-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VArsTSPpaoRHZtViyEeS5U1SQJ9uqLVltEc82ElmfK+/Zpp1G9gZTGB166ArlmuC 6ML0M44xApW1+R5vtwhsvg== 0000950124-01-001752.txt : 20010330 0000950124-01-001752.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950124-01-001752 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB CORP /MI/ CENTRAL INDEX KEY: 0000779125 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 362662386 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-00737 FILM NUMBER: 1583616 BUSINESS ADDRESS: STREET 1: PO BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 BUSINESS PHONE: 6166277111 MAIL ADDRESS: STREET 1: P O BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 10-K405 1 k61166e10-k405.txt FORM 10-K PURSUANT TO ITEM 405 1 UNITED STATES 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 For the fiscal year ended December 31, 2000 Commission file number 0-28388 CNB CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2662386 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 303 NORTH MAIN STREET, CHEBOYGAN, MI 49721 (Address of principal executive offices, including Zip code) Registrant's telephone number (231) 627-7111 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $ 2.50 PER SHARE (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 the 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 ) Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 20, 2001 was $ 62,016,060. As of March 20, 2001 there were outstanding 1,135,411 shares of the registrant's common stock, $ 2.50 par value. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the registrant's annual report to security holders for fiscal year ended December 31, 2000 are incorporated by reference in Part I and Part II of this report, and specified portions of the registrant's proxy statement for its annual meeting of shareholders to be held May 15, 2001 are incorporated by reference in Part III of this report. Page 1 2 PART I ITEM 1 -- BUSINESS CNB Corporation ("the Company") was incorporated in June, 1985 as a business corporation under the Michigan Business Corporation Act, pursuant to the authorization and direction of the Board of Directors of The Citizens National Bank of Cheboygan ("the Bank"). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act with the Bank as its only wholly-owned subsidiary. The Bank was acquired by the Company effective December 31, 1985. The Company has corporate power to engage in such activities as permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve Board. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or such other activities which are closely related to the business of banking. The Bank offers a full range of banking services to individuals, partnerships, corporations, and other entities. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. The Bank's lending function provides a full range of loan products. These include real estate mortgages, secured and unsecured commercial and consumer loans, check credit loans, lines of credit, home equity loans and construction financing. The Bank also participates in specialty loan programs through the Michigan State Housing Development Authority, Small Business Administration, Federal Home Loan Mortgage Corporation, Farm Service Agency and Mortgage Guaranty Insurance Corporation. Through correspondent relationships, the Bank also makes available credit cards and student loans. The Bank's loan portfolio is over 60% residential real estate mortgages on both primary and secondary homes. The borrower base is very diverse and loan to value ratios are generally 80% or less. The commercial loan portfolio accounts for approximately 9% of total loans. Agricultural lending is minimal and secured by real estate. Construction lending is predominately residential, with only an occasional "spec" home or commercial building. Unsecured lending is very limited and personal guarantees are required on most commercial loans. The Bank makes first and second mortgage loans to its customers for the purchase of residential and commercial properties. Historically, the Bank has sold its long term fixed rate residential mortgage loans qualifying for the secondary market to the Federal Home Loan Mortgage Corporation ("FHLMC"). The mortgage loan portfolio serviced by the Bank for the FHLMC totaled over $ 35 million at December 31, 2000. Banking services are delivered through five full-service banking offices and three drive-in branches plus eight automated teller machines in Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the counties is primarily tourism with light manufacturing. The Bank maintains correspondent bank relationships with several larger banks, which involve check clearing operations, transfer of funds, loan participation, and the purchase and sale of federal funds and other similar services. Under various agency relationships, the Bank provides trust and discount brokerage services and Page 2 3 mutual fund, annuity and life insurance products to its customers. In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac, Presque Isle and Montmorency Counties, the Bank is one of three principal banking institutions located within this market. One is a member of a multi-bank holding company with substantially more assets than the Company. The other is an independent community bank which recently moved into the Cheboygan area. There are also two credit unions, one savings and loan association and a brokerage firm. As of December 31, 2000, the Bank employed 68 full-time and 11 part-time employees. This compares to 66 full-time and 15 part-time employees as of December 31, 1999. The Company has no full-time employees. Its operation and business are carried out by officers and employees of the Bank who are not compensated by the Company. SECURITIES Securities and their fair values at December 31 were as follows: AVAILABLE FOR SALE
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- -------- (In thousands) 2000 U.S. government and agency $ 36,838 $ 335 $ (60) $ 37,113 State and municipal 10,726 144 (14) 10,856 -------- -------- -------- -------- $ 47,564 $ 479 $ (74) $ 47,969 ======== ======== ======== ======== 1999 U.S. government and agency $ 38,725 $ 1 $ (484) $ 38,242 State and municipal 6,333 1 (97) 6,237 -------- -------- -------- -------- $ 45,058 $ 2 $ (581) $ 44,479 ======== ======== ======== ======== 1998 U.S. government and agency $ 21,046 $ 211 $ -- $ 21,257 State and municipal 2,763 137 -- 2,900 -------- -------- -------- -------- $ 23,809 $ 348 $ -- $ 24,157 ======== ======== ======== ======== HELD TO MATURITY 2000 State and municipal $ 7,882 $ 100 $ (6) $ 7,976 ======== ======== ======== ======== 1999 State and municipal $ 15,116 $ 20 $ (114) $ 15,022 ======== ======== ======== ======== 1998 U.S. government and agency $ 14,053 $ 95 $ -- $ 14,148 State and municipal 19,614 388 (1) 20,001 -------- -------- -------- -------- $ 33,667 $ 483 $ (1) $ 34,149 ======== ======== ======== ========
Page 3 4 Scheduled maturities of the carrying value of securities available for sale and held to maturity at December 31, 2000, were as follows:
Due in Due from Due from Due one year one to five to after ten or less five years ten years years Total ------- ------- ------- ------- ---------- (In thousands) U.S. Government and agencies $13,902 $23,211 $ -- $ -- $ 37,113 State and municipal 7,381 7,999 2,123 1,235 18,738 ------- ------- ------- ------- ---------- $21,283 $31,210 $ 2,123 $ 1,235 $ 55,851 ======= ======= ======= ======= ========== Yield 5.37% 6.15% 4.66% 5.97% 5.79%
LOANS The following is a summary of loans at December 31:
2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (In thousands) Residential real estate $ 77,823 $ 71,709 $ 69,319 $ 60,754 $ 56,699 Consumer 12,155 10,891 10,229 10,009 9,239 Commercial real estate 26,571 24,810 20,202 20,899 21,331 Commercial 11,193 11,939 10,836 11,705 9,632 --------- --------- --------- --------- --------- 127,742 119,349 110,586 103,367 96,901 Deferred loan origination fees, net (41) (58) (81) (128) (160) Allowance for loan losses (1,652) (1,583) (1,518) (1,442) (1,361) --------- --------- --------- --------- --------- $ 126,049 $ 117,708 $ 108,987 $ 101,797 $ 95,380 ========= ========= ========= ========= =========
Maturity and Rate Sensitivity of Selected Loans The following table presents the remaining maturity of total loans outstanding excluding residential real estate and consumer loans at December 31, 2000, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity of changes in interest rates.
Total -------------- (In thousands) In one year or less $11,968 After one year but within five years Interest rates are floating or adjustable 3,194 Interest rates are fixed or predetermined 17,264 After five years Interest rates are floating or adjustable 3,430 Interest rates are fixed or predetermined 1,908 ------- $37,764 =======
Page 4 5 Summary of loan loss experience is as follows: Additional information relative to the allowance for loan losses is presented in the following table. This table summarizes loan balances at the end of each period and daily average balances, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense.
