been
able to grow the residential real estate balances.
Consumer and other loans decreased $2.4 million or 20.57%. 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 profitable and
posed unnecessary underwriting risk. The exit from this market contributed to
the decline in the consumer and other loan totals in 1999 and 1998.
The following table presents the amount of loans outstanding by loan type:
<TABLE>
<CAPTION>
December 31,
1999 1998
- --------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial, financial and
agricultural $ 80,116 $ 70,272
Real estate - construction 16,145 11,127
Real estate - mortgage 47,085 42,988
Consumer and other 9,121 11,483
- --------------------------------------------------------
Total loans $ 152,467 $ 135,870
========================================================
</TABLE>
The following table shows the maturity of loans (excluding real estate-mortgage
and consumer and other loans) outstanding at December 31, 1999. 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 Due
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 22,880 $ 47,644 $ 8,636 $ 956 $ 80,116
Real estate - construction 3,652 5,989 4,330 2,174 16,145
- -------------------------------------------------------------------------------------------------------------------
Total $ 26,532 $ 53,633 $ 12,966 $ 3,130 $ 96,261
===================================================================================================================
Loans due after one year:
Fixed rate $ 43,431
Floating or adjustable rate 26,298
- ------------------------------------------------
Total $ 69,729
================================================
</TABLE>
- --------------------------------------------------------------------------------
ASSET QUALITY
- --------------------------------------------------------------------------------
Management believes that a conservative credit culture is critical to successful
performance. Through Officer and Director Loan Committees, management reviews
and monitors the quality of the various loan portfolios. Loan performance is
also reviewed regularly by internal and external loan review personnel.
Commercial continues to use independent loan review services. A strong regional
economy and low unemployment have contributed to an ideal lending environment.
The recent rise in interest rates does not appear to have significantly affected
the repayment ability of our loan customers.
Loans are placed on non-accrual status when principal or interest is past due 90
days or more, the loan is not well-secured, and is in the process of collection
or when reasonable doubt exists concerning collectibility of interest or
principal. Any interest previously accrued in the current
11
<PAGE> 13
period, but not collected, is reversed and charged against current earnings.
At December 31, 1999 Commercial had $725,000 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 regularly reviewed. As of December 31, 1999 there were no
concentrations of loans exceeding 10% of total loans.
The following table summarizes non-accrual, past due and restructured loans:
<TABLE>
<CAPTION>
December 31,
1999 1998
- ---------------------------------------------------------------
(In thousands)
<S> <C> <C>
Non-accrual loans $ 963 $ 25
Accruing loans past due 90 days or more 14 30
Other real estate owned - -
Restructured loans - 37
- ---------------------------------------------------------------
Total non-performing assets $ 977 $ 92
===============================================================
Total non-performing assets
as a percentage of total loans .65% .07%
===============================================================
</TABLE>
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
The following table summarizes changes in the allowance for possible loan
losses.
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998
- -----------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Loans
Amount of loans outstanding at
end of year $ 152,467 $ 135,870
=============================================================================
Daily average of loans
outstanding for the year $ 143,026 $ 128,312
=============================================================================
Balance of allowance at beginning of year $ 2,344 $ 2,064
Loans charged off:
Commercial, financial and agricultural - (33)
Real estate - mortgage - -
Consumer and other (29) (139)
--------------------------------------------------------------------------
Total loans charged off (29) (172)
- -----------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 76 33
Real estate - mortgage 15 10
Consumer and other 26 49
--------------------------------------------------------------------------
Total recoveries 117 92
--------------------------------------------------------------------------
Net (charge-offs)/recoveries 88 (80)
Provision for loan losses (1) 360 360
- -----------------------------------------------------------------------------
Allowance at end of period $ 2,792 $ 2,344
=============================================================================
Ratio of net (charge-offs)/recoveries during period to
average loans outstanding during
the period .06% (.06)%
=============================================================================
Ratio of allowance for loan losses to
loans outstanding at end of period 1.83% 1.73%
=============================================================================
</TABLE>
(1) The provision for loan losses charged to expense is based on loan loss
experience, loan growth 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.
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the probability of losses being
incurred as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
Percent Percent
Of Loans of Loans
To Total to Total
Allowance Loans Allowance Loans
- ----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 1,352 52.55% $ 596 51.72%
Real estate - construction - 10.59 - 8.19
Real estate - mortgage 100 30.88 96 31.64
Consumer and other 351 5.98 362 8.45
Unallocated 989 - 1,290 -
- ---------------------------------------------------------------------
Total $ 2,792 100.00% $2,344 100.00%
=====================================================================
</TABLE>
12
<PAGE> 14
- --------------------------------------------------------------------------------
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 sources of liquid funds must be available. These sources include
short-term investments, repayments of loans, maturing and called securities,
sales of assets, growth in deposits and other liabilities and profits.
At December 31, 1999, Commercial had $1.3 million in federal funds sold. The
Bank also has $8.4 million of additional borrowing capacity at the Federal Home
Loan Bank and $9.0 million of borrowing capacity with correspondent banks. The
Federal Reserve also approved a $1.5 million line of credit with the Federal
Reserve Discount Window.
During 1999, Commercial also generated $3.3 million in cash from operating
activities. All of these sources are available to meet cash flow needs of loan
and deposit customers.
Commercial 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. Commercial was also approved for a $1.5
million line of credit with a correspondent institution.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
At December 31, 1999, capital totaled $18,965,000. 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, 1999, the Corporation and the Bank exceeded all regulatory
minimum capital requirements and are considered to be "well capitalized".
- --------------------------------------------------------------------------------
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 this process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commercial's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. Commercial's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Also, Commercial 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 earnings and capital.
Accordingly, effective risk management that maintains IRR at prudent levels is
essential to Commercial's safety and soundness.
Evaluating exposure to changes in interest rates includes assessing both the
adequacy of management's process used to control IRR and the organization's
quantitative level of exposure. When assessing the IRR management process,
Commercial 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 assessment of existing and
13
<PAGE> 15
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.
Commercial derives the majority of income from the excess of interest collected
over interest paid. The rates of interest earned on its assets and owed on its
liabilities generally are established contractually for a period of time. Since
market interest rates change over time, Commercial 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 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.
Various techniques might be used by an institution to minimize IRR. Commercial
periodically analyzes assets and liabilities and makes 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.
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. Commercial has not
purchased derivative financial instruments in the past and does not presently
intend to purchase such instruments.
Commercial is also subject to repayment risk when interest rates fall. For
example, mortgage loans and other financial assets may be prepaid by a debtor so
that the debtor may refinance their obligations at new, lower rates. Prepayments
of assets carrying higher rates reduces 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, Commercial seeks to have in place sources of cash to
meet short-term demands. These funds can be obtained by increasing deposits or
selling assets. Also, Federal Home Loan Bank advances and short-term borrowings
provide additional sources of liquidity.
