UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
Commercial National Financial Corporation
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, APRIL 27, 2004
================================================================================
The annual meeting of shareholders of Commercial National Financial
Corporation will be held at COMMERCIAL BANK, 101 NORTH PINE RIVER STREET,
ITHACA, MICHIGAN 48847, on Tuesday, April 27, 2004, at 7:00 p.m. to consider and
vote upon:
1. Election of Directors.
2. To transact any other business that may come before the
meeting.
Shareholders of record at the close of business on March 12, 2004 are
entitled to notice of and to vote at the meeting or any adjournment of the
meeting.
By Order of the Board of Directors,
/s/ Jeffrey S. Barker
Jeffrey S. Barker
President and Chief Executive Officer
March 26, 2004
================================================================================
It is important that your shares be represented at the
meeting. Even if you expect to attend the meeting,
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS OF
COMMERCIAL NATIONAL FINANCIAL CORPORATION
P.O. Box 280
101 North Pine River Street
Ithaca, Michigan 48847
This proxy statement is being furnished to holders of common stock,
with no par value ("Common Stock"), of Commercial National Financial Corporation
(the "Corporation") in connection with the solicitation of proxies by the
Corporation's board of directors for use at the annual meeting of shareholders
to be held on April 27, 2004, and at any adjournment of that meeting. The annual
meeting will be held at COMMERCIAL BANK, 101 NORTH PINE RIVER STREET, ITHACA,
MICHIGAN 48847, AT 7:00 P.M. for the purposes set forth in the accompanying
Notice of Annual Meeting of Shareholders. This proxy statement and form of proxy
are first being sent to shareholders on or about March 26, 2004.
If a proxy in the form distributed by the Corporation is properly
executed and returned to the Corporation, the shares represented by that proxy
will be voted at the annual meeting of shareholders and at any adjournment of
that meeting. Where a shareholder specified a choice, the proxy will be voted as
specified. If no choice is specified, the shares represented by the proxy will
be voted for the election of all nominees to the board of directors. Management
does not know of any other matters to be presented at the annual meeting. If
other matters are presented, all proxies will be voted in accordance with the
judgment of the persons named as proxies, who will consider management's
recommendations.
The following is information regarding the meeting and the voting
process, presented in a question and answer format.
Why am I receiving this proxy statement and proxy card?
You are receiving a proxy statement and proxy card from us because on
March 12, 2004, the record date for the annual meeting, you owned shares of
Commercial National Financial Corporation's common stock. This proxy statement
describes the matters that will be presented for consideration by the
shareholders at the annual meeting. It also gives you information concerning the
matters to assist you in making an informed decision.
When you sign the enclosed proxy card, you appoint the proxy holder as
your representative at the meeting. The proxy holder will vote your shares as
you have instructed in the proxy card, thereby ensuring that your shares will be
voted whether or not you attend the meeting. Even if you plan to attend the
meeting, you should complete, sign and return your proxy card in advance of the
meeting just in case your plans change. If you have signed and returned the
proxy card and an issue comes up for a vote at the meeting that is not
identified on the card, the proxy holder will vote your shares, pursuant to your
proxy, in accordance with his or her judgment.
What matters will be voted on at the meeting?
You are being asked to vote on the election of all directors of
Commercial National Financial Corporation for a term of one year. This matter is
more fully described in this proxy statement.
1
How do I vote?
You may vote either by mail or in person at the meeting. If you are a
record holder of shares, you may complete and sign the enclosed proxy card and
mail it in the enclosed pre-addressed envelope. No postage is required if mailed
in the United States. If you mark your proxy card to indicate how you want your
shares voted, your shares will be voted as you instruct.
If you sign and return your proxy card but do not mark the card to
provide voting instructions, the shares represented by your proxy card will be
voted "for" all nominees.
If you are a beneficial owner and a broker or other fiduciary is the
record holder (or in what is usually referred to as "street name"), then you
received this proxy statement from the record holder. The broker should have
given you instructions for directing how your broker should vote your shares. It
will then be your broker's responsibility to vote your shares for you in the
manner you direct.
If you want to vote in person, please come to the meeting. We will
distribute written ballots to anyone who wants to vote at the meeting. Please
note, however, that if your shares are held in the name of your broker, you will
need to arrange to obtain a proxy from your broker in order to vote in person at
the meeting. Even if you plan to attend the annual meeting, you should complete
and return your proxy card in advance of the annual meeting in case your plans
change.
If I hold shares in the name of a broker, who votes my shares?
Under the rules of various national and regional securities exchanges,
brokers may generally vote on routine matters, such as the election of directors
and the ratification of independent auditors, but cannot vote on non-routine
matters, such as an amendment to the articles of incorporation or the adoption
of a stock option plan, unless they have received voting instructions from the
person for whom they are holding shares. If your broker does not receive
instructions from you on how to vote particular shares on a matter on which your
broker does not have discretionary authority to vote, your broker will return
the proxy card to us, indicating that he or she does not have the authority to
vote on these matters. This is generally referred to as a "broker non-vote" and
will not affect the outcome of the voting as described below, under "How many
votes are needed for approval of the proposal?" We encourage you to provide
directions to your broker as to how you want your shares voted on all matters to
be brought before the meeting. You should do this by carefully following the
instructions your broker gives you concerning its procedures. This ensures that
your shares will be voted at the meeting.
What does it mean if I receive more than one proxy card?
It means that you have multiple holdings reflected in our stock
transfer records and/or in accounts with stockbrokers. Please sign and return
ALL proxy cards to ensure that all your shares are voted.
What if I change my mind after I return my proxy card?
If you hold your shares in your own name, you may revoke your proxy and
change your vote at any time before the polls close at the meeting. You may do
this by:
- signing another proxy card with a later date and returning that proxy
card to us, or notify us that
2
you are revoking your proxy to:
Commercial National Financial Corporation
101 North Pine River
Ithaca, Michigan 48847
- voting in person at the meeting.
