EX-13 3 k68470ex13.txt ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 CNB CORPORATION ANNUAL REPORT December 31, 2001, 2000 and 1999 CNB CORPORATION ANNUAL REPORT December 31, 2001, 2000 and 1999 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
CNB CORPORATION FINANCIAL HIGHLIGHTS
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (In thousands, except per share data) OPERATING STATISTICS Interest income $ 15,788 $ 15,685 $ 14,296 $ 14,321 $ 13,728 Interest expense 6,900 6,820 6,077 6,359 6,087 Net interest income 8,888 8,865 8,219 7,962 7,641 Income before income taxes 4,910 4,882 4,459 4,445 4,151 Net income 3,501 3,386 3,145 3,136 2,880 Basic earnings per share 2.94 2.84 2.64 2.64 2.42 Diluted earnings per share 2.92 2.81 2.61 2.61 2.42 Return on average assets (ROA) 1.56% 1.60% 1.54% 1.61% 1.58% Return on average shareholders' equity (ROE) 15.24% 16.25% 15.63% 16.38% 16.10% BALANCE SHEET STATISTICS Securities $ 68,286 $ 55,851 $ 59,595 $ 57,824 $ 59,245 Total loans 134,803 127,742 119,349 110,586 103,367 Deposits 204,589 193,091 182,584 174,461 170,326 Total assets 231,031 217,725 205,265 196,510 190,822 CAPITAL STATISTICS Shareholders' equity $ 23,377 $ 21,615 $ 19,918 $ 19,494 $ 18,145 Book value per share 19.59 19.04 17.54 17.21 16.05 Cash dividend per share 1.97 1.88 1.77 1.69 1.55 Dividend payout ratio 67.15% 66.39% 67.00% 63.84% 63.92% Average equity to average total assets 10.23% 9.84% 9.86% 9.86% 9.82% CREDIT STATISTICS Net charge-offs to total loans .05% .03% .03% .02% .02% Nonperforming loans to total loans .48% .21% .20% .06% .10% Allowance for loan losses to total loans 1.24% 1.29% 1.33% 1.37% 1.40% Allowance for loan losses to nonperforming loans 2.58x 6.31x 6.60x 24.48x 14.57x
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 2001 and 2000. The Company had 869 shareholders as of December 31, 2001. The prices and dividends per share have been restated to reflect the 2000 and 2001 5% stock dividends.
2001 2000 ---------------------------------- --------------------------------- Market Price Cash Market Price Cash --------------------- Dividends ------------------- Dividends Quarter High Low Declared High Low Declared ------- ------ ------ --------- ------ ------ --------- 1st $60.00 $54.29 $.36 $71.43 $70.48 $.33 2nd 58.10 56.19 .36 71.43 64.29 .33 3rd 57.14 53.33 .36 69.52 57.14 .33 4th 54.29 51.43 .89 60.95 52.38 .89
See accompanying notes to consolidated financial statements. 1. CNB CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
2001 2000 -------- -------- (In thousands) ASSETS Cash and due from banks $ 9,229 $ 9,202 Interest-bearing deposits with other financial institutions 2,718 5,258 Federal funds sold 4,900 8,850 -------- -------- Total cash and cash equivalents 16,847 23,310 Securities available for sale 61,118 47,969 Securities held to maturity (market value of $7,114 in 2001 and $7,976 in 2000) 7,168 7,882 Other securities 4,810 4,653 Loans, net of allowance for loan losses of $1,667 in 2001 and $1,652 in 2000 133,106 126,049 Premises and equipment, net 3,592 3,234 Other assets 4,390 4,628 -------- -------- Total assets $231,031 $217,725 ======== ======== LIABILITIES Deposits Non-interest bearing $ 32,919 $ 30,574 Interest-bearing 171,670 162,517 -------- -------- Total deposits 204,589 193,091 Other liabilities 3,065 3,019 -------- -------- Total liabilities 207,654 196,110 -------- -------- SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares authorized; 1,193,415 and 1,135,461 shares issued and outstanding in 2001 and 2000 2,984 2,839 Additional paid-in capital 18,509 15,549 Retained earnings 983 2,959 Accumulated other comprehensive income, net of tax 901 268 -------- -------- Total shareholders' equity 23,377 21,615 -------- -------- Total liabilities and shareholders' equity $231,031 $217,725 ======== ========
See accompanying notes to consolidated financial statements. 