The following table provides information about Commercial's financial
instruments that are sensitive to changes in interest rates as of December 31,
1999. Commercial 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.
14
<PAGE> 16
Principal/notional amount as of December 31, 1999 maturing in:
<TABLE>
<CAPTION>
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Federal funds sold and other
interest bearing deposits $ 2,978 $ - $ - $ - $ - $ - $ 2,978 $ 2,978
Average interest rate 4.91% - - - - - 4.91%
Fixed interest rate securities 4,530 5,810 4,760 5,690 3,260 2,690 26,740 26,687
Average interest rate 6.23% 5.93% 6.25% 6.24% 6.81% 7.50% 6.37%
FHLB stock 1,391 - - - - - 1,391 1,391
Average interest rate 8.00% - - - - - 8.00%
Fixed interest rate loans 9,943 7,627 13,496 17,515 15,540 21,581 85,702 84,672
Average interest rate 7.71% 8.73% 8.70% 8.33% 8.29% 7.64% 8.17%
Variable interest rate loans 20,856 3,288 4,637 2,101 6,940 28,943 66,765 66,765
Average interest rate 9.27% 9.40% 9.22% 9.27% 9.42% 7.97% 8.73%
RATE SENSITIVE LIABILITIES
Interest-bearing demand 26,639 - - - - - 26,639 26,639
Average interest rate 1.69% - - - - - 1.69%
Savings 41,272 - - - - - 41,272 41,272
Average interest rate 2.65% - - - - - 2.65%
Time deposits 46,764 8,744 2,884 1,424 734 207 60,757 61,226
Average interest rate 4.05% 4.55% 4.54% 4.75% 5.08% 4.51% 4.17%
Variable interest rate securities
sold under agreements
to repurchase 4,690 - - - - - 4,690 4,690
Average interest rate 5.22% - - - - - 5.22%
Variable interest rate U.S.
Treasury demand notes 2,191 - - - - - 2,191 2,191
Average interest rate 4.95% - - - - - 4.95%
Fixed interest rate FHLB advances 8,000 1,000 - 1,500 - 1,000 11,500 11,195
Average interest rate 5.95% 6.50% - 5.48% - 5.35% 5.80%
Variable interest rate FHLB advances 5,000 - - - - - 5,000 4,998
Average interest rate 5.70% - - - - - 5.70%
</TABLE>
Principal/notional amount as of December 31, 1998 maturing in:
<TABLE>
<CAPTION>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Federal funds sold and other
interest bearing deposits $ 5,427 $ - $ - $ - $ - $ - $ 5,427 $ 5,427
Average interest rate 4.84% - - - - - 4.84%
Fixed interest rate securities 5,495 5,030 4,810 3,760 3,190 6,670 28,955 29,821
Average interest rate 6.44% 6.20% 6.04% 6.29% 6.67% 7.12% 6.49%
FHLB stock 1,391 - - - - - 1,391 1,391
Average interest rate 8.00% - - - - - 8.00%
Fixed interest rate loans 8,709 8,960 14,152 8,870 22,125 18,263 81,079 81,327
Average interest rate 12.12% 9.50% 8.81% 8.71% 8.50% 7.73% 8.90%
Variable interest rate loans 21,679 2,806 2,381 4,881 2,410 20,633 54,790 54,790
Average interest rate 9.00% 8.97% 8.86% 8.75% 8.80% 7.63% 8.45%
RATE SENSITIVE LIABILITIES
Interest-bearing demand 25,462 - - - - - 25,462 25,462
Average interest rate 1.79% - - - - - 1.79%
Savings 38,783 - - - - - 38,783 38,783
Average interest rate 2.59% - - - - - 2.59%
Time deposits 40,148 10,511 3,129 1,591 1,252 250 56,881 57,577
Average interest rate 4.76% 4.88% 5.14% 4.66% 4.91% 5.29% 4.75%
Variable interest rate securities
sold under agreements
to repurchase 6,965 - - - - - 6,965 6,965
Average interest rate 4.66% - - - - - 4.66%
Variable interest rate U.S.
Treasury demand notes 1,553 - - - - - 1,553 1,553
Average interest rate 4.42% - - - - - 4.42%
Fixed interest rate FHLB advances 3,000 4,000 1,000 - 2,500 - 10,500 10,248
Average interest rate 6.11% 6.40% 6.50% - 5.30% - 6.01%
Variable interest rate FHLB advances 1,000 - - - - - 1,000 1,000
Average interest rate 4.95% - - - - - 4.95%
</TABLE>
15
<PAGE> 17
- --------------------------------------------------------------------------------
YEAR 2000 ISSUES
- --------------------------------------------------------------------------------
On December 31, 1999, Commercial successfully rolled over all computer systems
to January 1, 2000. We noted no computer errors caused by a failure to recognize
the year 2000. In the weeks prior to December 31, 1999, Commercial increased
cash reserves and short term liquidity in anticipation of cash withdrawals as
individuals and businesses implemented their own contingency plans. Commercial
was able to meet all liquidity needs without accessing any contingency cash
reserves.
Commercial is not aware of any of our customers, their related interests, and
our vendors who have experienced Y2K related problems that threatens their
ability to perform those tasks necessary to maintain operations.
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENT
- --------------------------------------------------------------------------------
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
Commercial 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 in the national and local economies.
These are representative of the Future Factors that could cause a difference
between an actual outcome and a forward-looking statement.
16
<PAGE> 18
COMMERCIAL NATIONAL FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
[CROWE LOGO]
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, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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.
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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 3, 2000
17
<PAGE> 19
COMMERCIAL NATIONAL FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 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 five non-management
Directors. The Committee meets periodically with the internal auditors and the
independent auditors.