If you hold your shares in the name of your broker and desire to revoke
your proxy, you will need to contact your broker to revoke your proxy.
How many votes do we need to hold the annual meeting?
A majority of the shares that are outstanding and entitled to vote as
of the record date must be present in person or by proxy at the meeting in order
to hold the meeting and conduct business. Shares are counted as present at the
meeting if the shareholder either:
- is present in person at the meeting; or
- has properly submitted a signed proxy card or other form of proxy.
On March 12, 2004, the record date, there were 4,072,569 shares of common
stock issued and outstanding. Therefore, at least 2,036,285 shares need to be
present at the annual meeting.
What happens if a nominee is unable to stand for re-election?
In the event that any nominee is unable to serve or is otherwise
unavailable for election, which is not now contemplated, the incumbent
Corporation board of directors may or may not select a substitute nominee. If a
substitute nominee is selected, all proxies will be voted for the person so
selected. If a substitute nominee is not so selected, all proxies will be voted
for the election of the remaining nominees. Proxies will not be voted for a
greater number of persons than the number of nominees named.
What options do I have in voting on each of the proposals?
You may vote "for" or "withhold authority to vote for" each nominee for
director. You may vote "for," "against" or "abstain" on any other proposal that
may properly be brought before the meeting.
How many votes may I cast?
You are entitled to cast one vote for each share of stock you owned on
the record date. The proxy card included with this proxy statement indicates the
number of shares owned by an account attributable to you.
3
How many votes are needed for approval of the proposal?
A vote of shareholders holding a plurality of shares is required to
elect directors. For the purpose of counting votes on this proposal,
abstentions, broker non-votes, and other shares not voted will not be counted as
shares voted, and the number of votes of which a plurality is required will be
reduced by the number of shares not voted.
Where do I find the voting results of the meeting?
We will announce voting results at the meeting. The voting results will
also be disclosed in our Form 10-Q for the quarter ended June 30, 2004.
Who bears the cost of soliciting proxies?
We bear the cost of soliciting proxies. In addition to solicitations by
mail, officers, directors or employees of the Corporation or its wholly owned
subsidiary, Commercial Bank, may solicit proxies in person or by telephone.
These persons will not receive any special or additional compensation for
soliciting proxies. We may reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses for
forwarding proxy and solicitation materials to shareholders.
ELECTION OF DIRECTORS
The board of directors of the Corporation has nominated the following
10 persons for election to the board of directors at the annual meeting:
Richard F. Abbott Patrick G. Duffy Howard D. Poindexter
Jefferson P. Arnold David A. Ferguson Scott E. Sheldon
Jeffrey S. Barker Paul B. Luneack
Don J. Dewey Kim C. Newson
Directors are to be elected at the annual meeting of shareholders to
serve until the next following annual meeting of shareholders. The proposed
nominees are willing to be elected and to serve.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF ALL NOMINEES AS
DIRECTORS
VOTING SECURITIES
The following table shows certain information concerning the number of
shares of Common Stock held as of March 12, 2004, by shareholders known to
management to have been the beneficial owner of more than 5% of the outstanding
shares as of that date:
4
VOTING SECURITIES
Amount and Nature of Beneficial Ownership (1)
Sole Voting or Shared Voting or
Name and Address of Investment Investment Total Beneficial Percent
Beneficial Owner Power Power(2) Ownership of Class
- ------------------- -------------- ---------------- ---------------- --------
Kenneth R. Luneack
9333 N. Union Road
St. Louis, Michigan 48880 292,201 11,171 303,372 7.45%
The following table sets forth information concerning the number of
shares of Common Stock held as of March 12, 2004, by each of the Corporation's
directors and nominees, the named executive officers of the Corporation, and by
all directors and executive officers of the Corporation as a group:
Amount and Nature of Beneficial Ownership (1)
Sole Voting Shared
and Voting or Total
Investment Investment Stock Beneficial Percent
Beneficial Owner Power Power(2) Options(3) Ownership of Class
---------------- ----------- ---------- ---------- --------- --------
Richard F. Abbott - 104,952 3,540 108,492 2.66%
Jefferson P. Arnold 37,878 58,877 5,302 102,057 2.51%
Jeffrey S. Barker(4) 15,092 12,673 56,845 84,610 2.08%
Don J. Dewey 5,650 14,672 6,192 26,514 .65%
Patrick G. Duffy(4) 3,023 7,390 30,417 40,830 1.00%
David F. Ferguson 35,208 50,453 2,281 87,942 2.16%
Paul B. Luneack 91,921 991 1,294 94,206 2.31%
Kim C. Newson 13,653 10,217 6,426 30,296 .74%
Howard D. Poindexter 70,732 71,722 3,664 146,118 3.59%
Andrew P. Shafley(4) 16,140 - 20,005 36,145 .89%
Scott E. Sheldon 154,044 3,726 11,347 169,117 4.15%
------- ----- ------ ------- -----
All Directors and Executive
Officers as a Group 443,341 335,673 147,313 926,327 22.74%
======= ======= ======= ======= =====
(1) The number of shares stated is based on information furnished by the
officers and directors and includes shares personally owned of record
by each person and shares which under applicable regulations are deemed
to be otherwise beneficially owned by each person. Under these
regulations, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
investment power with respect to the security. Voting power includes
the power to vote or to direct the voting of the security. Investment
power includes the power to dispose or to direct the disposition of the
security. A person is also considered to be the beneficial owner of a
security if the person has a right to acquire beneficial ownership of
the security within sixty days.