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (In thousands) Balance at the beginning of the period $ 1,583 $ 1,518 $ 1,442 $ 1,361 $ 1,305 Charge-offs: Residential real estate -- -- 4 2 -- Consumer 86 40 45 36 63 Commercial real estate -- -- -- -- -- Commercial -- 3 3 -- -- -------- -------- -------- -------- -------- Total charge-offs 86 43 52 38 63 -------- -------- -------- -------- -------- Recoveries: Residential real estate 14 1 1 4 2 Consumer 28 7 10 15 17 Commercial real estate 2 -- -- -- -- Commercial 1 -- 17 -- -- -------- -------- -------- -------- -------- Total recoveries 45 8 28 19 19 -------- -------- -------- -------- -------- Provision charged to expense 110 100 100 100 100 -------- -------- -------- -------- -------- Allowance for possible loan losses, end of period $ 1,652 $ 1,583 $ 1,518 $ 1,442 $ 1,361 ======== ======== ======== ======== ======== Total loans outstanding at end of period $127,742 $119,349 $110,586 $103,367 $ 96,901 Average total loans outstanding for the year $124,732 $114,042 $106,661 $101,518 $ 93,193 Ratio of net charge-offs to daily average loans outstanding 0.03% 0.03% 0.02% 0.02% 0.05% Ratio of net charge-offs to total loans outstanding 0.03% 0.03% 0.02% 0.02% 0.05%
Page 5 6 The allocation of the allowance for loan losses for the years ended December 31 is:
Residential Commercial Real Estate Consumer Real Estate Commercial Unallocated Total ----------- -------- ----------- ---------- ----------- ------- (In thousands) 2000 Allowance amount $ 218 $ 79 $ 67 $ 64 $ 1,224 $1,652 % of Total loans 60.9% 9.5% 20.8% 8.8% 100.0% 1999 Allowance amount $ 224 $ 35 $ 77 $ 29 $ 1,218 $1,583 % of Total loans 60.1% 9.1% 20.8% 10.0% 100.0% 1998 Allowance amount $ 15 $ 54 $ 5 $ 77 $ 1,367 $1,518 % of Total loans 62.7% 9.2% 18.3% 9.8% 100.0% 1997 Allowance amount $ 28 $ 28 $ 74 $ 57 $ 1,255 $1,442 % of Total loans 58.8% 9.7% 20.2% 11.3% 100.0% 1996 Allowance amount $ 42 $ 36 $ 7 $ 51 $ 1,225 $1,361 % of Total loans 58.5% 9.5% 22.0% 10.0% 100.0%
The review of the loan portfolio revealed no undue concentrations of credit, however, the portfolio continues concentrated in residential real estate mortgages and highly dependent upon the tourist Industry for the source of repayment. Because the reliance on tourism is both primary, (i.e. loans to motels, hotels and restaurants, etc.) and secondary (i.e. loans to employees of tourist related businesses), it is difficult to assess a specific dollar amount of inherent loss potential. Likewise, the residential real estate market has been stable or increasing, so inherent loss potential in this concentration is also difficult to reasonably assess. Therefore, it is believed that a reasonable margin should be maintained in the allowance for loan losses to cover these undefined losses within the loan portfolio. The following is a summary of nonaccrual, past due and restructured loans as of December 31:
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Nonaccrual loans $181 $181 $-- $ 21 $ 70 Loans past due 90 days or more 81 59 62 78 61 Troubled debt restructurings -- -- -- -- -- ---- ---- ---- ---- ---- $262 $240 $ 62 $ 99 $131 ==== ==== ==== ==== ====
DEPOSITS The following table presents the remaining maturity of time deposits individually exceeding $ 100,000 at December 31, 2000. Dollars are reported in thousands. Up to 3 Months $ 4,135 3 to 6 Months 2,084 7 to 12 Months 3,559 Over 12 Months 10,606 ------- $20,384 =======
Page 6 7 SUPERVISION AND REGULATION As a bank holding company within the meaning of the Bank Holding Company Act, the Company is required by said Act to file annual reports of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiary, to examination by the Federal Reserve Board. The Federal Reserve Board is the primary regulator of the Company. The Bank Holding Company Act requires every bank holding company to obtain prior approval of the Federal Reserve Board before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. However, holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be so closely related to banking or the management or control of banks as to be a proper incident thereto. Under current regulations of the Federal Reserve Board, a holding company and its nonbank subsidiaries are permitted, among other activities, to engage, subject to certain specified limitations, in such banking related business ventures as consumer finance, equipment leasing, computer service bureau and software operations, data processing, discount securities brokerage, mortgage banking and brokerage, sale and leaseback, and other forms of real estate banking. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. In addition, Federal legislation prohibits acquisition of "control" of a bank or bank holding company without prior notice to certain federal bank regulators. "Control" in certain cases may include the acquisition of as little as 10% of the outstanding shares of capital stock. The Company's cash revenues are derived primarily from dividends paid by the Bank. National banking laws restrict the payment of cash dividends by a national bank by providing, subject to certain exceptions, that dividends may be paid only out of net profits then on hand after deducting there from its losses and bad debts, and no dividends may be paid unless the bank will have a surplus amounting to not less than one hundred percent (100%) of its common capital stock. The Bank is a national banking association and as such is subject to the regulations of, and supervision and regular examination by, the Office of the Comptroller of the Currency ("OCC"). Deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of the State of Michigan and Title 12 of the United States Code include the requirements that banks maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by a bank, and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits, and restrictions relating to investments and other activities of a bank. The Federal Reserve Board has established guidelines for risk based capital by bank holding companies. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different Page 7 8 risk classes, and include certain off-balance-sheet items in the calculation of capital requirements. An analysis of the Company's regulatory capital requirements at December 31, 2000 is presented on page 21 of the Registrant's 2000 Annual Report in Note 14 Regulatory Capital to the Company's consolidated financial statements, which is incorporated herein by reference. ITEM 2 -- PROPERTIES The Company and the Bank have their primary office at 303 North Main Street, Cheboygan, Michigan. In addition, the Bank owns and operates the following facilities: Onaway Office, 20581 W. State Street, Onaway; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw City; Pellston Office, 200 Stimpson, Pellston; Indian River Office, 3990 Straits Highway, Indian River; South Side drive-in, 991 1/2 South Main Street, Cheboygan; Downtown drive-in, 414 Division Street, Cheboygan; and East Side drive-in, 816 East State Street, Cheboygan. All properties are owned by the Bank free of any mortgages or encumbrances. ITEM 3 -- LEGAL PROCEEDINGS. Neither the Company nor the Bank are a party to any pending legal proceedings other than the routine litigation that is incidental to the business of lending. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no matters submitted to a vote of security holders during the fourth quarter of 2000. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company has no public trading market. All trades are handled on a direct basis between buyer and seller. The Bank acts as the Company's transfer agent. The principal market for the Company's stock consists of existing shareholders, family members of existing shareholders and individuals in its service area. The information detailing the range of high and low bid information for the Company's common stock and cash dividends declared for each full quarterly period within the two most recent fiscal years can be found under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. The information which indicates the amount of common stock that is subject to outstanding options or warrants to purchase, or securities convertible into, common Page 8 9 equity of the registrant can be found in Note 8 on page 15 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. There are no public offerings pending. There are approximately 840 shareholders of record of the common stock of the Company as of January 31, 2001. During 2000, the Company declared regular dividends of $ 1.43 per share plus a special dividend of $ .55. In 1999, the Company declared regular dividends of $ 1.34 plus a special dividend of $ .52. These per share statistics have been retroactively adjusted for the 5% stock dividend of March 1, 1999 and March 1, 2000. The information detailing the cash dividends declared within the two most recent fiscal years can be found under the caption "Financial Highlights" of the Company's Annual Report to shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. These have resulted in a dividend payout ratio averaging 65.7% for the past three years. The Federal Reserve Board's Policy on the Payment of Cash Dividends by Bank Holding Companies restricts the payment of cash dividends based on the following criteria: (1) The Company's net income from operations over the past year must be sufficient to fully fund the dividend and (2) the prospective rate of earnings retention must be consistent with the Company's capital needs, asset quality and overall financial condition. ITEM 6 -- SELECTED FINANCIAL DATA. The information required by this item is included on Page 1 under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information required by this item is included on pages 26 through 36 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included on pages 30 through 31 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This information is included on pages 2 through 24 of the Company's Annual Report to Page 9 10 Shareholders for the fiscal year ended December 31, 2000, which is hereby incorporated by reference. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required by this item is included under the caption "Information About Director Nominees" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 15, 2001, which is hereby incorporated by reference. Information about the executive officers of the Corporation is set forth below. Name and Age Position - ------------ -------- Robert E. Churchill, 60 Chairman and Chief Executive Officer of the Corporation and Citizens National Bank of Cheboygan. Mr. Churchill has been an officer of the Corporation since its inception in 1985 and an employee of the Bank since 1975. He has been in his current position for more than 12 years. James C. Conboy, Jr., 53 President and Chief Operating Officer of the Corporation and Citizens National Bank of Cheboygan. Mr. Conboy joined the Corporation and the Bank during 1998. John F. Ekdahl, 50 Senior Vice President of the Corporation and Citizens National Bank of Cheboygan. Mr. Ekdahl has been an officer of the Corporation since 1993 and an employee of the Bank since 1987. He has been in his current position for more than 7 years. Susan A. Eno, 46 Senior Vice President of the Corporation; Senior Vice President and Cashier of Citizens National Bank of Cheboygan. Ms. Eno has been an officer of the Corporation since 1996 and an employee of the Bank since 1971. She has been in her current position for more than 4 years. Page 10 11 John P. Ward, 64 Secretary of the Corporation. Mr. Ward retired from the Bank during 1998. Irene M. English, 41 Treasurer of the Corporation; Vice President and Controller of Citizens National Bank of Cheboygan. Ms. English was appointed an officer of the Corporation during 1998 and has been an employee of the Bank since 1985. ITEM 11 -- EXECUTIVE COMPENSATION. The information required by this item is included under the caption "Compensation of Executive Officers" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 15, 2001, which is hereby incorporated by reference. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is included under the caption "Ownership of Common Stock" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 15, 2001, which is hereby incorporated by reference. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is included under the caption "Indebtedness of and Transactions with Management" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 15, 2001, which is hereby incorporated by reference. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements. The following financial statements, notes to financial statements and independent auditor's report of CNB Corporation and its subsidiary are incorporated by reference in Item 8 of this report: Consolidated Balance Sheets-December 31, 2000 and 1999. Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Page 11 12 Notes to Consolidated Financial Statements. Independent Auditor's Report dated February 22, 2001. (2) Financial Statement Schedules. Not applicable (3) Exhibits. (3a) Articles of Incorporation. Previously filed as exhibit to the registrant's Form 10-KSB filed April 26, 1996. (3b) By-laws. Previously filed as exhibit to the registrant's Form 10-KSB filed April 26, 1996. (11) Statement regarding computation per share earnings. This information is disclosed in Note 10 to the Company's Financial Statements for the year ended December 31, 2000, which is hereby incorporated by reference. (13) Annual report to shareholders for the year ended December 31, 2000. (filed herewith) (21) Subsidiaries of the Company. (b) Reports of Form 8-K. No reports on Form 8-K were filed during the last calendar quarter of the year covered by this report. Exhibits: Exhibit 21.) Subsidiary of the Company: Citizens National Bank of Cheboygan is the sole subsidiary of the Company. Page 12 13 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. CNB CORPORATION (Registrant) Date March 22, 2001 /s/ Robert E. Churchill - --------------------------------------- Robert E. Churchill Chairman and Chief Executive Officer Pursuant to the requirement 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 indicated on March 22, 2001. /s/ Steven J. Baker /s/ Thomas J. Ellenberger /s/ John F. Ekdahl - ------------------------------------- -------------------------- -------------------------- Steven J. Baker Thomas J. Ellenberger John F. Ekdahl Director Director Senior Vice President /s/ Robert E. Churchill /s/ Vincent J. Hillesheim /s/ Susan A. Eno - ------------------------------------- -------------------------- -------------------------- Robert E. Churchill Vincent J. Hillesheim Susan A. Eno Director Director Senior Vice President Chairman and Chief Executive Officer /s/ James C. Conboy, Jr. /s/ John L. Ormsbee /s/ Irene M. English - ------------------------------------- -------------------------- -------------------------- James C. Conboy, Jr. John L. Ormsbee Irene M. English Director Director Treasurer President and Chief Operating Officer /s/ Kathleen M. Darrow /s/ John P. Ward - ------------------------------------- -------------------------- Kathleen M. Darrow John P. Ward Director Director Secretary
Page 13 14 Exhibit Index
Exhibit No. Description - ----------- ----------- 13 Annual report to shareholders for the year ended December 31, 2000.