Jeffrey S. Barker Patrick G. Duffy
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
18
<PAGE> 20
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,690,716 $ 7,128,357
Federal funds sold 1,250,000 4,000,000
Other interest bearing deposits 1,728,377 1,427,071
- ------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,669,093 12,555,428
Securities available for sale 17,746,753 17,311,849
Securities held to maturity (fair value $8,940,714 - 1999, $12,510,000 - 1998) 8,813,986 12,017,433
Federal Home Loan Bank stock, at cost 1,391,300 1,391,300
Loans, net 149,674,589 133,525,631
Premises and equipment, net 2,694,511 2,790,001
Accrued interest receivable and other assets 2,031,782 1,503,999
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 191,022,014 $ 181,095,641
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 18,535,251 $ 20,048,154
Interest-bearing demand 26,639,403 25,461,761
Savings 41,271,920 38,783,466
Time 60,757,458 56,881,316
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 147,204,032 141,174,697
Securities sold under agreements to repurchase 4,689,557 6,965,058
U.S. Treasury demand notes 2,190,639 1,552,997
Federal Home Loan Bank advances 16,500,000 11,500,000
Accrued expenses and other liabilities 1,473,253 2,242,787
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 172,057,481 163,435,539
Shareholders' equity
Common stock and paid-in-capital, no par value-
5,000,000 shares authorized; shares issued
and outstanding 1999 - 3,189,025 and 1998 - 994,331 19,946,643 17,525,466
Retained earnings (deficit) (830,339) (8,483)
Accumulated other comprehensive income/(loss), net of tax (151,771) 143,119
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 18,964,533 17,660,102
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 191,022,014 $ 181,095,641
========================================================================================================================
</TABLE>
See accompanying notes
19
<PAGE> 21
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Loans, including fees $ 12,194,157 $ 11,315,309 $ 11,269,750
Taxable securities 1,017,086 934,747 667,930
Nontaxable securities 642,807 733,098 725,491
Federal funds sold 114,970 325,384 274,965
Federal Home Loan Bank stock dividends 111,304 111,409 105,098
Interest on other deposits 35,867 26,339 -
- -------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 14,116,191 13,446,286 13,043,234
Interest expense
Deposits 4,489,658 4,778,263 4,674,419
Securities sold under agreements to repurchase 316,144 295,611 305,330
Federal Home Loan Bank advances 862,879 789,975 680,023
Other 31,143 23,704 29,504
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 5,699,824 5,887,553 5,689,276
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,416,367 7,558,733 7,353,958
Provision for loan losses 360,000 360,000 395,000
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,056,367 7,198,733 6,958,958
- -------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges and fees 469,991 484,521 429,349
Net gains on loan sales 190,250 394,762 219,935
Receivable financing fees 196,516 223,935 66,433
Security gains 2,134 12,953 -
Other 240,108 238,734 326,783
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,098,999 1,354,905 1,042,500
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and employee benefits 2,748,623 2,557,625 2,516,696
Occupancy and equipment 1,036,857 1,000,482 989,213
FDIC insurance 22,359 22,047 9,925
Branch closing costs - - 546,614
Printing, postage and supplies 249,743 247,876 309,718
Professional and outside services 310,847 251,417 214,636
Other 979,065 990,640 1,222,896
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,347,494 5,070,087 5,809,698
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 3,807,872 3,483,551 2,191,760
Income tax expense 1,077,000 923,537 499,650
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,730,872 $ 2,560,014 $ 1,692,110
===================================================================================================================
Per share information
Basic earnings $ .86 $ .81 $ .54
Diluted earnings $ .86 $ .80 $ .54
Dividends declared $ .55 $ .47 $ .37
</TABLE>
See accompanying notes
20
<PAGE> 22
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock and Paid Earnings Income/(Loss), Equity
In Capital (Deficit) Net of Tax
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $ 13,996,241 $ 1,499,422 $ 15,495,663
Comprehensive income:
Net income 1,692,110 1,692,110
Net change in net unrealized gains (losses)
on securities available for sale $ 5,430 5,430
Tax effect (1,846) (1,846)
----------------------------
Total comprehensive income 1,695,694
---------------
Cash dividends declared, $0.37 per share (1,171,442) (1,171,442)
Payment of 5% stock dividend 1,368,669 (1,372,393) (3,724)
Issued under dividend reinvestment program 390,739 390,739
Issued under stock option plans 476,212 476,212
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 16,231,861 647,697 3,584 16,883,142
Comprehensive income:
Net income 2,560,014 2,560,014
Net change in unrealized gains (losses) on
securities available for sale 224,371 224,371
Reclassification adjustment for gains and (losses)
recognized in income (12,953) (12,953)
Tax effect (71,883) (71,883)
-----------------------------
Total comprehensive income 2,699,549
---------------
Cash dividends declared, $0.47 per share (1,476,518) (1,476,518)
Payment of 5% stock dividend 1,735,374 (1,739,676) (4,302)
Issued under dividend reinvestment program 548,186 548,186
Issued under stock option plans 122,357 122,357
Repurchase and retirement of 94,491 shares (1,112,312) (1,112,312)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 17,525,466 (8,483) 143,119 17,660,102
COMPREHENSIVE INCOME:
NET INCOME 2,730,872 2,730,872
NET CHANGE IN UNREALIZED GAINS (LOSSES) ON
SECURITIES AVAILABLE FOR SALE (444,669) (444,669)
RECLASSIFICATION ADJUSTMENT FOR GAINS AND (LOSSES)
RECOGNIZED IN INCOME (2,134) (2,134)
TAX EFFECT 151,913 151,913
-----------------------------
TOTAL COMPREHENSIVE INCOME 2,435,982
---------------
CASH DIVIDENDS DECLARED, $0.55 PER SHARE (1,730,590) (1,730,590)
PAYMENT OF 5% STOCK DIVIDEND 1,822,372 (1,822,138) 234
ISSUED UNDER DIVIDEND REINVESTMENT PROGRAM 686,391 686,391
ISSUED UNDER STOCK OPTION PLANS 159,062 159,062
ISSUED UNDER EMPLOYEE BENEFIT PLAN 41,795 41,795
REPURCHASE AND RETIREMENT OF 22,938 SHARES (288,443) (288,443)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 19,946,643 $ (830,339) $ (151,771) $ 18,964,533
=======================================================================================================================
</TABLE>
See accompanying notes
21
<PAGE> 23
COMMERCIAL NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,730,872 $ 2,560,014 $ 1,692,110
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan losses 360,000 360,000 395,000
Depreciation, amortization and accretion 751,785 728,296 404,668
Gain on sales of securities available for sale (2,134) - -
Net gain on loan sales (190,250) (394,762) (180,363)
Originations of loans held for sale (8,335,645) (17,200,058) (10,184,792)
Proceeds from sales of loans held for sale 9,197,895 17,176,070 9,974,905
Accrued interest receivable and other assets (375,870) (129,818) 488,214
Accrued expenses and other liabilities (818,242) 490,275 482,802
- -----------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 3,318,411 3,590,017 3,072,544
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (8,656,075) (15,729,554) (8,422,708)
Purchases of securities held to maturity - - (4,454,227)
Proceeds from maturities of securities held to maturity 3,196,600 8,385,000 9,560,000
Proceeds from maturities of securities available for sale 7,149,999 7,000,000 -
Proceeds from sales of securities available for sale 500,664 - -
Purchases of Federal Home Loan Bank stock - - (128,900)
Net change in loans (17,196,144) (11,187,193) (1,980,964)
Purchases of premises and equipment, net (508,423) (180,560) 344,157
- -----------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (15,513,379) (11,712,307) (5,082,642)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 6,029,335 7,227,806 930,069
Net change in securities sold under agreements to repurchase (2,275,501) 2,813,214 (1,450,402)
Net change in U.S. Treasury demand notes 637,642 (1,200,489) 1,811,518
Proceeds from Federal Home Loan Bank advances 24,000,000 10,500,000 7,000,000
Repayment of Federal Home Loan Bank advances (19,000,000) (12,000,000) (4,000,000)
Dividends paid and fractional shares (1,681,648) (1,397,768) (1,122,158)
Proceeds from sale of common stock 887,248 670,543 866,951
Repurchase and retirement of shares of common stock (288,443) (1,112,312) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 8,308,633 5,500,994 4,035,978
- -----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,886,335) (2,621,296) 2,025,880
Cash and cash equivalents at beginning of year 12,555,428 15,176,724 13,150,844
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,669,093 $ 12,555,428 $ 15,176,724
=======================================================================================================================
Cash paid during the year for
Interest $ 5,713,615 $ 5,937,086 $ 5,624,266
Federal income taxes 1,506,000 740,000 469,250
</TABLE>
See accompanying notes
22
<PAGE> 24
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 Commercial), 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, the Bank and CNFC Financial Services Inc., a
wholly-owned subsidiary of the Bank. Intercompany accounts and transactions are
eliminated in consolidation.