(2) These numbers include shares as to which the indicated person is
legally entitled to share voting or investment power by reason of joint
ownership, trust or other contract or property right, and shares held
by a family member over whom the indicated person may have substantial
influence by reason of relationship.
(3) These numbers include vested stock options, granted under the
Corporation's 1991 Stock Option Plan and 2001 Stock Option Plan, which
entitle the holder to acquire beneficial ownership of such shares
within sixty days.
(4) These numbers include shares that are allocated to the member's
individual account under the Commercial Bank Employee Savings and Stock
Ownership Plan.
5
DIRECTORS AND EXECUTIVE OFFICERS
Biographical information concerning executive officers and directors
who are nominated for election to the board of directors at the annual meeting
is presented below. Except as otherwise indicated, all directors and executive
officers have had the same principal employment for over 5 years and have held
their positions with the Corporation since January 1998. All nominees were last
elected to the Corporation's board of directors at the last annual meeting of
shareholders that was held on April 22, 2003.
Richard F. Abbott (age 69) has been a director of the Corporation and
the Bank since 1989. He had been interim president and chief executive
officer of the Bank from September 15, 1993, until March 16, 1994, and
of the Corporation from September 15, 1993 until May 18, 1994. From
May, 1990 to September 15, 1993, and from March 16, 1994 until December
31, 1996, Mr. Abbott served as executive vice president of the Bank and
of the Corporation.
Jefferson P. Arnold (age 64) has been a director of the Corporation
since May 18, 1994. Mr. Arnold is an attorney at law and has practiced
law with the Arnold Law Offices for over 30 years.
Jeffrey S. Barker (age 55) is president and chief executive officer of
the Corporation and the Bank. He has been a director of the Corporation
and the Bank since November 12, 1997. He has been president and chief
executive officer of the Bank and the Corporation since November 12,
1997.
Don J. Dewey (age 66) has been a director of the Corporation since 1988
and a director of the Bank since 1987. He is a funeral director and the
owner and president of Dewey Funeral Homes, Inc.
Patrick G. Duffy (age 40) is executive vice president and chief
financial officer of the Corporation and the Bank. He was named
executive vice president and appointed to the board of directors of the
Corporation and the Bank on May 19, 1999. He has been vice president
and chief financial officer of the Bank and the Corporation since
February 19, 1997.
David A. Ferguson (age 54) has been a director of the Corporation since
1988 and a director of the Bank since 1985. He is a member of Chodoka
LLC. He previously served as vice president of Ashcraft's Market, Inc.,
a regional retail grocery store chain.
Paul B. Luneack (age 44) has been a director of the Corporation and the
Bank since January 2002. He is Vice President of Ken Luneack
Construction, Inc., a building materials manufacturer.
Kim C. Newson (age 53) has been director of the Corporation since 1988
and a director of the Bank since 1987. He is president of Alma Hardware
Company and general manager of Alma True Value Hardware, both of which
are in the retail hardware business.
Howard D. Poindexter (age 68) has been chairman of the board of the
Corporation since February of 1993. He has been a director of the
Corporation since 1988 and a director of the Bank since 1973. He is
manager of Poindexter Farms, an independent farming business. From 1954
until his retirement in 1992, he was a soil conservationist for the
U.S. Department of Agriculture.
6
Scott E. Sheldon (age 46) has served as chairman of the board of the
Bank since July of 1997. He has been a director of the Corporation
since 1988 and a director of the Bank since 1985. He is the owner of
Kernen-Sheldon Agency, and Shepherd Insurance Agency, which are
insurance agencies.
Jeffrey S. Barker and Patrick G. Duffy serve as the executive officers
of the Corporation. Biographical information for Mr. Barker and Mr. Duffy is
presented above. Mr. Shafley serves as an executive officer of the Bank.
Biographical information for Mr. Shafley is presented below.
Andrew P. Shafley (age 38) has served as the senior vice president and
senior loan officer of Commercial Bank since May 19, 1999. Prior to
that he served as vice president senior loan officer from May of 1998
until May of 1999. He previously served as vice president commercial
loan officer from January of 1996 until May of 1999.
The Corporation's executive officers serve in their capacity without
receiving specific compensation for their services from the Corporation. The
Corporation's executive officers continue to serve as executive officers of the
Bank. All officers serve at the pleasure of the boards of directors of the
Corporation and the Bank.
CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
General The Corporation's board has three standing committees, the
Human Resources Committee, the Corporate Governance Committee and the Audit
Committee. The board of directors of the Corporation held 13 meetings during
2003. All incumbent directors attended at least 75% of the aggregate number of
meetings of the board of directors and meetings of committees on which they
served.
Human Resources Committee The Human Resources Committee includes
Messrs. Ferguson, Arnold, Poindexter, Luneack and Sheldon. The Human Resources
Committee makes compensation recommendations. The Human Resources Committee met
3 times in 2003. The Human Resources Committee administers the 2001 Stock Option
Plan.
Corporate Governance Committee The Corporate Governance Committee
includes Messrs. Abbott, Barker, Newson, Poindexter and Sheldon. The Corporate
Governance Committee is responsible for making recommendations to the board of
directors regarding director performance, ethical conduct and compensation,
director recruitment, management succession plans and other matters which affect
the board's ability to discharge its duties. The Committee met one time during
2003.
Audit Committee The Audit Committee recommends to the board the
employment of independent certified public accountants to examine the financial
statements of the Corporation and its subsidiary, makes such additional
examinations as the committee deems advisable, reviews reports of examination of
the Corporation and its subsidiary received from regulatory authorities, reports
to the board at least once each calendar year on the results of examinations
made and offers such conclusions and recommendations as the committee deems
appropriate. During 2003, the Audit Committee was comprised of Messrs. Dewey,
Newson, Poindexter, Sheldon and Abbott. The Audit Committee met 6 times during
2003.