EX-13 2 k61166ex13.txt ANNUAL REPORT TO SHAREHOLDERS FOR YEAR END 1 EXHIBIT 13 CNB CORPORATION ANNUAL REPORT December 31, 2000, 1999 and 1998 2 CNB CORPORATION ANNUAL REPORT December 31, 2000, 1999 and 1998 CONTENTS FINANCIAL HIGHLIGHTS ..................................................... 1 CONSOLIDATED BALANCE SHEETS .............................................. 2 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME................................................... 3 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ............... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS .................................... 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................... 6 INDEPENDENT AUDITOR'S REPORT.............................................. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 26 OFFICERS, COMMUNITY ADVISORS AND STAFF.................................... 37 DIRECTORS AND DIRECTORS EMERITI........................................... 38
3 CNB CORPORATION FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ---------- ----------- ----------- (In thousands, except per share data) OPERATING STATISTICS Interest income $ 15,685 $ 14,296 $ 14,321 $ 13,728 $ 12,958 Interest expense 6,820 6,077 6,359 6,087 5,699 Net interest income 8,865 8,219 7,962 7,641 7,259 Income before income taxes 4,882 4,459 4,445 4,151 3,723 Net income 3,386 3,145 3,136 2,880 2,601 Basic earnings per share 2.98 2.78 2.77 2.54 2.30 Diluted earnings per share 2.95 2.74 2.74 2.54 2.30 Return on average assets (ROA) 1.60% 1.54% 1.61% 1.58% 1.51% Return on average shareholders' equity (ROE) 16.25% 15.63% 16.38% 16.10% 15.33% BALANCE SHEET STATISTICS Securities $ 55,851 $ 59,595 $ 57,824 $ 59,245 $ 60,570 Total loans 127,742 119,349 110,586 103,367 96,901 Deposits 193,091 182,584 174,461 170,326 153,868 Total assets 217,725 205,265 196,510 190,822 173,085 CAPITAL STATISTICS Shareholders' equity $ 21,615 $ 19,918 $ 19,494 $ 18,145 $ 17,053 Book value per share 19.04 17.54 17.21 16.05 15.09 Cash dividend per share 1.98 1.86 1.77 1.63 1.54 Dividend payout ratio 66.39% 67.00% 63.84% 63.92% 67.09% Average equity to average total assets 9.84% 9.86 9.86 9.82 9.88 CREDIT STATISTICS Net charge-offs to total loans .03% .03% .02% .02% .05% Nonperforming assets to total loans .21% .20% .06% .10% .14% Allowance for loan losses to total loans 1.29% 1.33% 1.37% 1.40% 1.41% Allowance for loan losses to nonperforming assets 6.31x 6.60x 24.48x 14.57x 10.39x
PRICE RANGE FOR COMMON STOCK The following table shows the high and low selling prices of known transactions in common stock of the Company for each quarter of 2000 and 1999. The Company had 840 shareholders as of December 31, 2000. The prices and dividends per share have been restated to reflect the 1999 and 2000 5% stock dividends.
2 0 0 0 1 9 9 9 --------------------------------------- --------------------------------------- Market Price Cash Market Price Cash ------------------------ Dividends ------------------------ Dividends Quarter High Low Declared High Low Declared ------- --------- --------- --------- --------- --------- --------- 1st $ 75.00 $ 74.00 $ .35 $ 60.71 $ 57.14 $ .33 2nd 75.00 67.50 .35 62.86 60.71 .33 3rd 73.00 60.00 .35 66.67 62.86 .33 4th 64.00 55.00 .93 71.43 67.62 .87
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 1. 4 CNB CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 - --------------------------------------------------------------------------------
2000 1999 --------- --------- (In thousands) ASSETS Cash and due from banks $ 9,202 $ 7,573 Interest-bearing deposits with other financial institutions 5,258 1,000 Federal funds sold 8,850 6,300 --------- --------- Total cash and cash equivalents 23,310 14,873 Securities available for sale 47,969 44,479 Securities held to maturity (market value of $7,976 in 2000 and $15,022 in 1999) 7,882 15,116 Other securities 4,653 5,726 Loans, net 126,049 117,708 Premises and equipment, net 3,234 3,016 Other assets 4,628 4,347 --------- --------- Total assets $ 217,725 $ 205,265 ========= ========= LIABILITIES Deposits Non-interest bearing $ 30,574 $ 26,158 Interest-bearing 162,517 156,426 --------- --------- Total deposits 193,091 182,584 Other liabilities 3,019 2,763 --------- --------- Total liabilities 196,110 185,347 --------- --------- SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares authorized; 1,135,461 and 1,081,639 shares issued and outstanding in 2000 and 1999 2,839 2,704 Additional paid-in capital 15,549 11,694 Retained earnings 2,959 5,902 Accumulated other comprehensive income (loss), net of tax 268 (382) --------- --------- Total shareholders' equity 21,615 19,918 --------- --------- Total liabilities and shareholders' equity $ 217,725 $ 205,265 ========= =========
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 2. 5 CNB CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
2000 1999 1998 -------- -------- -------- (In thousands, except per share data) INTEREST INCOME Loans, including fees $ 11,244 $ 10,010 $ 9,959 Securities Taxable 3,395 3,240 3,281 Tax-exempt 491 509 502 Other interest income 555 537 579 -------- -------- -------- Total interest income 15,685 14,296 14,321 INTEREST EXPENSE ON DEPOSITS 6,820 6,077 6,359 -------- -------- -------- NET INTEREST INCOME 8,865 8,219 7,962 Provision for loan losses 110 100 100 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,755 8,119 7,862 -------- -------- -------- NON-INTEREST INCOME Service charges and fees 945 870 875 Net realized gains from sale of loans 37 59 103 Loan servicing fees, net of amortization 135 164 178 Other income 219 204 282 -------- -------- -------- Total non-interest income 1,336 1,297 1,438 -------- -------- -------- NON-INTEREST EXPENSES Salaries and employee benefits 3,052 2,934 2,900 Occupancy 670 650 635 Supplies 161 207 187 Other expenses 1,326 1,166 1,133 -------- -------- -------- Total non-interest expenses 5,209 4,957 4,855 -------- -------- -------- INCOME BEFORE INCOME TAXES 4,882 4,459 4,445 Income tax expense 1,496 1,314 1,309 -------- -------- -------- NET INCOME 3,386 3,145 3,136 Other comprehensive income (loss) Net change in unrealized gains (losses) on securities available for sale 984 (927) 267 Tax effects (334) 316 (91) -------- -------- -------- Total other comprehensive income (loss) 650 (611) 176 -------- -------- -------- COMPREHENSIVE INCOME $ 4,036 $ 2,534 $ 3,312 ======== ======== ======== Basic earnings per share $ 2.98 $ 2.78 $ 2.77 Diluted earnings per share 2.95 2.74 2.74
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 3. 6 CNB CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Additional Comprehensive Total Outstanding Common Paid-In Retained Income (Loss), Shareholders' Shares Stock Capital Earnings Net of Tax Equity ----------- ------ ---------- -------- -------------- ------------- (Dollars in thousands, except per share data) Balance - January 1, 1998 977,289 $2,443 $ 6,583 $ 9,066 $ 53 $18,145 Net income 3,136 3,136 Cash dividends - $1.77 per share (2,002) (2,002) 5% stock dividend 48,595 121 1,968 (2,101) (12) Share issued under stock option plan, net 1,902 5 51 56 Purchase and retirement of common stock (85) (5) (5) Net change in unrealized gains (losses) on securities available for sale 176 176 --------- ------ ------- ------- ------ ------- Balance - December 31, 1998 1,027,701 2,569 8,597 8,099 229 19,494 Net income 3,145 3,145 Cash dividends - $1.86 per share (2,107) (2,107) 5% stock dividend 51,074 128 3,064 (3,211) (19) Shares issued under stock option plan, net 3,933 10 106 (24) 92 Purchase and retirement of common stock (1,069) (3) (73) (76) Net change in unrealized gains (losses) on securities available for sale (611) (611) --------- ------ ------- ------- ------ ------- Balance - December 31, 1999 1,081,639 2,704 11,694 5,902 (382) 19,918 Net income 3,386 3,386 Cash dividends - $1.98 per share (2,248) (2,248) 5% stock dividend 53,741 135 3,897 (4,057) (25) Shares issued under stock option plan, net 1,277 3 38 (24) 17 Purchase and retirement of common stock (1,196) (3) (80) (83) Net change in unrealized gains (losses) on securities available for sale 650 650 --------- ------ ------- ------- ------ ------- Balance - December 31, 2000 1,135,461 $2,839 $15,549 $ 2,959 $ 268 $21,615 ========= ====== ======= ======= ====== =======
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 4. 7 CNB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
2000 1999 1998 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,386 $ 3,145 $ 3,136 Adjustments to reconcile net income to net cash from operating activities Depreciation 306 300 277 Accretion and amortization of securities, net (17) 136 42 Provision for loan losses 110 100 100 Loans originated for sale (4,568) (7,706) (12,970) Proceeds from sales of loans originated for sale 4,571 7,707 12,976 Gain on sales of loans (37) (59) (103) Increase in other assets (581) (202) (91) Increase in other liabilities 175 160 110 -------- -------- -------- Total adjustments (41) 436 341 -------- -------- -------- Net cash from operating activities 3,345 3,581 3,477 CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-earning deposits -- -- 1,000 Proceeds from maturities of securities available for sale 14,826 10,654 5,227 Purchase of securities available for sale (17,309) (32,007) (10,005) Proceeds from maturities of securities held to maturity 8,591 22,937 19,601 Purchase of securities held to maturity (1,363) (4,418) (13,177) Proceeds from other securities 1,600 200 700 Purchase of other securities (527) (2,474) (1,036) Net increase in portfolio loans (8,451) (8,821) (7,290) Premises and equipment expenditures (524) (120) (787) -------- -------- -------- Net cash from investing activities (3,157) (14,049) (5,767) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 10,507 8,123 4,135 Dividends paid (2,192) (2,078) (1,920) Proceeds from exercise of stock options 17 92 56 Purchases of common stock (83) (76) (5) -------- -------- -------- Net cash from financing activities 8,249 6,061 2,266 -------- -------- -------- Net change in cash and cash equivalents 8,437 (4,407) (24) Cash and cash equivalents at beginning of year 14,873 19,280 19,304 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,310 $ 14,873 $ 19,280 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid during the period for Interest $ 6,786 $ 6,022 $ 6,426 Income taxes 1,442 1,320 1,306