NATURE OF OPERATIONS, BUSINESS SEGMENTS AND CONCENTRATIONS OF CREDIT RISK The
Corporation is a one-bank holding company which conducts limited business
activities. The Bank performs the majority of business activities.
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. While the Corporation's chief
decision makers monitor the revenue stream of various Corporate products and
services, operations are managed and financial performance is evaluated on a
Corporation-wide basis. Accordingly, all of the Corporation's banking operations
are considered by management to be aggregated into one operating segment.
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.
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 in other comprehensive
income. Trading securities are reported at fair value with unrealized gains and
losses included in income. Other securities such as Federal Home Loan Bank Stock
are carried at cost.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest and dividend income, includes amortization of
purchase premiums and discounts. Securities are written down to fair value when
a decline in fair value is not temporary.
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 Loans 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
23
<PAGE> 25
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
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 subjective. Management estimates the allowance
balance using past loan loss experience, the nature and volume of 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.
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.
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. Major improvements are capitalized.
SERVICING RIGHTS 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.
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 at December
31, 1999 and 1998.
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.
EMPLOYEE BENEFITS A benefit plan with 401(k) features cover substantially all
employees. The plan allows participant compensation deferrals. The amount of any
matching contribution is based solely on the discretion of the board of
directors. Historically, Commercial has matched up to 6% of such deferrals at
100%.
STOCK COMPENSATION 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.
24
<PAGE> 26
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
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 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 1999, 1998 and 1997 and the 3 for 1 stock split
recorded in September 1999.
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.
COMPREHENSIVE INCOME Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in
unrealized appreciation (depreciation) on securities available for sale, net of
tax, which is also recognized as a separate component of shareholders' equity.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit issued to meet customer's needs. The face amount for
these items represents the exposure to loss before considering customer
collateral or ability to repay. Such financial instruments are recorded when
they are funded.
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.
25
<PAGE> 27
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and fair value of securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURIES AND GOVERNMENT AGENCIES $ 13,586,123 $ 100 $ (179,535) $ 13,406,688
STATE AND MUNICIPALS 2,885,041 474 (27,950) 2,857,565
CORPORATE 1,505,544 - (23,044) 1,482,500
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $ 17,976,708 $ 574 $ (230,529) $ 17,746,753
=============================================================================================================================
December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries and government agencies $ 13,662,894 $ 164,888 $ - $ 13,827,782
State and municipals 2,529,666 42,339 - 2,572,005
Corporate 902,441 9,621 - 912,062
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 17,095,001 $ 216,848 $ - $ 17,311,849
=============================================================================================================================
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATE AND MUNICIPALS $ 8,813,986 $ 129,632 $ (2,904) $ 8,940,714
=============================================================================================================================
December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries and government agencies $ 1,000,125 $ 875 $ - $ 1,001,000
State and municipals 11,017,308 491,692 - 11,509,000
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 12,017,433 $ 492,567 $ - $ 12,510,000
=============================================================================================================================
</TABLE>
The amortized cost and fair value of debt securities at year-end 1999, 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 $ 3,679,431 $ 3,673,996 $ 855,522 $ 861,109
Due from one to five years 13,510,511 13,297,215 6,053,637 6,129,950
Due from five to ten years 786,766 775,542 1,904,827 1,949,655
- ----------------------------------------------------------------------------------------------------------
Total $ 17,976,708 $ 17,746,753 $ 8,813,986 $ 8,940,714
==========================================================================================================
</TABLE>
There was one security sale during 1999 and no sales of securities during 1998
and 1997.
In addition to Federal Home Loan Bank (FHLB) stock, securities having an
amortized cost of approximately $16,273,000 and $18,400,000 at year end 1999 and
1998 were pledged to secure FHLB advances, public deposits, securities
26
<PAGE> 28
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 1999 and
1998, the amortized cost of securities issued by the state of Michigan and all
its political subdivisions totaled $8,947,000 and $9,892,000 with an estimated
market value of $9,052,000 and $10,350,000.
- --------------------------------------------------------------------------------
NOTES 3 - LOANS RECEIVABLE
- --------------------------------------------------------------------------------
Year-end loans receivable are as follows:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Real estate
Secured by single family
residential properties $ 47,084,838 $ 42,988,361
Secured by non-farm
nonresidential properties 48,561,801 41,199,791
Secured by farmland 3,858,865 4,796,595
Secured by multi-family
residential properties 6,002,469 5,607,091
Construction/land development 16,144,849 11,126,942
Installment loans 9,120,976 11,482,473
Commercial 21,693,084 18,668,354
- -------------------------------------------------------------
Gross loans receivable 152,466,882 135,869,607
Allowance for loan losses (2,792,293) (2,343,976)
- -------------------------------------------------------------
Net loans receivable $149,674,589 $133,525,631
=============================================================
</TABLE>
Loans held for sale, included in real estate secured by single family
residential properties, were $137,000 and $809,000 at year-end 1999 and 1998.
Certain directors and executive officers, including associates of such persons,
were loan customers of Commercial during 1999 and 1998. A summary of aggregate
related party loan activity for loans aggregating $60,000 or more to any related
party is as follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 4,178,000 $ 4,149,000
New loans 25,484,000 11,578,000
Repayments (23,034,000) (11,361,000)
Other changes, net 51,000 (188,000)
- -----------------------------------------------------------
Balance at end of year $ 6,679,000 $ 4,178,000
===========================================================
</TABLE>
Other changes include adjustments for persons included in one reporting period
that are not reported in the other reporting period.