7
The board of directors and Audit Committee have adopted a revised Audit
Charter effective December 17, 2003. (Appendix A)
During 2003, the Corporation's Audit Committee was comprised of Mr.
Dewey, Mr. Newson, Mr. Poindexter, Mr. Sheldon and Mr. Abbott. Each of these
members meets the requirements for independence as defined in Rule 4200(a)(15)
of the National Association of Securities Dealers' listing standards.
The board of directors has determined that it does not have a member of
the Audit Committee that qualifies as an "audit committee financial expert"
under the regulations of the Securities and Exchange Commission. The Board of
Directors has not been able to identify individuals that meet the Security and
Exchange Commissions definition of "audit committee financial expert" that also
meets the general requirements for serving as a member of the board of directors
including residency in the markets served by the Bank. The board of directors
believes that the experience of the Audit Committee members, and access to
regular training through association sponsored programs serves as a compensating
factor.
The Corporation's entire board of directors, excluding Mr. Barker and
Mr. Duffy, performs the functions of Compensation Committee. The Corporation's
entire board of directors performs the functions of Nominating Committee.
DIRECTOR NOMINATIONS AND QUALIFICATIONS
The Corporation's board of directors will consider the nomination of
candidates for election as directors of the Corporation at any meeting of
shareholders called for the purpose of electing directors submitted by any
shareholder entitled to vote at that meeting assuming that the nomination is
made in accordance with the procedures outlined in the following section
entitled Shareholder Communication with the Board, Nomination and Proposal
Procedures. The nomination shall be void and all votes cast in favor of a person
so nominated shall be disregarded if the nomination is not made in accordance
with the outlined procedures.
The Corporation's board of directors evaluates all potential nominees
for election, including incumbent directors, board nominees and those
shareholder nominees included in the proxy statement, in the same manner.
Generally, the Corporation's board of directors believes that, at a minimum,
directors should possess certain qualities, including the highest personal and
professional ethics and integrity, a sufficient educational and professional
background, demonstrated leadership skills, sound judgment, a strong sense of
service to the communities which we serve and an ability to meet the standards
and duties set forth in our code of conduct. Additionally, all nominees must be
under the age of 70, which is the mandatory retirement age established by the
board. The Corporation's board of directors also evaluates potential nominees to
determine if they have any conflicts of interest that may interfere with their
ability to serve as effective board members and to determine whether they are
"independent" in accordance with Nasdaq requirements (to ensure that at least a
majority of the directors will, at all times, be independent). The Corporation's
board of directors has not, in the past, retained any third party to assist it
in identifying candidates.
8
SHAREHOLDER COMMUNICATION WITH THE BOARD, NOMINATION AND PROPOSAL PROCEDURES
General Communications with the Board Shareholders may contact
Commercial National Financial Corporation's board of directors by contacting
Patrick G. Duffy, Secretary, at Commercial National Financial Corporation, 101
North Pine River, Ithaca, Michigan 48847 (989) 875-4144. All comments will be
forwarded directly to the Chairman of the board of directors.
Nominations of Directors Currently, the corporation does not have a
separate Nominating Committee of the board of directors. Instead, the entire
board of directors, include Mr. Barker and Mr. Duffy, serve as the Nominating
Committee. The Corporation believes that all directors, except for Mr. Barker
and Mr. Duffy, are independent. The independent board members met 2 times during
2003 without the presence of Mr. Barker and Mr. Duffy. These meetings also
provide a forum which director candidates are discussed. The board of directors
believes that the directors as a group are able to perform the duties of
Nominating Committee in a fair and impartial manner.
In accordance with our articles of incorporation, a shareholder may
nominate a director for election to the board at an annual meeting of
shareholders by delivering written notice of the nomination to the Secretary of
the Corporation not fewer than 14 days nor more than 50 days prior to the date
of the annual meeting. If less than 21 days notice is given to the shareholders,
such nomination shall be delivered to the Secretary of the Corporation not more
than 7 days following the date of such notice. If a nomination is not made in
accordance with the foregoing procedures, such nomination shall be void and all
votes cast in favor of a person so nominated shall be disregarded.
The shareholder's notice of intention to nominate a director must
include:
1. the name, age, business address and residence address of the
proposed nominee,
2. the principal occupation or employment of the proposed
nominee,
3. the number of shares of capital stock of the Corporation
beneficially owned by the nominee
4. the total number of shares of capital stock of the
Corporation that will be voted for each nominee
5. the name business address and resident address of the
shareholder making the nomination
6. the number of shares of capital stock of the Corporation
owned by the nominating shareholder
7. a statement indicating that the nominee is willing to be
nominated,
8. and such other information regarding the nominee as would be
required under the rules of the Securities and Exchange
Commission to be included in a proxy statement soliciting
proxies for the election of the nominee.
Proposals of Shareholders Proposals of shareholders intended to be
presented at the annual meeting scheduled to be held April 26, 2005, must be
received by the Corporation for inclusion in its proxy statement and form of
proxy relating to that meeting by November 26, 2004. Proposals of shareholders
should be made in accordance with Securities and Exchange Commission Rule 14a-8.
Code of Ethics Commercial National Financial Corporation has a code of
conduct in place that applies to all of our directors and employees. The code
sets forth the standard of ethics that we expect all of our directors and
employees to follow. The Chief Executive Officer, Chief Financial Officer and
Controller have also signed additional code of ethics agreements that comply
with provisions of the Sarbanes-Oxley Act.
9
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows certain information concerning the
compensation of the named executive officers of the Corporation and the Bank for
the three years ended December 31, 2003. For the same period, the annual salary
and bonus of no other executive officer of the Corporation or Bank exceeded
$100,000.