2. CNB CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 -------- -------- -------- (In thousands, except per share data) INTEREST INCOME Loans, including fees $ 11,446 $ 11,244 $ 10,010 Securities Taxable 2,895 3,395 3,240 Tax-exempt 834 491 509 Other interest income 613 555 537 -------- -------- -------- Total interest income 15,788 15,685 14,296 INTEREST EXPENSE ON DEPOSITS 6,900 6,820 6,077 -------- -------- -------- NET INTEREST INCOME 8,888 8,865 8,219 Provision for loan losses 83 110 100 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,805 8,755 8,119 -------- -------- -------- NON-INTEREST INCOME Service charges and fees 1,024 945 870 Net realized gains from sale of loans 357 77 129 Loan servicing fees, net of amortization 45 95 94 Other income 244 219 204 -------- -------- -------- Total non-interest income 1,670 1,336 1,297 -------- -------- -------- NON-INTEREST EXPENSES Salaries and employee benefits 3,333 3,052 2,934 Occupancy 673 670 650 Supplies 156 161 207 Other expenses 1,403 1,326 1,166 -------- -------- -------- Total non-interest expenses 5,565 5,209 4,957 -------- -------- -------- INCOME BEFORE INCOME TAXES 4,910 4,882 4,459 Income tax expense 1,409 1,496 1,314 -------- -------- -------- NET INCOME 3,501 3,386 3,145 Other comprehensive income (loss) Net change in unrealized gains (losses) on securities available for sale 960 984 (927) Tax effects (327) (334) 316 -------- -------- -------- Total other comprehensive income (loss) 633 650 (611) -------- -------- -------- COMPREHENSIVE INCOME $ 4,134 $ 4,036 $ 2,534 ======== ======== ======== Basic earnings per share $ 2.94 $ 2.84 $ 2.64 Diluted earnings per share 2.92 2.81 2.61
See accompanying notes to consolidated financial statements. 3. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2001, 2000 and 1999
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, 1999 1,027,701 $2,569 $ 8,597 8,099 $229 $19,494 Net income 3,145 3,145 Cash dividends - $1.77 per share (2,107) (2,107) 5% stock dividend 51,074 128 3,064 (3,211) (19) Share 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 - $1.88 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 Net income 3,501 3,501 Cash dividends - $1.97 per share (2,351) (2,351) 5% stock dividend 56,461 141 2,964 (3,126) (21) Shares issued under stock option plan, net 2,799 7 71 78 Purchase and retirement of common stock (1,306) (3) (75) (78) Net change in unrealized gains (losses) on securities available for sale 633 633 --------- ------ ------- ------- ---- ------- Balance - December 31, 2001 1,193,415 $2,984 $18,509 $ 983 $901 $23,377 ========= ====== ======= ======= ==== =======
See accompanying notes to consolidated financial statements. 4. CNB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,501 $ 3,386 $ 3,145 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 364 289 436 Provision for loan losses 83 110 100 Loans originated for sale (21,750) (4,568) (7,706) Proceeds from sales of loans originated for sale 21,940 4,571 7,707 Gain on sales of loans (357) (77) (129) Increase in other assets (89) (581) (202) Increase in other liabilities 25 175 160 -------- -------- -------- Total adjustments 216 (81) 366 -------- -------- -------- Net cash from operating activities 3,717 3,305 3,511 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 29,323 14,826 10,654 Purchase of securities available for sale (41,519) (17,309) (32,007) Proceeds from maturities of securities held to maturity 4,445 8,591 22,937 Purchase of securities held to maturity (3,731) (1,363) (4,418) Proceeds from other securities 1,000 1,600 200 Purchase of other securities (1,157) (527) (2,474) Net increase in portfolio loans (6,973) (8,411) (8,751) Premises and equipment expenditures (715) (524) (120) -------- -------- -------- Net cash from investing activities (19,327) (3,117) (13,979) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 11,498 10,507 8,123 Dividends paid (2,351) (2,192) (2,078) Proceeds from exercise of stock options 78 17 92 Purchases of common stock (78) (83) (76) -------- -------- -------- Net cash from financing activities 9,147 8,249 6,061 -------- -------- -------- Net change in cash and cash equivalents (6,463) 8,437 (4,407) Cash and cash equivalents at beginning of year 23,310 14,873 19,280 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,847 $ 23,310 $ 14,873 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid during the period for Interest $ 6,949 $ 6,786 $ 6,022 Income taxes 1,423 1,442 1,320