- --------------------------------------------------------------------------------
NOTES 4 - ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 2,343,976 $2,063,668 $ 1,824,080
Loan charge-offs (28,614) (171,467) (278,129)
Loan recoveries 116,931 91,775 122,717
- -----------------------------------------------------------
Net loan recoveries
(charge-offs) 88,317 (79,692) (155,412)
Provision for loan
losses 360,000 360,000 395,000
- -----------------------------------------------------------
Ending balance $ 2,792,293 $2,343,976 $ 2,063,668
===========================================================
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Year-end loans with allowance for
loan losses allocated $988,984 $ 54,694
Year-end loans with no allowance
for loan losses allocated - -
- ------------------------------------------------------------
Total impaired loans $988,984 $ 54,694
============================================================
</TABLE>
27
<PAGE> 29
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Additional information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Amount of the allowance allocated $195,341 $ -
Average balance of impaired loans
during the year 555,446 50,640
Interest income recognized during
impairment 1,000 2,115
Cash-basis interest income
recognized - -
<CAPTION>
December 31,
1999 1998
- ------------------------------------------------------------
(In thousands)
<S> <C> <C>
Non-accrual loans $ 963 $ 25
Accruing loans past due 90 days or
more 14 30
Restructured loans - 37
- -----------------------------------------------------------
Total non-performing assets $ 977 $ 92
===========================================================
Total non-performing assets
as a percentage of total loans .65% .07%
===========================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5 - LOAN SERVICING
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not reported as assets. These loans
totaled $39,459,000 and $36,156,000 at year-end 1999 and 1998. Related escrow
deposit balances were approximately $(11,000) and $(7,000).
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT, NET
- --------------------------------------------------------------------------------
Year-end premises and equipment consist of:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Land $ 310,689 $ 310,689
Buildings and improvements 2,698,154 2,937,780
Equipment 2,702,569 3,310,811
- ------------------------------------------------------------
Total cost 5,711,412 6,559,280
Less accumulated depreciation (3,016,901) (3,769,279)
- ------------------------------------------------------------
Net premises and equipment $ 2,694,511 $ 2,790,001
============================================================
</TABLE>
Depreciation expense was $603,482, $578,045, and $514,474 in 1999, 1998 and
1997.
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
- --------------------------------------------------------------------------------
At year-end 1999, stated maturities of time deposits were as follows, for the
years ending December 31:
<TABLE>
<S> <C>
2000 $ 46,763,727
2001 8,744,173
2002 2,884,415
2003 1,423,634
2004 734,343
Thereafter 207,166
- -------------------------------------------------------
Total time deposits $ 60,757,458
=======================================================
</TABLE>
Time deposits in denominations of $100,000 or more were $18,135,000 and
$12,871,000 at year-end 1999 and 1998.
At year-end 1999, stated maturities of time deposits in denominations of
$100,000 or more were as follows:
<TABLE>
<S> <C>
In 3 months or less $ 11,701,000
Over 3 through 6 months 2,052,000
Over 6 through 12 months 3,408,000
Over 12 months 974,000
- -----------------------------------------------------
Total time deposits > $100,000 $ 18,135,000
=====================================================
</TABLE>
Related party deposits were $1,298,000 and $1,716,000 at year-end 1999 and 1998.
28
<PAGE> 30
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8-BORROWINGS
- --------------------------------------------------------------------------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Amount outstanding at
year-end $ 4,689,557 $ 6,965,058
Weighted average interest
rate at year-end 5.30% 4.55%
Average daily balance
during the year $ 6,649,185 $ 5,842,000
Weighted average interest
rate during the year 4.75% 5.07%
Maximum month end
balance during the year $ 8,714,656 $ 7,244,000
</TABLE>
FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances totaled $16,500,000 and $11,500,000 at
year-end 1999 and 1998. A majority of the advances have fixed interest rates
ranging from 5.04% to 6.66% in 1999 and 1998. The variable rate advances are
based on the FHLB overnight discount rate plus 30 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 $40,548,000 and $42,681,000 at
year-end 1999 and 1998.
At year-end 1999, scheduled principal reductions on these advances were as
follows for the years ending December 31:
<TABLE>
<S> <C>
2000 $ 13,000,000
2001 1,000,000
2002 -
2003 1,500,000
2004 -
Thereafter 1,000,000
- -------------------------------------------------------
Total FHLB advances $ 16,500,000
=======================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS
- --------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLAN Under Commercial's employee benefit plan, participants may
defer up to 15% of their compensation. Commercial's annual contribution to the
plan is based solely on the discretion of the board of directors. Historically,
Commercial has matched 100% of the elective deferrals on the first 6% of the
participant's compensation. Employee and employer contributions are vested
immediately. The plan covers substantially all employees.
Contributions attributable to the plan were approximately $99,000, $88,000, and
$72,000 in 1999, 1998, and 1997. Expense for the corresponding years was
approximately $102,000, $86,000 and $51,000.
STOCK OPTION PLANS SFAS No. 123, Accounting for Stock-Based Compensation
requires proforma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. 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. No compensation cost was actually recognized
for stock options.
The fair value of options granted during 1999, 1998 and 1997 is estimated using
the following weighted-average information: risk-free interest rate of 6.20%,
4.52% and 6.00%; expected life of 5.0, 5.4 and 4.0 years; expected dividends of
4.0% per year, and nominal expected stock price volatility.
29
<PAGE> 31
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 2,730,872 $2,560,014 $1,692,110
Proforma net income 2,721,097 2,528,496 1,674,677
Basic earnings per share $ .86 $ .81 $ .54
as reported
Proforma basic earnings $ .86 $ .80 $ .54
per share
Diluted earnings per $ .86 $ .80 $ .54
share as reported
Proforma diluted $ .86 $ .79 $ .54
earnings per share
</TABLE>
In future years, the proforma effect 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 granted to employees are issued for 7 year
periods, with vesting occurring over a 5 year period. Options granted to
directors are issued for 2 year periods with vesting occurring after 6 months.
At year-end 1999, 127,476 shares were authorized for future grants. Information
about option grants follows.
<TABLE>
<CAPTION>
Number Weighted Average
of Options Exercise Price
- ----------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of 1997 98,816 $ 6.67
Granted 33,683 7.91
Exercised (73,222) 6.46
Cancelled (1,763) 7.23
Forfeited (900) 7.91
- -----------------------------------------------------------------
Outstanding, end of 1997 56,614 7.65
Granted 31,266 11.58
Exercised (15,565) 7.79
- -----------------------------------------------------------------
OUTSTANDING, END OF 1998 72,315 9.32
GRANTED 33,733 11.74
EXERCISED (16,130) 9.83
- -----------------------------------------------------------------
OUTSTANDING, END OF 1999 89,918 $ 10.14
=================================================================
</TABLE>
The weighted-average fair value of options granted in 1999, 1998 and 1997 was
$1.00, $1.01, and $.76. At year end 1999, options outstanding had a
weighted-average remaining life of 5.2 years and a range of exercise price from
$6.52 to $11.74.