SUMMARY COMPENSATION TABLE
Long Term
Compensation Awards
Securities Underlying
Annual Compensation Options All Other
Name and Principal Position Year Salary(1) Bonus(3) (No. Shares) (2) Compensation (4)
- --------------------------- ---- ------------------- -------- --------------------- ----------------
Jeffrey S. Barker 2003 134,000 56,000 11,592 11,904
President and 2002 129,000 56,000 11,980 11,278
Chief Executive Officer 2001 125,000 62,000 13,081 10,449
of the Corporation and
Bank
Patrick G. Duffy 2003 107,000 37,000 10,542 8,961
Executive Vice President 2002 101,000 37,000 10,879 8,749
and Chief Financial 2001 98,000 41,000 11,923 8,374
Officer of the Corporation
and Bank
Andrew P. Shafley 2003 98,000 36,000 9,450 8,763
Senior Vice President 2002 89,200 36,000 9,923 8,551
and Senior Loan Officer 2001 83,113 40,000 9,261 7,319
of the Bank
(1) Includes compensation deferred under the Commercial Bank Employee Savings
and Stock Ownership Plan and directors' fees.
(2) Shares have been adjusted for the 5% stock dividend paid in November of
2003.
(3) Bonuses are calculated based on a board of director approved formula. The
formula is based on earnings, return on average equity, and return on
average assets. The board of directors also has discretion in adjusting the
bonus for other factors including but not limited to individual
performance.
(4) All other compensation for Mr. Barker, Mr. Duffy, and Mr. Shafley includes
the following:
Matching and Base Contributions
Under the Commercial Bank Employee Savings Life, Short-term and Long-term
Stock Ownership Plan Disability Premium Paid by the Corporation
------------------------------------------ ------------------------------------------
Mr. Barker 2003 10,620 1,284
2002 10,087 1,191
2001 9,314 1,135
Mr. Duffy 2003 7,862 1,099
2002 7,756 993
2001 7,440 934
Mr. Shafley 2003 7,682 1,081
2002 7,576 975
2001 7,267 909
10
It is the Corporation's practice to award stock options annually to key
policy making members of management. Stock options have been an important
component of the Corporation's executive compensation program for several years.
Stock options are believed to help align the interests of senior management with
the interests of shareholders by promoting stock ownership by senior executive
officers and by rewarding them for appreciation in the price of the
Corporation's Common Stock. Stock options which were granted, exercised, or
outstanding during 2003 were granted under the 1991 Stock Option Plan and the
2001 Stock Option Plan. The 1991 Stock Option Plan terminated by its terms on
April 22, 2001. The Corporation's shareholders have approved the 2001 Stock
Option Plan.
The Corporation's 1991 Stock Option Plan and 2001 Stock Option Plan
provide that stock options, stock appreciation rights, and tax benefit rights
may be issued to directors, officers, and key employees. Stock options entitle a
participant to buy shares of Common Stock of the Corporation during a specified
time period at a specified price. Subject to restrictions imposed by the Plan,
the human resource committee in its discretion determines who will be granted
options, how many shares will be subject to options, and the form of
consideration that may be paid upon exercise of an option. As of December 31,
2003, a maximum of 138,141 authorized shares are subject to the exercise of
options under the 2001 plan. As of December 31, 2003, a maximum of 155,699
authorized shares are subject to the exercise of options under the 1991 plan. As
of December 31, 2003, no stock appreciation rights had been granted under the
2001 plan.
The following tables set forth information concerning stock options
granted to and exercised or retained by the named executive officers of the
Corporation and Bank during 2003. In 2003, the Corporation granted options under
the 2001 Stock Option Plan. As indicated in the following table, options awarded
in 2003 are exercisable for ten years.
OPTIONS GRANTED IN LAST FISCAL YEAR (1)
No. of Percent of
Securities Total Options Potential Realizable Value at Assumed
Underlying Granted to Annual Rates of Stock Price
Options Employees in Exercise Expiration Appreciation for Option Term
Name Granted Fiscal Year Price ($/Shr) Date 0% 5% 10%
---- ---------- ------------- ------------- ----------- --------- --------- --------
Jeffrey S. Barker 11,592 22.98% $ 11.90 6/6/2013 $ 0 $ 86,753 $219,848
Patrick G. Duffy 10,542 20.89% $ 11.90 6/6/2013 $ 0 $ 78,895 $199,935
Andrew P. Shafley 9,450 18.73% $ 11.90 6/6/2013 $ 0 $ 70,722 $179,224
(1) The per share exercise price of each option is equal to the market value
of the Common Stock on the date each option was granted. The option
information has been adjusted to reflect the 5% stock dividend paid in
November of 2003. All outstanding options were granted for a term of ten
or fewer years. Options terminate subject to certain limited exercise
provisions, in the event of death, retirement, or other termination of
employment. In the event of a change in control of the Corporation, a
participant may exercise tax benefit rights granted in tandem with the
options. Such tax benefit rights would entitle an optionee to cash
payments at the time of exercise to partially reimburse the optionee for
tax liability.
11
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
Value of Unexercised
Number of Number of Unexercised In-the-Money Options at
Shares Acquired Options at Year End Year End
Name On Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
Jeffrey S. Barker - $ - 56,845 32,939 $ 164,948 $ 30,122
Patrick G. Duffy - $ - 30,417 29,305 $ 63,125 $ 26,156
Andrew P. Shafley - $ - 20,005 27,498 $ 35,760 $ 22,576
CHANGE OF CONTROL ARRANGEMENT
The Bank has entered into a Change of Control Arrangement with named
executive officers Jeffrey S. Barker, Patrick G. Duffy, and Andrew P. Shafley
providing that if certain "employment changes" occur within 24 months after a
"change of control" of the Corporation, then they shall receive a lump sum
severance payment equal to 1-1/2 times their yearly salary and bonus.