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 5. 8 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include CNB Corporation (the Company) and its wholly-owned subsidiary, Citizens National Bank of Cheboygan (the Bank). All significant intercompany accounts and transactions are eliminated in consolidation. Nature of Operations and Concentrations of Credit Risk: The Company is a one-bank holding company which conducts no direct business activities. All business activities are performed by the Bank. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. It maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles, personal expenditures and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit accounts, including checking, savings, money market, individual retirement accounts and certificates of deposit. The principal markets for the Bank's financial services are the Michigan communities in which the Bank is located and the area immediately surrounding these communities. The Bank serves these markets through eight offices located in Cheboygan, Presque Isle and Emmet Counties in northern lower Michigan. Segments: The Company, through its subsidiary, the Bank, provides a broad range of financial services to individuals and companies in northern lower Michigan. These services include demand, time and savings deposits; lending; ATM processing and cash management. Operations of the Company are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. 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, fair values of financial instruments and status of contingencies are particularly subject to change in the near term. Cash Flow Reporting: Cash and cash equivalents include cash and due from banks and federal funds sold. Net cash flows are reported for customer loan and deposit transactions and interest-earning deposits. - -------------------------------------------------------------------------------- (Continued) 6. 9 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities: Securities classified as held to maturity are 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 unrealized holding gains and losses reported in shareholders' equity, net of tax. Trading securities are carried at fair value, with changes in unrealized holding gains and losses included in income. Realized gains and losses are based on specific identification of amortized cost. Securities are written down to fair value when a decline in fair value is not temporary. Interest income includes amortization of purchase premium or discount. Other securities, which include Federal Reserve Bank stock, Federal Home Loan Bank stock and other taxable securities that are not readily marketable, are carried at cost. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Loan Income: Interest income is earned 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 the loan is impaired or payments are past due over 90 days (180 days for residential mortgages). 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 incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required 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 losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. A loan is impaired 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, consumer, and credit card 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. - -------------------------------------------------------------------------------- (Continued) 7. 10 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the assets useful lives. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are charged to expense and improvements are capitalized. Other Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially 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 expenses. Servicing Rights: Servicing rights represent 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. Employee Benefits: A defined benefit pension plan covers substantially all employees, with benefits based on years of service and compensation prior to retirement. Contributions to the plan are based on the maximum amount deductible for income tax purposes. A 401(k) savings and retirement plan has also been established and covers substantially all employees. Contributions to the 401(k) plan are made and expensed annually. Stock Options: No expense for stock options is recorded, as the grant price equals the market price of the stock at grant date. Pro forma disclosures show the effect on income and earnings per share had the options' fair value been recorded using an option pricing model. The pro forma effect is expected to increase in the future as additional options are granted. Options granted vest over one year and have a maximum term of ten years. There are 16,858 shares authorized for future grant. 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. - -------------------------------------------------------------------------------- (Continued) 8. 11 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings Per Share: Basic earnings per share is based on the net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional potential shares issuable under stock options. Stock Splits and 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. Stock splits are recorded by adjusting par value. Fractional shares are paid in cash for all stock splits and dividends. Basic earnings per share, diluted earnings per share and dividends per share have been restated for all stock splits and stock dividends, including the five percent stock dividends declared in 2000 and 1999. Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes commitments to extend credit which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 12. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the net change in net unrealized appreciation (depreciation) on securities available for sale, net of tax, which is also recognized as a separate component of shareholders' equity. Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions. 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 do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. New Accounting Pronouncements: 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 statements. Fair value changes involving hedges will generally be recorded by offsetting gains or losses on the hedges and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001 did not have a material effect on the Company's financial condition or results of operations. Reclassification: Some items in prior financial statements have been reclassified to conform with the current presentation. - -------------------------------------------------------------------------------- (Continued) 9. 12 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 2 -- SECURITIES The amortized cost and fair values of securities at year end, were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Available for sale Cost Gains Losses Value -------- -------- ---------- -------- (In thousands) 2000 U.S. Government and agency $ 36,838 $ 335 $ (60) $ 37,113 State and municipal 10,726 144 (14) 10,856 -------- -------- -------- -------- $ 47,564 $ 479 $ (74) $ 47,969 ======== ======== ======== ======== 1999 U.S. Government and agency $ 38,725 $ 1 $ (484) $ 38,242 State and municipal 6,333 1 (97) 6,237 -------- -------- -------- -------- $ 45,058 $ 2 $ (581) $ 44,479 ======== ======== ======== ======== Held to maturity 2000 State and municipal $ 7,882 $ 100 $ (6) $ 7,976 ======== ======== ======== ======== 1999 State and municipal $ 15,116 $ 20 $ (114) $ 15,022 ======== ======== ======== ========
There were no sales of securities during 2000, 1999 and 1998. Contractual maturities of debt securities at year end 2000 were as follows. Expected maturities may differ from contractual maturity because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available For Sale Held to Maturity -------------------- -------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ------- --------- ------- (In thousands) Due in one year or less $19,190 $19,172 $ 2,111 $ 2,114 Due from one to five years 27,413 27,762 3,448 3,478 Due from five to ten years 961 1,035 1,088 1,141 Due after ten years -- -- 1,235 1,243 ------- ------- ------- ------- $47,564 $47,969 $ 7,882 $ 7,976 ======= ======= ======= =======
- -------------------------------------------------------------------------------- (Continued) 10. 13 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 2 -- SECURITIES (Continued) Securities with a carrying value of $984,000 and $956,000 were pledged at December 31, 2000 and 1999, to secure public deposits and for other purposes. Except as indicated below, total securities of any state (including its political subdivisions) were less than 10% of shareholders' equity. At year end 2000 and 1999, the amortized cost of securities issued by the state of Michigan and all of its political subdivisions totaled $10,385,000 and $9,416,000 with an estimated fair value of $10,584,000 and $9,329,000. At year end 2000 and 1999, the amortized cost of securities issued by the state of Illinois and all of its political subdivisions totaled $1,410,000 and $3,160,000 with an estimated fair value of $1,408,000 and $3,138,000. NOTE 3 -- LOANS Year end loans were as follows:
2000 1999 --------- --------- (In thousands) Residential real estate $ 77,823 $ 71,709 Consumer 12,155 10,891 Commercial real estate 26,571 24,810 Commercial 11,193 11,939 --------- --------- 127,742 119,349 Deferred loan origination fees, net (41) (58) Allowance for loan losses (1,652) (1,583) --------- --------- $ 126,049 $ 117,708 ========= =========
Activity in the allowance for loan losses is summarized as follows:
2000 1999 1998 ------- ------- ------- (In thousands) Beginning balance $ 1,583 $ 1,518 $ 1,442 Provision for loan losses 110 100 100 Charge-offs (86) (43) (52) Recoveries 45 8 28 ------- ------- ------- Ending balance $ 1,652 $ 1,583 $ 1,518 ======= ======= =======
The Company had no impaired loans during 2000 and 1999. There were no loans held for sale at year end 2000 and 1999. - -------------------------------------------------------------------------------- (Continued) 11. 14 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 4 -- LOAN SERVICING Mortgage loans serviced for others are not reported as assets. These loans totaled $35,228,000 and $34,401,000 at year end 2000 and 1999. Related escrow deposit balances were $52,000 and $53,000. Capitalized mortgage servicing rights balances were $211,000 and $198,000 at year end 2000 and 1999. The related additions recognized were $34,000, $58,000 and $97,000 and the amortization was $22,000, $17,000 and $68,000 in 2000, 1999 and 1998. NOTE 5 -- PREMISES AND EQUIPMENT Year end premises and equipment were as follows:
2000 1999 ------ ------ (In thousands) Real estate and buildings $3,765 $3,590 Furniture and fixtures 3,453 3,104 ------ ------ 7,218 6,694 Less accumulated depreciation 3,984 3,678 ------ ------ $3,234 $3,016 ====== ======
Depreciation expense amounted to $306,000, $300,000 and $277,000 in 2000, 1999 and 1998. NOTE 6 -- DEPOSITS Time deposit accounts individually exceeding $100,000 total $20,384,000 and $15,333,000 at year end 2000 and 1999. At year end 2000, the scheduled maturities of time deposits are as follows:
(In thousands) 2001 $35,621 2002 39,114 2003 1,839 2004 1,656 2005 624 ------- $78,854 =======
- -------------------------------------------------------------------------------- (Continued) 12. 15 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 7 -- EMPLOYEE BENEFITS Defined Benefit Retirement Plan: The Company has a defined benefit, noncontributory pension plan which provides retirement benefits for essentially all employees. The following sets forth the plan's funded status and amounts recognized in the financial statements:
2000 1999 ------- ------- (In thousands) Change in benefit obligation: Beginning benefit obligation $(2,937) $(3,108) Service cost (138) (122) Interest cost (231) (199) Actuarial gain (188) (97) Benefits paid 249 589 ------- ------- Ending benefit obligation (3,245) (2,937) Change in plan assets, at fair value: Beginning plan assets 3,371 3,195 Actual return (233) 478 Employer contribution 75 287 Benefits paid (249) (589) ------- ------- Ending plan assets 2,964 3,371 Funded status (281) 434 Unrecognized net actuarial loss(gain) 673 (14) Unrecognized transition amount (77) (86) Unrecognized prior service amount (33) (37) ------- ------- Prepaid pension cost $ 282 $ 297 ======= =======
Net pension expense and related year end assumptions consist of the following:
2000 1999 1998 ----- ----- ----- (In thousands) Service cost $ 138 $ 122 $ 126 Interest cost on benefit obligation 231 199 211 Expected return on plan assets (266) (226) (232) Net amortization and deferral (13) (13) (14) ----- ----- ----- Pension expense $ 90 $ 82 $ 91 ===== ===== =====
- -------------------------------------------------------------------------------- (Continued) 13. 16 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 7 -- EMPLOYEE BENEFITS (Continued)
2000 1999 1998 ----- ----- ----- Weighted average discount rate 7.50% 7.50% 7.50% Rate of increase in future compensation 5.00% 5.00% 5.00% Expected long term return on plan assets 8.00% 8.00% 8.00%
Plan assets are administered by Huntington National Bank as trustee of the plan. Plan assets are invested in diversified mutual funds operated and administered by the Frank Russell Investment Company. Deferred Compensation Plan: The Company has a deferred compensation plan to provide retirement benefits to certain Directors, at their option, in lieu of annual directors' fees. The present value of future benefits are accrued annually over the period of active service of each participant. The expense for the plan was $177,000, $164,000 and $170,000 in 2000, 1999 and 1998. The Company has also purchased insurance on the lives of participating directors with the Company as the owner and beneficiary of the policies. The Company has another deferred compensation plan that allows executive officers of the Bank, at senior vice president and above, and certain Directors an opportunity to defer a portion of their compensation. On a monthly basis, the account of each participant accrues interest based on the interest rate determined for that year. The expense of the plan was $11,000, $7,000 and $4,000 in 2000, 1999 and 1998. 401(k) Plan: The Company has a 401(k) savings and retirement plan covering substantially all employees. Under the plan, employees may defer up to the lesser of 20% of their eligible compensation or the limitations set by the IRS. During 2000, 1999 and 1998, the Board of Directors elected to contribute a matching contribution equal to 100% of the first 2% and 50% of the next 2% of the employee's deferred compensation. Employee contributions and the Company's matching percentages are vested immediately. The Company's matching percentages are determined annually by the Board of Directors and resulted in total contributions of $64,000, $61,000 and $58,000 in 2000, 1999 and 1998. - -------------------------------------------------------------------------------- (Continued) 14. 17 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 8 -- STOCK OPTIONS Stock Option Plan: The shareholders approved an incentive stock option plan in May 1996 under which options may be issued at market prices to employees. The right to exercise the options vests over a one year period. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. SFAS No. 123 requires proforma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following proforma information presents net income and earnings per share had the fair value method been used to measure compensation cost for stock option plans. Compensation cost actually recognized for stock options was $-0- for 2000, 1999 and 1998. The fair value of options granted during 2000 and 1999 is estimated using the following weighted average information: risk-free interest rate of 5.75% and 5.00% expected life of 10 years, expected dividends of 3.00% and 4.50% per year and expected stock price volatility of 10.00% and 11.00%. There were no options granted for the year ended December 31, 2000.
2000 1999 1998 ------- ------- ------- (In thousands, except for per share data) Net income as reported $ 3,386 $ 3,145 $ 3,136 Proforma net income 3,327 3,075 3,104 Reported earnings per share Basic $ 2.98 $ 2.78 $ 2.77 Diluted 2.95 2.74 2.74 Proforma earnings per share Basic $ 2.93 $ 2.71 $ 2.74 Diluted 2.90 2.68 2.71
- -------------------------------------------------------------------------------- (Continued) 15. 18 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 8 -- STOCK OPTIONS (Continued) Activity in the option plan for the years ended is summarized as follows:
Weighted Weighted Number of Average Average Outstanding Exercise Exercise Fair Value Options Price Price of Grants ----------- ------------ -------- ---------- Balance at January 1, 1998 12,075 $ 30.48 $30.48 Effect of 5% stock dividend 599 -- -- Granted 16,550 40.85-60.00 44.32 $ 2.54 Exercised (2,853) 29.03 29.03 ------ ------------ ------ Balance at December 31, 1998 26,371 29.03-60.00 38.63 Effect of 5% stock dividend 1,316 -- -- Granted 10,000 66.00 66.00 11.85 Exercised (4,894) 27.65-38.90 31.38 ------ ------------ ------ Balance at December 31, 1999 32,793 27.65-66.00 46.51 Effect of 5% stock dividend 1,625 -- -- Exercised (2,300) 26.36-62.86 39.82 ------ ------------ ------ Balance at December 31, 2000 32,118 26.36-66.00 44.63 ======
Options exercisable at December 31 are as follows:
Weighted Number Average Of Exercise Options Price ------- -------- 1998 10,828 $26.33 1999 23,922 36.14 2000 32,118 44.63
At December 31, 2000, options outstanding had a weighted-average remaining life of 7.7 years. - -------------------------------------------------------------------------------- (Continued) 16. 19 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 9 -- INCOME TAXES Income tax expense consists of:
2000 1999 1998 ------- ------- ------- (In thousands) Current $ 1,516 $ 1,282 $ 1,338 Deferred (20) 32 (29) ------- ------- ------- $ 1,496 $ 1,314 $ 1,309 ======= ======= =======
Year end deferred tax assets and liabilities consist of:
2000 1999 ------ ------ (In thousands) Deferred tax assets Allowance for loan losses $ 414 $ 391 Deferred compensation 421 440 Unrealized loss on securities available for sale -- 198 Other 70 10 ------ ------ Total deferred tax assets 905 1,039 ------ ------ Deferred tax liabilities Pension 112 115 Unrealized gains on securities available for sale 138 -- Fixed assets 70 74 Mortgage servicing rights 72 67 Accretion 56 10 ------ ------ Total deferred tax liabilities 448 266 ------ ------ Net deferred tax asset $ 457 $ 773 ====== ======
Income tax expense calculated at the statutory rate of 34% differs from actual income tax expense as follows:
2000 1999 1998 ------- ------- ------- (In thousands) Statutory rate applied to income before taxes $ 1,660 $ 1,516 $ 1,511 Deduct Tax-exempt interest income (148) (160) (161) Other (16) (42) (41) ------- ------- ------- $ 1,496 $ 1,314 $ 1,309 ======= ======= =======
- -------------------------------------------------------------------------------- (Continued) 17. 20 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 10 -- EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations is presented below:
2000 1999 1998 ---------- ---------- ---------- Basic earnings per share Net income available to common shareholders (in thousands) $ 3,386 $ 3,145 $ 3,136 ========== ========== ========== Weighted average shares outstanding 1,135,655 1,132,822 1,132,322 Basic earnings per share $ 2.98 $ 2.78 $ 2.77 ========== ========== ========== Diluted earnings per share Net income available to common shareholders (in thousands) $ 3,386 $ 3,145 $ 3,136 ========== ========== ========== Weighted average shares outstanding 1,135,655 1,132,822 1,132,322 Add dilutive effects of assumed exercises of stock options 11,183 16,660 10,160 ---------- ---------- ---------- Weighted average dilutive potential shares outstanding 1,146,838 1,149,482 1,142,482 ========== ========== ========== Diluted earnings per share $ 2.95 $ 2.74 $ 2.74 ========== ========== ==========
- -------------------------------------------------------------------------------- (Continued) 18. 21 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 11 -- RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and the Bank (including family members, affiliates and companies in which they are principal owners) had loans outstanding with the Bank in the ordinary course of business. A summary of the aggregate loans outstanding which exceeded $60,000 to these individuals follows:
2000 1999 ------- ------- (In thousands) Balance outstanding, January 1 $ 3,082 $ 2,382 New loans and rewrites 3,536 3,716 Payments and payoffs (4,399) (3,063) Other (9) 47 ------- ------- Balance outstanding, December 31 $ 2,210 $ 3,082 ======= =======
Related party deposits totaled $877,000 and $1,078,000 at year end 2000 and 1999. NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES There are various contingent liabilities that are not reflected in the 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 financial condition or result of operations. At year end 2000 and 1999, reserves of $1,055,000 and $1,054,000 were required as deposits with the Federal Reserve or as cash on hand. These reserves do not earn interest. Some financial instruments are used in the normal course of business to meet the financing needs of customers and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to a varying degree, credit and interest-rate risk in excess of the amount reported in the financial statements. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. The same credit policies are used for commitments and conditional obligations as are used for loans. - -------------------------------------------------------------------------------- (Continued) 19. 22 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 12 -- COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the total commitments do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments to guarantee a customer's performance to a third party. A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
2000 1999 ------- ------- (In thousands) Commitments to extend credit $15,768 $17,323 Standby letters of credit 67 52
Substantially all of these commitments are at variable or uncommitted rates. NOTE 13 -- FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis or underlying collateral values, where applicable. The fair value of off-balance-sheet items approximates cost and is not considered significant to this presentation. The estimated year end values of financial instruments were:
2 0 0 0 1 9 9 9 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- (In thousands) Assets Cash and cash equivalents $ 23,310 $ 23,310 $ 14,873 $ 14,873 Securities available for sale 47,969 47,969 44,479 44,479 Securities held to maturity 7,882 7,976 15,116 15,022 Other securities 4,653 4,653 5,726 5,726 Loans, net 126,049 124,056 117,708 116,883 Liabilities Deposits Non-interest bearing $ (30,574) $ (30,574) $ (26,158) $ (26,158) Interest-bearing (162,517) (162,351) (156,426) (156,345)
- -------------------------------------------------------------------------------- (Continued) 20. 23 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 14 -- REGULATORY CAPITAL The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to Risk- Weighted Assets --------------------- Tier 1 Capital Total Tier 1 To Average Assets ----- ------ ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8% 4% 4% Undercapitalized 6% 3% 3%
The Company and Bank were categorized as well capitalized at year end. Actual capital levels (in millions) and minimum required levels were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations -------------------- -------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- 2000 Total capital (to risk weighted assets) Consolidated $ 22.9 18.4% $ 10.0 8.0% $ 12.5 10.0% Bank 22.9 18.4 10.0 8.0 12.5 10.0 Tier 1 capital (to risk weighted assets) Consolidated 21.3 17.1 5.0 4.0 7.5 6.0 Bank 21.3 17.1 5.0 4.0 7.5 6.0 Tier 1 capital (to average assets) Consolidated 21.3 9.9 8.6 4.0 10.8 5.0 Bank 21.3 9.9 8.6 4.0 10.8 5.0
- -------------------------------------------------------------------------------- (Continued) 21. 24 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 14 -- REGULATORY CAPITAL (Continued)
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------------------- ----------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------ ----- ------- ----- 1999 Total capital (to risk weighted assets) Consolidated $ 21.8 18.5% $ 9.4 8.0% $ 11.8 10.0% Bank 21.7 18.4 9.4 8.0 11.8 10.0 Tier 1 capital (to risk weighted assets) Consolidated 20.3 17.2 4.7 4.0 7.1 6.0 Bank 20.3 17.2 4.7 4.0 7.1 6.0 Tier 1 capital (to average assets) Consolidated 20.3 9.8 8.3 4.0 10.4 5.0 Bank 20.3 9.8 8.3 4.0 10.4 5.0
One of the principal sources of cash for the Company is dividends from the Bank. Total dividends which may be declared by the Bank depend on the regulations which govern them. In addition, regulatory agencies can place dividend restrictions on the Bank based on their evaluation of its financial condition. No restrictions are currently imposed by regulatory agencies on the Bank other than the limitations found in the regulations which govern them. At December 31, 2000, the Bank could pay additional dividends of $5,596,000 to the Company without prior regulatory approval. NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are condensed parent company financial statements: CONDENSED BALANCE SHEETS December 31, 2000 and 1999
2000 1999 ------- ------- (In thousands) ASSETS Cash $ 12 $ 28 Investment in subsidiary 21,602 19,891 Other assets 1,056 972 ------- ------- $22,670 $20,891 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 1,055 $ 973 Shareholders' equity 21,615 19,918 ------- ------- $22,670 $20,891 ======= =======
- -------------------------------------------------------------------------------- (Continued) 22. 25 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 15 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ------- ------- ------- (In thousands) Dividends from subsidiary $ 2,346 $ 2,105 $ 2,043 Operating expenses (32) (29) (54) ------- ------- ------- Income before income tax and equity in undistributed income of subsidiary 2,314 2,076 1,989 Income tax benefit 11 10 18 Equity in undistributed income of subsidiary 1,061 1,059 1,129 ------- ------- ------- NET INCOME $ 3,386 $ 3,145 $ 3,136 ======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ------- ------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,386 $ 3,145 $ 3,136 Equity in undistributed net income of subsidiary (1,061) (1,059) (1,129) Change in other assets (83) (27) (108) ------- ------- ------- Net cash from operating activities 2,242 2,059 1,899 CASH FLOWS FROM FINANCING ACTIVITIES Dividends (2,192) (2,078) (1,920) Net shares issued (66) 16 51 ------- ------- ------- Net cash from financing activities (2,258) (2,062) (1,869) ------- ------- ------- Net change in cash and cash equivalents (16) (3) 30 Cash at beginning of year 28 31 1 ------- ------- ------- CASH AT END OF YEAR $ 12 $ 28 $ 31 ======= ======= =======
- -------------------------------------------------------------------------------- (Continued) 23. 26 CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 16 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Earnings Per Share Interest Interest Net -------------------- Income Income Income Basic Diluted -------- -------- ------ ----- ------- 2000 First quarter $ 3,721 $ 2,103 $ 762 $ .67 $ .66 Second quarter 3,855 2,211 831 .73 .72 Third quarter 4,042 2,300 886 .78 .77 Fourth quarter 4,067 2,251 907 .80 .80 1999 First quarter $ 3,450 $ 1,944 $ 805 $ .71 $ .70 Second quarter 3,508 2,015 730 .65 .64 Third quarter 3,657 2,126 827 .73 .72 Fourth quarter 3,681 2,134 783 .69 .68
- -------------------------------------------------------------------------------- 24. 27 INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders CNB Corporation Cheboygan, Michigan We have audited the accompanying consolidated balance sheets of CNB Corporation as of December 31, 2000 and 1999, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. 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 CNB Corporation as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP South Bend, Indiana February 22, 2001 - -------------------------------------------------------------------------------- 25. 28 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation (the Company) and its subsidiary, Citizens National Bank of Cheboygan (the Bank). This discussion should be read in conjunction with the consolidated financial statements beginning on Page 2 and the related footnotes. FINANCIAL CONDITION CASH AND CASH EQUIVALENTS The Company's balances of cash and cash equivalents increased $8.4 million from 1999 to 2000. During the year, $8.2 million of cash was provided from financing activities due to increases in deposits, while $3.3 million of cash was provided from operating activities. Investing activities utilized $3.2 million of cash during 2000. The balances maintained in cash and cash equivalents vary based on daily fluctuations in loan and deposit balances. Sufficient cash is maintained on a daily basis to meet the anticipated liquidity needs of the Company for customer transactions and to clear checks drawn on other financial institutions. The amount of clearings can vary by as much as $3.0 million in one day, causing the Company's cash position to vary. SECURITIES The Company maintains securities portfolios that include obligations of Government Sponsored Agencies as well as securities issued by states and political subdivisions. Security balances decreased $3.7 million during 2000. Securities available for sale represent 85.9% of the portfolio. Currently, the Company primarily maintains a short-term securities portfolio. The average life of the security portfolio is being extended as securities of a longer maturity are added to the portfolio when appropriate. As the amount of securities maturing on a regular basis decreases, liquidity will be maintained by adding to the available for sale portfolio. The chart below shows the change in each of the categories of the portfolio.
2000 1999 1998 ---------- ----------- ----------- (In thousands) U.S. Government and agency securities $ (1,129) $ 2,932 $ (9,335) Tax exempt state and municipal 1,672 (3,788) 3,509 Taxable state and municipal (4,287) 2,627 4,405 ---------- ----------- ----------- Total change in securities $ (3,744) $ 1,771 $ (1,421) ========== =========== ===========
- -------------------------------------------------------------------------------- 26. 29 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- Holdings in state and municipal securities decreased during the year primarily as a result of maturities in the security portfolio which were used to fund loan growth. The chart below shows the percentage composition of the portfolio as of December 31.