Options exerciseable at year-end are as follows.
<TABLE>
Number Weighted Average
of Options Exercise Price
- -----------------------------------------
<S> <C> <C>
1997 56,614 $ 7.65
1998 49,170 8.26
1999 45,569 8.64
</TABLE>
- --------------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
Income tax expense consists of:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,238,086 $1,029,420 $ 512,496
Deferred (161,086) (105,883) (12,846)
- -------------------------------------------------------
$ 1,077,000 $ 923,537 $ 499,650
=======================================================
</TABLE>
Income tax expense calculated at the statutory federal income tax rate of 34%
differs from actual income tax expense as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rates $ 1,295,000 $1,184,000 $745,000
Increase (decrease) from
Tax-exempt interest income (222,000) (257,000) (262,000)
Goodwill amortization 1,000 9,000 14,000
Other, net 3,000 (12,463) 2,650
- ------------------------------------------------------------------------------
$ 1,077,000 $ 923,537 $499,650
==============================================================================
</TABLE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 544,000 $ 421,000
Accumulated depreciation (174,000) (225,000)
Mortgage servicing rights (53,000) (51,000)
Net unrealized gain (loss) on
securities available for sale 78,185 (73,729)
Other (7,185) 3,729
- ----------------------------------------------------------------
388,000 75,000
Valuation allowance - -
- ----------------------------------------------------------------
Net deferred tax asset $ 388,000 $ 75,000
================================================================
</TABLE>
30
<PAGE> 32
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to
common shareholders $2,730,872 $2,560,014 $1,692,110
===========================================================================
Weighted-average common
shares outstanding for
basic earnings per share 3,167,623 3,174,605 3,105,755
===========================================================================
BASIC EARNINGS PER SHARE $ .86 $ 0.81 $ 0.54
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
DILUTED EARNINGS PER SHARE:
Net income available to
common shareholders $ 2,730,872 $2,560,014 $1,692,110
===========================================================================
Weighted-average common
shares outstanding for
basic earnings per share 3,167,623 3,174,605 3,105,755
Add:
Dilutive effect of assumed exercise
of stock options 13,049 15,750 4,073
- ---------------------------------------------------------------------------
Weighted-average common
and dilutive additional potential
common shares outstanding 3,180,672 3,190,355 3,109,828
===========================================================================
Diluted earnings per share $ .86 $ .80 $ .54
===========================================================================
</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 Commercial's financial condition or
results of operations.
CASH RESERVE AND CLEARING BALANCES At year-end 1999 and 1998, cash reserve and
clearing balance requirements of $1,112,000 and $1,191,000 were required as
deposits with the Federal Reserve or as cash on hand. These balances do not earn
interest.
LEASES Commercial leases certain branch facilities under lease agreements
expiring through 2018, with optional renewal periods through 2028. Two related
party leases were terminated during 1997 in conjunction with the closing of two
branches. Rental expense on all leases totaled $17,000, $16,000, and $84,000 in
1999, 1998 and 1997, including $0 in 1998 and 1999, and $68,000 in 1997 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 December 31,1999
there were no significant future rental commitments.
LOAN COMMITMENTS Commercial is a party to 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. 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. Commercial
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.
31
<PAGE> 33
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Commitments at year-end are as follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $ 23,852,000 $ 21,683,000
Standby letters of credit 720,000 850,000
- -----------------------------------------------------------
Total commitments $ 24,572,000 $ 22,533,000
===========================================================
</TABLE>
At December 31, 1999, fixed and variable interest rate commitments were
$4,295,000 and $20,277,000. Fixed rate commitments interest rates and terms
ranged from 7.0% to 16.2% and one year to eight years.
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate fair values for
financial instruments:
- - 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.
- - Fixed rate loans and deposits, and variable rate loans and deposits with
infrequent repricing or repricing limits, is estimated using discounted
cash flow analyses or underlying collateral values, where applicable.
- - Fair value of Federal Home Loan Bank advances is based on currently
available rates for similar financing.
- - Fair value of other financial instruments and off-balance-sheet items
approximate cost and are not considered significant to this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that if Commercial had disposed
of such items at December 31, 1999 and 1998, the estimated fair values would
have been achieved. Market values may differ depending on various circumstances
not taken into consideration in this methodology. The estimated fair values at
December 31, 1999 and 1998 should not necessarily be considered to apply at
subsequent dates.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Financial instruments at year-end are as follows, in thousands:
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 8,669 $ 8,669 $ 12,555 $ 12,555
Securities 26,561 26,687 29,329 29,822
FHLB stock 1,391 1,391 1,391 1,391
Loans, net of allowance 149,675 148,645 133,526 133,774
- ------------------------------------------------------------------------------------------------------------------
Total financial assets $ 186,296 $ 185,392 $ 176,801 $ 177,542
==================================================================================================================
FINANCIAL LIABILITIES
Demand and savings deposits $ (86,447) $ (86,447) $ (84,293) $ (84,293)
Time deposits (60,757) (61,226) (56,881) (57,577)
Securities sold under agreements
to repurchase (4,690) (4,690) (6,965) (6,965)
U.S. Treasury demand notes (2,191) (2,191) (1,553) (1,553)
Federal Home Loan Bank advances (16,500) (16,193) (11,500) (11,248)
- -------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ (170,585) $ (170,747) $ (161,192) $ (161,636)
===================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 34
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 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. 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, asset growth and
expansion are limited. Plans for capital restoration are also required. The
Corporation and Bank were categorized as well capitalized at year-end 1999 and
1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Actual capital levels (in millions) and minimum required levels were:
Minimum Required
To Be Well
Capitalized
Minimum Required Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED $ 21.0 14.3% $ 11.8 8.0% $ 14.7 10.0%
BANK 17.3 12.3 11.3 8.0 14.1 10.0
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED 19.1 13.0 5.9 4.0 8.8 6.0
BANK 15.5 11.0 5.6 4.0 8.5 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS)
CONSOLIDATED 19.1 10.0 7.7 4.0 9.6 5.0
BANK 15.5 8.2 7.5 4.0 9.4 5.0
1998
- -----------------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets)
Consolidated $ 19.1 14.3% $ 10.7 8.0% $ 13.4 10.0%
Bank 16.2 12.1 10.7 8.0 13.4 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 17.4 13.0 5.4 4.0 8.0 6.0
Bank 14.6 10.9 5.3 4.0 8.0 6.0
Tier 1 capital (to average assets)