The Arrangement generally defines employment changes as follows:
termination of employment for reasons other than good cause; a significant
change in the nature or scope of their authority or in the overall working
environment; their assignment to duties materially inconsistent with their
present duties, responsibilities and status; or a material reduction in their
monthly rate of base salary. A change of control occurs for purposes of the
Arrangement when more than 50% of the Corporation's common stock is acquired by
an entity, person or group.
The Bank's purpose in entering into the Arrangement with Mr. Barker,
Mr. Duffy, and Mr. Shafley is to provide these individuals with financial
security following a change of control and to provide an additional inducement
for them to remain employed by the Bank. With continuation of their employment
reasonably assured, the Corporation and its shareholders should be more assured
that they will act, with respect to a possible change of control, for the
benefit of the Corporation and its shareholders and without concern for their
own financial security.
COMPENSATION OF DIRECTORS
The board of directors of the Bank holds regular monthly meetings. The
Bank compensates its directors at the rate of $1,000 per month. The Chairman of
the board is paid $2,000 per month. Directors of the Bank, who are not executive
officers, are paid $150 for each committee meeting attended. The Corporation's
board of directors meetings customarily coincide with Bank board of directors
meetings. No separate cash compensation is paid to directors for Corporation
board of directors meetings.
The directors of the Corporation and Bank may receive stock options
under the Corporation's 2001 Stock Option Plan. The number of shares of Common
Stock covered by each option equals the number of shares the director could
purchase if he had purchased shares with the directors fees that the director
earned during the year. The options awarded to the directors are exercisable
after six months from the date of grant and expire ten years from the date of
grant.
12
AUDIT COMMITTEE REPORT
The following report is not deemed to be "soliciting material" or to be
"filed" with the SEC or subject to the SEC's proxy rules or to the liabilities
of Section 18 of the Securities Exchange Act of 1934 and the report shall not be
deemed to be incorporated by reference into any prior or subsequent filing by
the Corporation under the Securities Act of 1933 or the Securities Exchange Act
of 1934.
The Audit Committee reports as follows with respect to the
Corporation's audited financial statements for the year ended December 31, 2003
(the "Consolidated Financial Statements"): (1) the Audit Committee has reviewed
and discussed the Consolidated Financial Statements with the Corporation's
management; (2) the Audit Committee has discussed with its independent auditors
(Crowe, Chizek and Company LLP) the matters required to be discussed by
Statement on Auditing Standards No. 61, which include, among other items,
matters related to the conduct of the audit of the Consolidated Financial
Statements; (3) the Audit Committee has received written disclosures and the
letter from the independent auditors required by Independence Standards Board
Standard No. 1 (which relates to the auditor's independence from the Corporation
and its related entities) and has discussed with the auditors the auditors'
independence from the Corporation; and (4) based on the review and discussions
referred to above, the Audit Committee recommended to the Board of Directors
that the Consolidated Financial Statements be included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2003 for filing with
the Securities and Exchange Commission.
The above named report submitted by,
Don J. Dewey (Chairperson)
Richard F. Abbott
Howard D. Poindexter
Scott E. Sheldon
Kim C. Newson
DIRECTOR ATTENDANCE AT ANNUAL MEETING OF SHAREHOLDERS
The Corporation's directors are encouraged to attend the annual meeting
of the shareholders. At the 2003 annual shareholders meeting, all of the
directors were in attendance.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The firm of Crowe, Chizek and Company LLP examined and certified the
financial statements of the Corporation for the year ended December 31, 2003.
Upon the recommendation of the Audit Committee, the Board of Directors has
selected Crowe, Chizek and Company LLP to act as the Corporation's independent
auditors for 2004.
2003 2002
---- ----
Audit Fees $ 47,200 $ 50,200
Audit Related Fees 14,200 10,950
Tax Fees 7,500 5,500
Other Professional Services Fees 21,750 47,400
-------- --------
Total $ 80,650 $114,050
======== ========
13
Audit Fees includes fees paid to Crowe, Chizek and Company LLP for
professional services rendered for the audit of the Corporation's financial
statements for the year ended December 31, 2003 including fees related to annual
report on Form 10-K, and reviewing of the Corporation's quarterly reports on
Form 10-Q filed during the year ended December 31, 2003.
Audit Related Fees includes fees to audit the Employee Stock Ownership
Plan of Commercial Bank.
Tax Fees includes fees paid to Crowe, Chizek and Company LLP for
professional services rendered to prepare the Corporation's federal tax return
and the Corporation's and subsidiaries state tax returns.
Other Professional Fees includes the aggregate fees billed for services
rendered by Crowe, Chizek and Company LLP, other than services included above
under the captions "Audit Fees", "Audit Related Fees" and "Tax Fees". This
includes compliance review services.
The Audit Committee of the Corporation believes the services provided
by Crowe, Chizek and Company LLP in exchange for the fees set forth above under
the caption "All Other Fees" are compatible with Crowe, Chizek and Company LLP's
independence. Greater than 50% of the hours expended on Crowe, Chizek and
Company LLP's engagement to audit the Company's financial statements for the
year ended December 31, 2003 were performed by full-time permanent employees of
Crowe, Chizek and Company LLP.
Audit Committee Pre-Approval Policy Among other things, the Audit
Committee is responsible for appointing, setting compensation for and overseeing
the work of the independent auditor. The Audit Committee's policy is to
pre-approve all audit and permissible non-audit services provided by Crowe
Chizek. These services include audit and audit-related services, tax services,
and other services. Crowe Chizek and management are required to periodically
report to the Audit Committee regarding the extent of services provided by Crowe
Chizek in accordance with this pre-approval, and the fees for the services
performed to date. The Audit Committee may also pre-approve particular services
on a case-by-case basis that the committee had not already specifically
approved. In 2003, all of the services described above were pre-approved by the
Audit Committee.