2000 1999 ---------- --------- U.S. Government and agency securities 66.45% 64.17% Tax exempt state and municipal 21.29 17.15 Taxable state and municipal 12.26 18.68 ---------- --------- 100.00% 100.00% ========== =========
Securities available for sale are recorded at fair value and securities held to maturity are recorded at amortized cost. The net unrealized gain on securities available for sale at December 31, 2000 was $268,000, net of taxes. The unrealized gains and losses are temporary, since they are a result of market changes rather than a reflection of credit quality. Management has no specific intent to sell these securities at the present time. The Company maintains a conservative security portfolio with a majority of the investments in U.S. Government and agency securities and issues of governmental units in our service area. The maturities of the U.S. Government and agency securities have typically been very short, two years or less, providing liquidity in addition to quality. During 2001, management feels that there will be sufficient liquidity to increase maturity of the investment portfolio, thereby potentially increasing the yield. LOANS Total loans increased $8.4 million or 7.0% during 2000. Substantial growth occurred in our consumer real estate lending which grew to $77.8 million in 2000 from $71.7 million in 1999, or a 8.5% increase. As a full service lender, the Company offers a variety of personal and commercial loans. Home mortgages comprise the largest portion of the loan portfolio. The Company generally retains the ownership of adjustable rate loans and short to medium term fixed-rate loans and originates and sells long term single family residential fixed-rate mortgage loans to the secondary market. The Company originated $4.6 million in loans for sale in 2000 and $7.7 million in 1999. This practice allows the Company to meet the housing credit needs of its service area while maintaining an appropriate interest rate sensitivity and liquidity position. In addition to mortgage loans, the Company makes loans for personal and business use, secured and unsecured, to customers in its services area. The Company maintains a conservative loan policy and strict credit underwriting standards. All loans are domestic. An annual review of loan concentrations at December 31, 2000 indicated the pattern of loans in the portfolio has not changed. There is no individual industry with more than a 10% concentration, however, all tourism related businesses, when combined, total 9.7% of total loans. - -------------------------------------------------------------------------------- 27. 30 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents that amount which management estimates is adequate to provide for losses inherent in the loan portfolio. Management determines the adequacy of the allowance for loan losses by reviewing selected loans (including large loans, non-accrual loans, problem loans and delinquent loans) and establishes specific loss allowances on these loans. Historical loss information, local economic conditions and other factors are considered in establishing allowances on the remaining loan portfolio. The allowance is increased by provisions charged to expense and reduced by loan losses, net of recoveries. The quality of the Company's loan portfolio compares well with its peer group with non-performing loans at 0.21% of total loans at December 31, 2000 and 0.20% at December 31, 1999. Net loans charged off were 0.03% of total loans during 2000 and 0.03% in 1999. The allowance for loan losses increased in 2000 and 1999 to an amount considered adequate by management to cover losses that are currently anticipated based on past experience and specific identification. CREDIT QUALITY The Company continues to maintain a high level of asset quality as a result of actively managing delinquencies, nonperforming assets and potential problem loans. The Company performs an ongoing review of all large credits to watch for any deterioration in quality. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in the nonaccrual loans in (1) above); and (3) other loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above). The aggregate amount of nonperforming loans is shown in the table below.
December 31, ---------------------------- 2000 1999 -------- --------- (Dollars in thousands) Nonaccrual loans $ 181 $ 181 Loans past due 90 days or more 81 59 Troubled debt restructurings - - -------- --------- Total nonperforming loans $ 262 $ 240 ======== ========= Percent of total loans .21% .20% ========= ==========
- -------------------------------------------------------------------------------- 28. 31 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- DEPOSITS The Company's service area has experienced steady economic growth. The Company offers competitive deposit products and has, therefore, shown steady deposit growth as it increases its market share. Deposits increased $10.5 million or 5.8% during 2000. Time deposits increased $12.3 million and non interest-bearing demand increased $4.4 million. The majority of the Company's deposits are derived from core customers, relating to long term relationships with local personal, business and public customers. Deposit rates are monitored continually to assure that the Company pays a competitive rate. As of December 31, 2000 the loan to deposit ratio was 66.1% compared to 65.3% for December 31, 1999. Management continues to emphasize loan growth and would like to see this ratio at a minimum of 65%. This change in asset mix from securities to higher yielding loans will increase the net interest margin. EQUITY Total equity for the Company at year end 2000 was $21.6 million compared to $19.9 million in 1999. The Company realized $3.4 million in income and paid out $2.2 million in dividends during 2000. The unrealized gain on securities available for sale increased equity $650,000. LIQUIDITY AND FUNDS MANAGEMENT Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Company are met. The Company's sources of funds have been dividends from the Bank. The Company manages its liquidity position to provide cash necessary to pay dividends to shareholders and satisfy other operating requirements. The Bank manages liquidity to insure adequate funds are available to meet the cash flow needs of depositors and borrowers. The Bank's most readily available sources of liquidity are federal funds sold, securities classified as available for sale and securities classified as held to maturity maturing within one year. These sources of liquidity are supplemented by new deposits and by loan payments received from customers. As of December 31, 2000 the Company held $8.9 million in federal funds sold, $48.0 million in securities available for sale and $2.1 million in held to maturity maturing within one year. These short-term assets represents 30.6% of total deposits as of December 31, 2000. Historically, the Company's security portfolio has been short-term in nature, with the average life of the portfolio consistently being less than two years. The Company serves a market which is highly tied to the tourist industry. Consequently, the Company experiences seasonal swings in liquidity. Deposit growth occurs during July, August, and September, then may decline through the fall and winter months. The Company does not anticipate any significant change in its seasonal pattern. - -------------------------------------------------------------------------------- 29. 32 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates at December 31, 2000 and 1999. For loans receivable, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of loans. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable related weighted-average interest rates based upon the Company's historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted average variable rates are based upon contractual rates existing at the reporting date. The primary source of market risk for the financial instruments presented is interest rate risk. That is, the risk that an adverse change in market rates will adversely affect the market value of the instruments. Generally, the longer the maturity, the higher the interest rate risk exposure. While maturity information does not necessarily present all aspects of exposure, it may provide an indication of where risks are prevalent. All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring interest rate risk is a dynamic, multi-faceted process that ranges from reducing the exposure of the Company's net interest margin to swings in interest rates, to assuring sufficient capital and liquidity to support future balance sheet growth. The Company manages interest rate risk through the Asset/Liability Committee. The Asset/Liability Committee is comprised of bank officers from various disciplines. The Committee establishes policies and rates which lead to the prudent investment of resources, the effective management of risks associated with changing interest rates, the maintenance of adequate liquidity and the earning of an adequate return on shareholders' equity. - -------------------------------------------------------------------------------- 30. 33 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- MARKET RISK DISCLOSURE AT DECEMBER 31, 2000 (Dollars in thousands)
Fair Value 2001 2002 2003 2004 2005 Thereafter Total 12/31/00 -------- -------- -------- -------- -------- ---------- --------- ---------- RATE-SENSITIVE ASSETS Variable interest rate loans $ 9,439 $ 2,770 $ 2,469 $ 2,032 $ 2,082 $ 20,732 $ 39,524 $ 39,524 Average interest rate 9.44% 8.74% 8.67% 8.51% 8.52% 8.32% 6.41% Fixed interest rate loans 15,575 13,127 9,554 9,642 6,903 33,417 88,218 86,225 Average interest rate 9.12% 8.95% 8.98% 8.60% 8.92% 7.90% 8.54% Variable interest rate securities 111 45 -- -- -- -- 156 156 Average interest rate 5.71% 5.71% --% --% --% --% 5.71% Fixed interest rate securities 21,172 15,352 13,286 2,004 523 3,358 55,695 55,789 Average interest rate 5.36% 5.84% 6.66% 5.50% 5.04% 5.27% 5.80% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits 30,574 -- -- -- -- -- 30,574 30,574 Average interest rate --% --% --% --% --% --% --% Fixed interest rate savings and interest-bearing deposits 43,653 11,431 11,431 11,431 5,717 -- 83,663 83,663 Average interest rate 3.79% 2.81% 2.81% 2.81% 2.81% --% 3.32% Fixed interest rate time deposits 35,621 39,114 1,839 1,656 624 -- 78,854 78,688 Average interest rate 5.41% 6.11% 5.79% 5.78% 6.32% --% 5.77%
MARKET RISK DISCLOSURE AT DECEMBER 31, 1999 (Dollars in thousands)