Consolidated 17.4 9.9 7.0 4.0 8.8 5.0
Bank 14.6 8.3 7.0 4.0 8.7 5.0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 35
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 15 - PARENT CORPORATION CONDENSED
- --------------------------------------------------------------------------------
Commercial's primary source of funds to pay dividends to shareholders is the
dividends received from the Bank. The Bank is subject to certain restrictions on
the amount of dividends it may declare without prior regulatory approval. In
2000, the Bank may distribute to the Corporation, in addition to 2000 net
profits, approximately $2,776,000 in dividends without prior approval from
regulatory agencies. Following are condensed parent only financial statements.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,025,546 $ 2,013,394
Securities available for sale 1,350,879 1,226,341
Investment in subsidiary 15,379,528 14,770,125
Loans, net 1,627,729 -
Other assets 35,913 48,196
- -----------------------------------------------------------------------
Total assets $ 19,419,595 $18,058,056
=======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 447,019 $ 397,954
Other liabilities 8,043 -
Shareholders' equity 18,964,533 17,660,102
- -----------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 19,419,595 $18,058,056
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary $ 1,790,000 $ 2,730,000 $ 1,199,460
Interest and fees on loans 122,530 - -
Interest on securities 50,397 36,495 3,334
Other income 2,600 500 -
- ----------------------------------------------------------------------------
Total income 1,965,527 2,766,995 1,202,794
Provision for loan losses 30,000 - -
Other expense 80,983 45,722 71,865
- ----------------------------------------------------------------------------
Income before income
taxes and equity in
undistributed net income
of subsidiary 1,854,544 2,721,273 1,130,929
Income tax benefit/(expense) (9,000) 9,000 17,350
Equity in undistributed
(excess distribution)
net income of subsidiary 885,328 (170,259) 543,831
- ----------------------------------------------------------------------------
NET INCOME $ 2,730,872 $ 2,560,014 $ 1,692,110
============================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 2,730,872 $ 2,560,014 $ 1,692,110
Adjustment:
Equity in(undistributed net
income)/excess distribution
of subsidiary (885,328) 170,259 (543,831)
Provision for loan losses 30,000 - -
Amortization 22,745 10,350 -
Net change in:
Other assets 12,787 (9,943) 378,045
Other liabilities 8,400 - -
- ----------------------------------------------------------------------------
Net cash from
operating activities 1,919,476 2,730,680 1,526,324
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of securities
available for sale (166,752) (1,216,495) -
Net change in loans (1,657,729) - -
- ----------------------------------------------------------------------------
Net cash from investing
activities (1,824,481) (1,216,495) -
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends and fractional
shares paid (1,681,648) (1,397,768) (1,122,158)
Sale of common stock 887,248 670,543 866,951
Repurchase of common stock (288,443) (1,112,312) -
- ----------------------------------------------------------------------------
Net cash from
financing activities (1,082,843) (1,839,537) (255,207)
- ----------------------------------------------------------------------------
Net change in cash
and cash equivalents (987,848) (325,352) 1,271,117
Cash and cash equivalents
at the beginning of year 2,013,394 2,338,746 1,067,629
- ----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,025,546 $ 2,013,394 $ 2,338,746
============================================================================
</TABLE>
34
<PAGE> 36
COMMERCIAL NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 16 - DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
Commercial established a Dividend Reinvestment Plan for its shareholders in
1992. The Plan permits the issuance of previously authorized and unissued
shares. As of December 31, 1999 120,193 shares of authorized but unissued common
stock were reserved for Plan requirements.
- --------------------------------------------------------------------------------
NOTE 17 - STOCK REPURCHASE PLAN
- --------------------------------------------------------------------------------
Commercial announced a stock repurchase plan in 1998. The Plan permits the
repurchase of up to 165,375 shares of the Corporation's outstanding shares of
common stock. As of December 31, 1999 Commercial had repurchased and retired
118,244 shares, in accordance with the program.
- --------------------------------------------------------------------------------
NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
Beginning January 1, 2001 a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. This is not expected to have a material effect but the
effect will depend on derivative holdings when this standard applies.
35
<PAGE> 37
- --------------------------------------------------------------------------------
COMMON STOCK INFORMATION
- --------------------------------------------------------------------------------
Commercial National Financial Corporation common stock is listed on the NASD
Over the Counter Bulletin Board under the symbol CEFC. Several brokers provide a
market for the stock. There were approximately 641 shareholders of record and
3,189,025 common shares outstanding at December 31, 1999.
Management is aware of 47 sales involving a total of 82,850 shares of stock
during 1999. The price was reported to management for only some of these
transactions. All prices have been adjusted for the 5% stock dividends issued in
November 1999 and November 1998 and the three for one stock split issued in
September 1999.
During 1999 and 1998 the price ranges of transactions reported were:
<TABLE>
<CAPTION>
Shares Actual Price
Traded Range
- ---------------------------------------------------------------
1999 Low High
- ---------------------------------------------------------------
<S> <C> <C> <C>
FIRST QUARTER 27,405 $ 11.75 $ 12.06
SECOND QUARTER 15,435 11.75 12.22
THIRD QUARTER 17,010 11.59 11.90
FOURTH QUARTER 23,000 10.95 13.50
- ---------------------------------------------------------------
1998
- ---------------------------------------------------------------
First Quarter 86,931 $ 9.07 $ 11.49
Second Quarter 80,640 10.58 12.01
Third Quarter 87,280 11.03 11.79
Fourth Quarter 97,555 11.18 12.22
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
The holders of Commercial National Financial Corporation common stock are
entitled to dividends when, and if, declared by the Board of Directors of
Commercial 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 ten years.
The following table sets forth the dividends per share declared during 1999 and
1998. The dividends per share have been adjusted for the 5% stock dividends
issued in November 1999 and November 1998 and the three for one stock split
issued in September 1999.
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------
<S> <C> <C>
First Quarter $ .14 $.11
Second Quarter .14 .11
Third Quarter .13 .12
Fourth Quarter .14 .13
- --------------------------------------------------------------
Total dividend per share $ .55 $.47
==============================================================
</TABLE>
36
<PAGE> 38
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Jeffrey S. Barker President and Chief Executive Officer
Patrick G. Duffy Executive Vice President - Chief Financial Officer
</TABLE>
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Howard D. Poindexter Chairperson of the Board, Manager of Poindexter Farms
Richard F. Abbott Vice Chairperson of the Board, Retired EVP 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.
Patrick G. Duffy Executive Vice President - Chief Financial Officer of the Corporation and Bank
David A. Ferguson Member, Chodoka LLC
Kenneth R. Luneack President, Ken Luneack Construction, Inc.