A representative of Crowe, Chizek and Company LLP is expected to be
present at the Annual Meeting to respond to appropriate questions from
shareholders and to make any comments deemed appropriate.
CERTAIN RELATIONSHIPS
Directors and officers of the Corporation and members of their
immediate families and businesses controlled by them were customers of and had
certain transactions with the Bank in the ordinary course of business since
January 1, 2003. It is anticipated that such transactions will take place in the
future in the ordinary course of business. All loans and commitments included in
such transactions were made on substantially the same terms, including interest
rates, fees, and collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than normal risk of
collectibility or present any unfavorable features.
During 2003, the Bank retained the services of Mr. Arnold, an attorney,
for routine legal matters. These fees were billed at the regular rates charged
by Mr. Arnold for services rendered to all of his firm's clients. The fees paid
by the Bank did not exceed 5% of the firm's gross revenues for its last fiscal
year.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and certain officers and persons who own more than ten
percent of the Corporation's common stock, to file with the SEC initial reports
of ownership and reports of changes in ownership of the Corporation's common
stock. These officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Corporation with copies of these
reports.
To the Corporation's knowledge, based solely on review of the copies of
such reports furnished to the Corporation during the fiscal year ended December
31, 2003, all Section 16(a) filing requirements were satisfied, with respect to
the applicable officers, directors and greater than ten percent beneficial
owners.
14
APPENDIX A
AUDIT CHARTER
15
COMMERCIAL NATIONAL FINANCIAL CORPORATION
AUDIT CHARTER
PURPOSE
The board of directors of Commercial National Financial Corporation and its
affiliates recognizes that a comprehensive internal control structure is an
important component of achieving the overall goals and objectives of the
organization. The board of directors has established the Audit Committee for the
purpose of governing and overseeing the design and implementation of the
internal control structure.
DEFINITION OF INTERNAL CONTROL
Internal control is defined as a process, affected by an entity's board of
directors, management, internal auditors, external auditors and other personnel,
designed to provide reasonable assurance regarding the achievement of the
following objectives:
- - effectiveness and efficiency of operations including the safeguarding of
assets,
- - reliability of financial reporting, and
- - compliance with applicable laws and regulations.
Effectiveness and Efficiency of Operations
Effectiveness and efficiency of operations includes:
- - The ability to monitor progress in achieving profitability and performance
goals. This includes the reporting processes used by management and the
board to make decisions.
- - Safeguarding of resources by ensuring that assets are protected from theft
and abuse, are properly recorded and fairly valued.
RELIABILITY OF FINANCIAL REPORTING
The Audit Committee recognizes its fiduciary responsibility to shareholders,
depositors and loan customers; who rely on our financial information to make
informed decisions. The accounting practices used by management are to be
conservative and in compliance with GAAP and other regulatory guidance.
Financial reporting includes but is not limited to:
- - Press releases
- - Annual reports
- - Condensed interim reports
- - Regulatory reports filed with the SEC, FDIC, Federal Reserve and other
agencies
Compliance with Applicable Laws and Regulations
This objective covers all laws and regulations that management and the board of
directors must comply with including SEC rules, consumer protection laws, labor
laws etc. The goal is to avoid compliance failures that result in:
- - civil or criminal litigation,
- - adverse public relations,
16
- - loss of customer goodwill, or
- - other penalties that restrict management's ability to manage the
institution.
STRUCTURE AND RESPONSIBILITIES
Membership
The Audit Committee is to be comprised of a minimum of 5 members of the board of
directors. The Committee shall be appointed annually by a majority of the board
of directors.
The Committee shall be comprised of INDEPENDENT members of the board of
directors:
- Management is excluded from membership on the Committee.
- The Committee should exclude board members that act as a
consultant, advisor, promoter, or underwriter of the bank or
any of its affiliates
- Members may not have any extensions of credit from the bank,
other than ordinarily offered to any other similar customer.
- Members must comply with independent standards as defined by
the Security and Exchange Commission and the Nasdaq.
- The Committee shall ANNUALLY assess the independence of each
member of the Committee.
The Committee members shall demonstrate competence and financial sophistication
regarding the financial reporting process. This includes:
- attending internal and external training sessions,
- possessing skills and expertise in related disciplines such as
accounting, finance, banking etc.
- demonstrating the ability to understand fundamental financial
statements including balance sheet, income statement and
statement of cash flow.
Meetings
The Committee is expected to meet at least 4 TIMES PER YEAR. The Committee shall
elect a chairperson and a secretary.
The Committee shall have unrestricted access to internal and external auditors.
At each committee meeting, time will be reserved for the Committee to discuss
issues without management present. The Committee reserves the right to request
the presence of any other member of the board of directors, member of
management, employees or third party advisor.
The Committee shall keep minutes of all activities and report their activities
to the board of directors.
Responsibilities
1) Oversee Financial Reporting and Disclosure
- Financial Statements and Disclosures - The Committee shall read the
Corporation's periodic and annual filings with the SEC and consider
whether they accurately reflect the financial condition of Commercial
National Financial Corporation and its results of operations.
17
- Disclosure of Transactions Involving Management and Principal
Stockholders - The Committee shall determine that management has
established procedures to report to the SEC, within two (2) business
days, changes in Commercial National Financial Corporation
stockholdings by directors, officers, and more than 10% stockholders
of the Corporation. Also, the Committee shall determine that
management has put in place procedures to report to the SEC, within
ten (10) business days, for any new directors, officers or 10%
stockholders of the Corporation.
- Management Certification of Financial Statements and Disclosures, and
Assessment of Internal Controls - The Committee shall ensure that
management has established adequate procedures to ensure that
quarterly and annual financial statements and disclosures are accurate
and complete. This will include reviewing and approving the quarterly
and annual CEO and CFO certifications.