See accompanying notes to consolidated financial statements. 5. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 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) and the Bank's wholly-owned subsidiary CNB Mortgage Corporation. 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. Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, 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. 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. 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. (Continued) 6. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 uncollectibility 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. Premises and Equipment: Land is carried at cost. 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. (Continued) 7. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Earnings 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. (Continued) 8. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 2001 and 2000. 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: A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Adoption of this standard on January 1, 2002 will not have a material effect on the Company's financial statements. Reclassification: Some items in prior financial statements have been reclassified to conform with the current presentation. (Continued) 9. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 2 - SECURITIES The amortized cost and fair values of securities at year end, were as follows:
Gross Gross Carrying Unrealized Unrealized Fair Amount Gains Losses Value -------- ---------- ---------- ------- (In thousands) Available for sale 2001 U.S. Government and agency $32,071 $ 986 $ - $33,057 State and municipal 27,682 432 (53) 28,061 ------- ------- ----- ------- $59,753 $ 1,418 $ (53) $61,118 ======= ======= ===== ======= 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 ======= ======= ===== ======= Held to maturity 2001 State and municipal $ 7,168 $ 132 $(186) $ 7,114 ======= ======= ===== ======= 2000 State and municipal $ 7,882 $ 100 $ (6) $ 7,976 ======= ======= ===== =======
There were no sales of securities during 2001, 2000 and 1999. Contractual maturities of debt securities at year end 2001 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 --------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------ (In thousands) Due in one year or less $14,481 $14,755 $1,487 $1,498 Due from one to five years 38,312 39,314 3,017 3,090 Due from five to ten years 5,655 5,771 1,006 1,055 Due after ten years 1,305 1,278 1,658 1,471 ------- ------- ------ ------ $59,753 $61,118 $7,168 $7,114 ======= ======= ====== ======
(Continued) 10. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 2 - SECURITIES (Continued) Securities with a carrying value of $987,000 and $984,000 were pledged at December 31, 2001 and 2000, to secure public deposits and for other purposes. The Company held securities exceeding 10% of shareholders' equity for the following states (including its political subdivisions) at December 31:
2001 2000 ------- ------- (In thousands) Michigan $13,087 $10,385 Indiana 2,566 - Washington 3,070 - Wisconsin 2,526 -
NOTE 3 - LOANS Year end loans were as follows:
2001 2000 -------- -------- (In thousands) Residential real estate $ 84,588 $ 77,823 Consumer 11,767 12,155 Commercial real estate 26,536 26,571 Commercial 11,912 11,193 -------- -------- 134,803 127,742 Deferred loan origination fees, net (30) (41) Allowance for loan losses (1,667) (1,652) -------- -------- $133,106 $126,049 ======== ========
Activity in the allowance for loan losses is summarized as follows:
2001 2000 1999 ------ ------ ------ (In thousands) Beginning balance $1,652 $1,583 $1,518 Provision for loan losses 83 110 100 Charge-offs (87) (86) (43) Recoveries 19 45 8 ------ ------ ------ Ending balance $1,667 $1,652 $1,583 ====== ====== ======
The Company had no impaired loans during 2001 and 2000. There were no loans held for sale at year end 2001 and 2000. (Continued) 11. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 4 - LOAN SERVICING Mortgage loans serviced for others are not reported as assets. These loans totaled $39,951,000 and $35,228,000 at year end 2001 and 2000. Related escrow deposit balances were $59,000 and $52,000. Capitalized mortgage servicing rights balances were $266,000 and $211,000 at year end 2001 and 2000. The related additions recognized were $163,000, $34,000 and $58,000 and the amortization was $107,000, $22,000 and $17,000 in 2001, 2000 and 1999. NOTE 5 - PREMISES AND EQUIPMENT Year end premises and equipment were as follows:
2001 2000 ------ ------ (In thousands) Real estate and buildings $4,160 $3,765 Furniture and fixtures 3,714 3,453 ------ ------ 7,874 7,218 Less accumulated depreciation 4,282 3,984 ------ ------ $3,592 $3,234 ====== ======
Depreciation expense amounted to $357,000, $306,000 and $300,000 in 2001, 2000 and 1999. NOTE 6 - DEPOSITS Time deposit accounts individually exceeding $100,000 total $17,445,000 and $20,384,000 at year end 2001 and 2000. At year end 2001, the scheduled maturities of time deposits are as follows:
(In thousands) -------------- 2002 $54,901 2003 17,828 2004 1,989 2005 1,131 2006 697 ------- $76,546 =======
(Continued) 12. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 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:
2001 2000 ------- ------- (In thousands) Change in benefit obligation: Beginning benefit obligation $(3,245) $(2,937) Service cost (144) (138) Interest cost (238) (231) Actuarial loss (gain) 32 (188) Benefits paid 114 249 ------- ------- Ending benefit obligation (3,481) (3,245) Change in plan assets, at fair value: Beginning plan assets 2,964 3,371 Actual return (187) (233) Employer contribution 310 75 Benefits paid (114) (249) ------- ------- Ending plan assets 2,973 2,964 Funded status (508) (281) Unrecognized net actuarial loss 1,051 673 Unrecognized transition amount (68) (77) Unrecognized prior service amount (30) (33) ------- ------- Prepaid pension cost $ 445 $ 282 ======= =======
Net pension expense and related year end assumptions consist of the following:
2001 2000 1999 ----- ----- ----- (In thousands) Service cost $ 144 $ 138 $ 122 Interest cost on benefit obligation 238 231 199 Expected return on plan assets (241) (266) (226) Net amortization and deferral (13) (13) (13) Recognized net actuarial loss 18 - - ----- ----- ----- Pension expense $ 146 $ 90 $ 82 ===== ===== =====
(Continued) 13. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 7 - EMPLOYEE BENEFITS (Continued)
2001 2000 1999 ---- ---- ---- Weighted average discount rate 7.50% 7.50% 7.50% Rate of increase in future compensation 4.00% 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 is accrued annually over the period of active service of each participant. The expense for the plan was $180,000, $177,000 and $164,000 in 2001, 2000 and 1999. 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 $17,000, $11,000 and $7,000 in 2001, 2000 and 1999. 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 2001, 2000 and 1999, 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 $67,000, $64,000 and $61,000 in 2001, 2000 and 1999. 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. (Continued) 14. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 8 - STOCK OPTIONS (Continued) SFAS No. 123 requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma 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 2001, 2000 and 1999. The fair value of options granted during 1999 was estimated using the following weighted average information: risk-free interest rate of 5.75%, expected life of 10 years, expected dividends of 3.00% per year and expected stock price volatility of 10.00%. There were no options granted for the years ended December 31, 2001 and 2000.
2001 2000 1999 ------ ------ ------ (In thousands, except for per share data) Net income as reported $3,501 $3,386 $3,145 Pro forma net income 3,501 3,327 3,075 Reported earnings per share Basic $ 2.94 $ 2.84 $ 2.64 Diluted 2.92 2.81 2.61 Pro forma earnings per share Basic $ 2.94 $ 2.79 $ 2.58 Diluted 2.92 2.76 2.55
Activity in the option plan for the years ended, and as restated for all stock dividends, is summarized as follows:
Weighted Weighted Number of Average Average Outstanding Exercise Exercise Fair Value Options Price Price of Grants ----------- ------------ -------- ---------- Balance at January 1, 1999 30,528 $25.08-51.83 $33.37 Granted 11,025 59.86 59.86 $10.75 Exercised (5,415) 25.08-35.30 28.46 ------ ------------ ------ Balance at December 31, 1999 36,138 25.08-59.86 42.19 Exercised (2,415) 25.08-59.86 37.92 ------ ------------ ------ Balance at December 31, 2000 33,723 25.08-59.86 42.50 Exercised (2,938) 25.08-35.30 26.56 ------ ------------ ------ Balance at December 31, 2001 30,785 $25.08-59.86 $44.02 ====== ============ ======
(Continued) 15. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 8 - STOCK OPTIONS (Continued) Options exercisable at December 31 are as follows:
Weighted Number Average Of Exercise Options Price ------- -------- 1999 25,118 $34.42 2000 33,723 42.50 2001 30,785 44.02
At December 31, 2001, options outstanding had a weighted-average remaining life of 6.7 years. NOTE 9 - INCOME TAXES Income tax expense consists of:
2001 2000 1999 ------ ------- ------ (In thousands) Current $1,390 $ 1,516 $1,282 Deferred 19 (20) 32 ------ ------- ------ 1,409 $ 1,496 $1,314 ====== ======= ======
Year end deferred tax assets and liabilities consist of:
2001 2000 ---- ---- (In thousands) Deferred tax assets Allowance for loan losses $442 $414 Deferred compensation 444 421 Other 102 70 ---- ---- Total deferred tax assets 988 905 ---- ----