Kim C. Newson President, Alma Hardware Corporation
Scott E. Sheldon Owner, Kernen-Sheldon, Shepherd and LaDu-Brundage Insurance Agencies
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL BANK OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Scott E. Sheldon Chairperson of the Board
Howard D. Poindexter Vice Chairperson of the Board
Jeffrey S. Barker President and Chief Executive Officer
Patrick G. Duffy Executive Vice President - Chief Financial Officer
Andrew P. Shafley Senior Vice President - Senior Loan Officer
Daniel E. Raleigh Vice President - Marketing and Branch Administration
Kevin D. Collison Vice President - Commercial Lending - Ithaca
Thomas D. Cooper Vice President - Commercial Lending - Middleton
Jason E. Williams Vice President - Commercial Lending - Greenville
Corey S. Bailey Assistant Vice President - Consumer Lending - Alma
Janet M. Davison Assistant Vice President - Manager/Information Systems
Wendy M. Lombard Assistant Vice President - Mortgage Lending - Ithaca
Vicki L. Nelson Assistant Vice President - Mortgage Lending - Greenville
Karen M. Taylor Assistant Vice President - Mortgage Lending - Alma
Carol L. Vallance Assistant Vice President - Customer Relations - Alma
Tamera L. Fisher Loan Officer - St. Louis
Kathryn K. Greening Loan Officer - Alma
Dawn K. Riley Loan Officer - Greenville
Sherry L. Weber Loan Officer - Ithaca
Rebecca A. Smith Administrative Assistant - Transfer Agent - Ithaca
</TABLE>
37
<PAGE> 39
- --------------------------------------------------------------------------------
Directors [PHOTO]
- --------------------------------------------------------------------------------
38
<PAGE> 40
[Four amigo's PHOTO]
Pat Duffy, Executive Vice President and CFO; Dan Raleigh, Vice
President Branch Administration; Jeff Barker, President and CEO; Andy
Shafley, Senior Vice President
[350 Group PHOTO]
These employees have each been with Commercial Bank for at least fifteen
years and represent over 350 years of experience at the Bank. Pictured left
to right with number of years of experience: Wendy Lombard (16), Gary
McDaid (24), Marty McDaid (17), Dawn Riley (17), Sharen Clark (32), Cyndi
Bovee (15), Debbie Becker (19), Bonnie Barrett (18), seated, Tom Cooper
(27), Jan Davison (20), Linda Vaughn (20), Becky Smith (24), Nora Barry
(25), Melanie Smith (23), Marie Misenhelder (17). Not pictured is Carol
Vallance (31).
39
<PAGE> 41
- --------------------------------------------------------------------------------
COMMERCIAL BANK LOCATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------- ------------------ ------------------ ------------------------- ------------------ ----------------------
<S> <C> <C> <C> <C> <C>
ALMA ITHACA POMPEII GREENVILLE ST. LOUIS MIDDLETON
301 NORTH STATE ST. 101 N. PINE RIVER* 105 E. FULTON ST. 101 NORTH LAFAYETTE ST.* 104 N. MILL ST.* 101 NORTH NEWTON ST.*
Ph. (517) 463-2185 Ph. (517) 875-4144 Ph. (517) 838-2525 Ph. (616) 754-7166 Ph. (517) 681-5738 Ph. (517) 236-7236
Fax (517) 463-5996 Fax (517) 875-4534 Fax (616) 754-2118 Fax (517) 681-3509 Fax (517) 236-7732
119 WEST CENTER*
Ph. (517) 463-3120
1500 WRIGHT AVE.*
Ph. (517) 463-3901
- -------------------- ------------------ ------------------ ------------------------- ------------------ ----------------------
</TABLE>
* Denotes Bank locations with ATMs on site.
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
As a service to its shareholders, Commercial National Financial Corporation
sponsors a Dividend Reinvestment Plan. The Plan allows a shareholder to purchase
this stock without brokerage commissions using dividends. For information about
this plan, contact the Corporation's Transfer Agent.
- --------------------------------------------------------------------------------
TRANSFER AGENT
- --------------------------------------------------------------------------------
Commercial National Financial Corporation
Care of Mrs. Rebecca A. Smith
101 North Pine River, P.O. Box 280
Ithaca, Michigan 48847
- --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
- --------------------------------------------------------------------------------
101 North Pine River
Ithaca, Michigan 48847
Phone (517) 875-4144
Fax (517) 875-4534
- --------------------------------------------------------------------------------
10-K AVAILABILITY
- --------------------------------------------------------------------------------
Commercial National's annual report on Form 10-K is available upon written
request without charge from:
Commercial National Financial Corporation,
Care of Mr. Patrick G. Duffy, Executive Vice
President - Chief Financial Officer,
101 North Pine River, P.O. Box 280
Ithaca, Michigan 48847
Phone (517) 875-4144
- --------------------------------------------------------------------------------
MARKET MAKERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------- ----------------- -------------------- --------------------- -------------------- ------------------
WILLIAM KAHL MARK AGAH MICHAEL T. SEEKELL PETER VANDERSCHAAF CHRISTOPHER TURNER JAMES CRAWFORD
- ----------------- ----------------- -------------------- --------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
First Union Howe Barnes Robert W. Baird Stifel, Nicolaus McDonald & Co. Raymond James
Securities Investment Inc. & Co. & Co.
1-800-292-1960 1-800-800-4693 1-800-888-6200 1-800-676-0477 1-800-548-6011 1-800-521-9767
- ----------------- ----------------- -------------------- --------------------- -------------------- ------------------
</TABLE>
40
<PAGE> 42
[PHOTO]
COMMERCIAL NATIONAL FINANCIAL CORPORATION
101 N. Pine River
P.O. Box 280
Ithaca, Michigan 48847
(517) 875-4144
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated February
3, 2000, which appears in Commercial National Financial Corporation's annual
report on Form 10-K for 1999, 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 20, 2000
South Bend, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7419
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19138
<INVESTMENTS-CARRYING> 8814
<INVESTMENTS-MARKET> 8941
<LOANS> 152467
<ALLOWANCE> 2792
<TOTAL-ASSETS> 191022
<DEPOSITS> 147204
<SHORT-TERM> 6880
<LIABILITIES-OTHER> 1473
<LONG-TERM> 16500
0
0
<COMMON> 19947
<OTHER-SE> (982)
<TOTAL-LIABILITIES-AND-EQUITY> 191022
<INTEREST-LOAN> 12194
<INTEREST-INVEST> 1771
<INTEREST-OTHER> 151
<INTEREST-TOTAL> 14116
<INTEREST-DEPOSIT> 4490
<INTEREST-EXPENSE> 5700
<INTEREST-INCOME-NET> 8416
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 5347
<INCOME-PRETAX> 3808
<INCOME-PRE-EXTRAORDINARY> 2731
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2731
<EPS-BASIC> .86
<EPS-DILUTED> .86
<YIELD-ACTUAL> 4.94
<LOANS-NON> 963
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 725
<ALLOWANCE-OPEN> 2344
<CHARGE-OFFS> 29
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 2792
<ALLOWANCE-DOMESTIC> 1803
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 989
</TABLE>