- Disclosure of Code of Business Conduct and Ethics - The Committee
shall determine that management has complied with requirements of the
SEC to disclose in periodic reports whether or not Commercial National
Financial Corporation has established a Code of Ethics.
- Disclosure of Audit Committee Approval of Non-Audit Services - The
Committee shall determine that management has complied with
requirements of the SEC to disclose the approval by the Committee of
all non-audit services to be performed by the Corporation's
independent external auditor.
- The Committee shall review significant accounting policies, accounting
estimates, and new accounting rules.
2) Selection of Internal and External Auditors.
- The Committee should consider competency, independence, scope of
testing and the budget.
- Internal and external audit functions shall report directly to the
Audit Committee.
- All reports, responses and other correspondence shall be directed to
the Committee.
3) Assess the Independence of the External and Internal Auditors Annually.
- Recommend the appointment and/or discharge of the independent external
auditor;
- Pre-approve the external auditors fees;
- Evaluate the external auditors independence; and
- Pre-approve all permissible non-audit services and fees to be provided
by the external auditors.
4) Annually Approve the Internal and External Audit Plans
a) establishing the scope of work performed by the internal and external
auditors as required by the annual audit in conjunction with the
bank's management, internal auditor, and independent public
accountant,
5) Supervise Internal Audit Function
- Review with management the results of the independent external
auditor's quarterly financial statements reviews;
- Review with management and the independent external auditor the
results of the annual financial statements audit;
- Review with management and the independent external auditor their
assessment of the quality of the Corporation's accounting principles,
the adequacy of internal accounting and disclosure controls and
resolution of identified significant deficiencies or material
weaknesses and reportable conditions in internal accounting and
disclosure controls;
18
- Review compliance with laws and regulations and other audit reports
deemed significant by the Committee;
- Receive certain communications from the independent external auditors
on an annual basis which include required communications under
generally accepted auditing standards; and
- Based on this review, the Committee shall make its recommendation to
the Board as to the inclusion of the audited consolidated financial
statements in the Corporation's annual report on Form 10-K.
6) Fraud Reporting and Handling of Complaints The Committee shall establish
procedures for:
- the receipt, retention, and treatment of complaints received by
the corporation regarding accounting, internal controls,
regulatory matters or other audit matters, and
- the confidential, anonymous submission by employees of Commercial
National Financial Corporation and its subsidiaries regarding
questionable accounting or auditing matters.
7) Report to the Board of Directors
The Committee shall report the results of all audits the board of
directors as soon as practical after each Committee meeting.
8) Communication to Shareholders
- The Committee shall report activities in an annual report to be
included in Commercial National Financial Corporation's proxy
statement.
- The Committee should file a copy of the audit charter with the
SEC every three years and after any amendments.
- The Committee shall disclose annually the name and number of
persons determined to be Committee financial experts, or explain
why it does not have one. It must also indicate whether the
financial experts are independent of management,
Authority
In order to properly discharge it's duties, the Audit Committee, has the
authority to:
- engage third party advisors including legal counsel, auditors, or
other advisors as it deems necessary,
- meet with the Corporation's general in-house legal counsel when
appropriate,
- establish the appropriate funding needed to compensate the external
and internal auditors and any advisor employed by the Committee, and
- register for seminars, presentations and other educational
opportunities as deemed appropriate by the Committee.
19
PROXY COMMERCIAL NATIONAL FINANCIAL CORPORATION PROXY
ANNUAL MEETING OF SHAREHOLDERS
APRIL 27, 2004
The undersigned acknowledges receipt of notice of and a proxy statement for the
annual meeting of shareholders of Commercial National Financial Corporation to
be held on APRIL 27, 2004. The undersigned hereby appoints James A. Navarre and
Karen L. Ebright, each of them proxies of the undersigned with full power of
substitution, to vote all shares of the undersigned in Commercial National
Financial Corporation at the annual meeting of its shareholders to be held on
April 27, 2004, and at any adjournment thereof, with all powers which the
undersigned would have if personally present. The undersigned hereby instructs
Commercial National Financial Corporation to vote any and all shares held for
the account of the undersigned under the Commercial National Financial
Corporation Dividend Reinvestment Plan in accordance with the specifications, if
any, made in this proxy.
1. Election of Directors:
[ ] VOTE FOR all nominees (except as [ ] WITHHOLD AUTHORITY to vote for
marked to the contrary). all nominees listed below.
Richard F. Abbott, Jefferson P. Arnold, Jeffrey S. Barker, Don J. Dewey, Patrick
G. Duffy, David A. Ferguson, Paul B. Luneack, Kim C. Newson, Howard D.
Poindexter, and Scott E. Sheldon.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES.
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.)
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
COMMERCIAL NATIONAL FINANCIAL CORPORATION. IF THIS PROXY IS PROPERLY EXECUTED
AND DELIVERED, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED.
IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR ELECTION OF ALL
NOMINEES NAMED ON THIS PROXY. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS WHICH MAY COME BEFORE THE
MEETING.
Number of Shares:
-------------
Dated: , 2004
-----------------------------------------
X
- --------------------------------------------------------------
Signature
X
- --------------------------------------------------------------
Signature, if held jointly
Please sign exactly as your name(s) appear(s). Joint owners should each sign
personally. Executors, administrators, trustees and persons signing for
corporations or partnerships should give their title as such. If a corporation,
please sign in full corporate name by president or authorized officer. If
partnership, please sign in partnership name by properly authorized person.
PLEASE SIGN AND RETURN THIS PROXY PROMPTLY IN THE
ENCLOSED ENVELOPE TO:
COMMERCIAL NATIONAL FINANCIAL CORPORATION
P.O. BOX 280
101 NORTH PINE RIVER STREET
ITHACA, MICHIGAN 48847