Fair Value 2000 2001 2002 2003 2004 Thereafter Total 12/31/99 -------- -------- -------- -------- -------- ---------- --------- ---------- RATE-SENSITIVE ASSETS Variable interest rate loans $ 7,282 $ 2,907 $ 3,817 $ 2,148 $ 2,068 $ 23,033 $ 41,255 $ 41,255 Average interest rate 8.95% 8.49% 8.65% 8.34% 8.39% 8.10% 8.36% Fixed interest rate loans 17,618 8,675 11,751 5,025 7,895 27,130 78,094 77,269 Average interest rate 9.11% 8.83% 8.73% 8.19% 8.34% 7.50% 8.33% Variable interest rate securities 175 484 -- -- -- -- 659 659 Average interest rate 6.03% 6.03% --% --% --% --% 6.03% Fixed interest rate securities 20,384 16,515 13,949 2,935 1,837 3,316 58,936 58,842 Average interest rate 5.45% 5.46% 5.67% 5.72% 5.47% 5.26% 5.51% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits 26,158 -- -- -- -- -- 26,158 26,158 Average interest rate --% --% --% --% --% --% --% Fixed interest rate savings and interest-bearing deposits 46,337 12,438 12,438 12,438 6,221 -- 89,872 89,871 Average interest rate 3.53% 2.84% 2.84% 2.84% 2.84% --% 3.20% Fixed interest rate time deposits 51,405 10,225 2,410 1,347 1,167 -- 66,554 66,474 Average interest rate 5.04% 5.15% 5.95% 5.60% 5.52% --% 5.11%
- -------------------------------------------------------------------------------- 31. 34 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- CAPITAL RESOURCES The capital ratios of the Company exceed the regulatory guidelines for well capitalized institutions. The Company has maintained an average leverage ratio of 9.8% for the last three years. This strong capital position provides the Company with the flexibility to leverage its capital to be able to take advantage of expansion opportunities. The Company's strong capital position also provides the flexibility to continue with a high dividend payout ratio which has averaged 65.7% over the past three years. Earnings are projected to continue at current levels or better which will allow the Company to continue to pay out dividends at this level. A five percent stock dividend was distributed to shareholders in 2000, 1999 and 1998. The stock of the Company is generally traded locally. Additional information concerning capital ratios and shareholder return is included in the Financial Highlights schedule. The Company maintains a five year plan and utilizes a formal strategic planning process. Management and the Board continue to monitor long term goals, which include increasing market share and maintaining long term earnings sufficient to pay consistent dividends. RESULTS OF OPERATIONS NET INTEREST INCOME Interest income is the total amount earned on funds invested in federal funds sold, securities and loans. Interest expense is the amount of interest paid on interest-bearing checking, savings and time deposits accounts. Net interest income is the difference between interest income and interest expense. The net margin is the net interest income as a percentage of average interest-earning assets. Interest spread is the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. In 2000, net interest income increased $646,000 or 7.9%, due primarily to an increase in average interest-earning assets of $7.9 million or 4.1%. The overall yield on average interest-earning assets was 7.87% for 2000 compared to 7.47% for 1999. The net interest margin increased to 4.45% in 2000 compared to 4.29% in 1999. This increase can be attributable to a higher yield on an increasing volume of average interest-earning assets. In 1999, net interest income increased $257,000 or 3.2%, due to an increase in average interest-earning assets of $8.7 million or 4.8%. The overall yield on average interest-earning assets was 7.47% for 1999 compared to 7.84% for 1998, while the cost on average interest-bearing liabilities was 3.94% for 1999 compared to 4.31% for 1998. The net interest margin decreased to 4.29% in 1999 compared to 4.36% in 1998. This decrease can be attributable to a lower yield on an increasing volume of average interest-earning assets. - -------------------------------------------------------------------------------- 32. 35 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- The following table shows the daily average Consolidated Balance Sheets, revenue on average interest-earning assets (on a pre-tax basis), expense on average interest-bearing liabilities and the annualized effective rate or yield for the periods ending: Yield Analysis of Consolidated Average Assets and Liabilities (Dollars in thousands)
Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 ----------------------------- ---------------------------- ----------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Int Rate Balance Int Rate Balance Int Rate ------- --------- --------- --------- --------- ------- --------- ------- ------- Interest-earning assets: Interest-earning deposits $ -- $ -- --% $ -- $ -- --% $ 534 $ 32 5.99% Other interest- earning assets 8,215 555 6.76 10,026 537 5.36 10,249 579 5.65 Total securities (1) 66,459 3,886 5.85 67,400 3,749 5.56 65,313 3,751 5.74 Loans 124,732 11,244 9.01 114,042 10,010 8.78 106,661 9,959 9.34 --------- --------- --------- --------- --------- --------- Total interest-earning assets 199,406 15,685 7.87% 191,468 14,296 7.47% 182,757 14,321 7.84% --------- --------- --------- Cash and due from banks 6,666 6,998 6,251 Premises and equipment, net 3,066 3,130 2,846 Allowance for loan losses (1,614) (1,563) (1,478) Other assets 4,224 4,037 3,878 --------- --------- --------- Total $ 211,748 $ 204,070 $ 194,254 ========= ========= ========= Interest-bearing liabilities: Interest-bearing demand deposits $ 15,664 $ 301 1.92% $ 15,905 $ 304 1.91% $ 14,792 $ 342 2.31% Savings deposits 72,730 2,641 3.63 73,293 2,482 3.39 67,864 2,522 3.72 Time deposits 70,793 3,878 5.48 65,168 3,291 5.05 65,005 3,495 5.38 --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities 159,187 6,820 4.28% 154,366 6,077 3.94% 147,661 6,359 4.31% --------- --------- --------- Non-interest bearing deposits 29,439 27,491 25,520 Other liabilities 2,279 2,093 1,922 Shareholders' equity 20,843 20,120 19,151 --------- --------- --------- Total $ 211,748 $ 204,070 $ 194,254 ========= ========= ========= Net interest income $ 8,865 $ 8,219 $ 7,962 ========= ========= ========= Net interest spread 3.59% 3.53% 3.53% ======== ======= ======= Net yield on interest earning assets 4.45% 4.29% 4.36% ======== ======== ======= Ratio of interest earning assets to interest bearing liabilities 1.25x 1.24x 1.24x ========= ========== ==========
(1) Yield computed using the average amortized cost for securities available for sale. - -------------------------------------------------------------------------------- 33. 36 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- The table below shows the effect of volume and rate changes on net interest income on a pre-tax basis.
2000 Compared to 1999 1999 Compared to 1998 ---------------------------- --------------------------- Volume Rate Net Volume Rate Net --------- ------ ------- -------- ------ ------- (In thousands) Interest-earning deposits $ -- $ -- $ -- $ (32) $ -- $ (32) Other interest-earning assets (107) 125 18 (12) (30) (42) Total securities (53) 190 137 118 (120) (2) Loans, net 958 276 1,234 667 (616) 51 ------ ----- ------- ------ ------- ------ Total interest-earning assets 798 591 1,389 741 (766) (25) Interest-bearing demand deposits (5) 2 (3) 24 (62) (38) Savings deposits (19) 178 159 193 (233) (40) Time deposits 296 291 587 9 (213) (204) ------ ----- ------- ------ ------- ------ Total interest-bearing deposits 272 471 743 226 (508) (282) ------ ----- ------- ------ ------- ------ Net change in net interest income (a) $ 526 $ 120 $ 646 $ 515 $ (258) $ 257 ====== ===== ======= ====== ======= ======
(a) The net change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NON-INTEREST INCOME Non-interest income is derived primarily from deposit account fees, fees for customer services and gains on the sale of residential real estate mortgages to the secondary market. Non-interest income increased $39,000 or 3.0% due to an increase in service charges and fees on deposit accounts in 2000 compared to 1999. Non-interest income decreased $141,000 or 9.8% in 1999 compared to 1998. This was due to a significant extent to selling less mortgages to the secondary market in 1999 compared to 1998. The decrease can be attributed to an increasing rate environment during 1999. - -------------------------------------------------------------------------------- 34. 37 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NON-INTEREST EXPENSE Total non-interest expenses were $5.2 million in 2000 and $5.0 million in 1999. The Company continued in its efforts to control non-interest expenses during 2000, resulting in total non-interest expenses increasing only 5.1% over 1999 expenses. Salaries, wages and employee benefits remain the largest component of non-interest expense. These expenses total $3.1 million and $2.9 million in 2000 and 1999. Occupancy expense totaled $670,000 in 2000 compared to $650,000 in 1999 while other expenses increased to $1.3 million from $1.2 million in 1999. Total non-interest expenses were $5.0 million in 1999 and $4.9 million in 1998. The Company continued in its efforts to control non-interest expenses during 1999, resulting in total non-interest expenses increasing only 2.1% over 1998 expenses. Salaries, wages and employee benefits remain the largest component of non-interest expense. These expenses totaled $2.9 million in 1999 and 1998. Occupancy expense totaled $650,000 in 1999 compared to $635,000 in 1998 while other expenses increased to $1.2 million in 1999 from $1.1 million in 1998. FEDERAL INCOME TAXES Income tax expense increased to $1.5 million in 2000 compared to $1.3 million in 1999. This was primarily due to an increase in pre-tax income of $423,000. The effective tax rates for 2000, 1999 and 1998 are shown in the table below:
2000 1999 1998 -------- -------- -------- Income before tax (In thousands) $ 4,882 $ 4,459 $ 4,445 Income tax expense (In thousands) 1,496 1,314 1,309 Effective tax rate 30.6% 29.5% 29.4%
NET INCOME Consolidated net income was $3.4 million for 2000, an increase compared to $3.1 million for 1999. Return on consolidated average assets for 2000 was 1.60%, compared to 1.54% for 1999. Return on average shareholders' equity was 16.25% in 2000 compared to 15.63% in 1999. Basic earnings per share for 2000, 1999 and 1998 were $2.98, $2.78 and $2.77. - -------------------------------------------------------------------------------- 35. 38 CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS When used in this filing and in future filings involving the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phases, "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "project," or similar expressions are intended to identify, "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's market area, and competition, all or some of which could cause actual results to differ materiality from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materiality from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. - -------------------------------------------------------------------------------- 36. -----END PRIVACY-ENHANCED MESSAGE-----