(Continued) 16. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 9 - INCOME TAXES (Continued)
2001 2000 ---- ---- (In thousands) Deferred tax liabilities Pension $159 $112 Unrealized gains on securities available for sale 464 138 Fixed assets 77 70 Mortgage servicing rights 90 72 Accretion 86 56 ---- ---- Total deferred tax liabilities 876 448 ---- ---- Net deferred tax asset $112 $457 ==== ====
Income tax expense calculated at the statutory rate of 34% differs from actual income tax expense as follows:
2001 2000 1999 ------ ------ ------ (In thousands) Statutory rate applied to income before taxes $1,669 $1,660 $1,516 Deduct Tax-exempt interest income (243) (148) (160) Other (17) (16) (42) ------ ------ ------ $1,409 $1,496 $1,314 ====== ====== ======
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:
2001 2000 1999 ---------- ---------- ---------- Basic earnings per share Net income available to common shareholders (in thousands) $ 3,501 $ 3,386 $ 3,145 ========== ========== ========== Weighted average shares outstanding 1,191,692 1,192,438 1,189,463 Basic earnings per share $ 2.94 $ 2.84 $ 2.64 ========== ========== ==========
(Continued) 17. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 10 - EARNINGS PER SHARE (Continued)
2001 2000 1999 ---------- ---------- ---------- Diluted earnings per share Net income available to common shareholders (in thousands) $ 3,501 $ 3,386 $ 3,145 ========== ========== ========== Weighted average shares outstanding 1,191,692 1,192,438 1,189,463 Add dilutive effects of assumed exercises of stock options 7,569 11,742 17,493 ---------- ---------- ---------- Weighted average dilutive potential shares outstanding 1,199,261 1,204,180 1,206,956 ========== ========== ========== Diluted earnings per share $ 2.92 $ 2.81 $ 2.61 ========== ========== ==========
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:
2001 2000 ------- ------- (In thousands) Balance outstanding, January 1 $ 2,648 $ 3,082 New loans and rewrites 1,396 3,974 Payments and payoffs (1,654) (4,399) Other 7 (9) ------- ------- Balance outstanding, December 31 $ 2,397 $ 2,648 ======= =======
Related party deposits totaled $1,080,000 and $877,000 at year end 2001 and 2000. (Continued) 18. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 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 2001 and 2000, reserves of $1,415,000 and $1,055,000 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. 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:
2001 2000 ------- ------- (In thousands) Commitments to extend credit $20,137 $15,768 Standby letters of credit 117 67
Substantially all of these commitments are at variable or uncommitted rates. (Continued) 19. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 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 1 2 0 0 0 ----------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- (In thousands) Assets Cash and cash equivalents $ 16,847 $ 16,847 $ 23,310 $ 23,310 Securities available for sale 61,118 61,118 47,969 47,969 Securities held to maturity 7,168 7,114 7,882 7,976 Other securities 4,810 4,810 4,653 4,653 Loans, net 133,106 133,753 126,049 124,056 Liabilities Deposits Non-interest bearing $ (32,919) $ (32,919) $ (30,574) $ (30,574) Interest-bearing (171,670) (173,192) (162,517) (162,351)
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. (Continued) 20. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 14 - REGULATORY CAPITAL (Continued) 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 ------ ----- ------ ----- ------ ----- 2001 Total capital (to risk weighted assets) Consolidated $24.1 18.3% $10.6 8.0% $13.2 10.0% Bank 24.0 18.2 10.5 8.0 13.2 10.0 Tier 1 capital (to risk weighted assets) Consolidated 22.4 17.0 5.3 4.0 7.9 6.0 Bank 22.4 17.0 5.3 4.0 7.9 6.0 Tier 1 capital (to average assets) Consolidated 22.4 9.8 9.2 4.0 11.4 5.0 Bank 22.4 9.8 9.2 4.0 11.4 5.0 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. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 14 - REGULATORY CAPITAL (Continued) 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. During 2002, the Bank could pay dividends of $2,149,000 plus 2002 net income without prior regulatory approval. NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are condensed parent company financial statements: CONDENSED BALANCE SHEETS December 31, 2001 and 2000
2001 2000 ------- ------- (In thousands) ASSETS Cash $ 72 $ 12 Investment in subsidiary 23,323 21,602 Other assets 1,060 1,056 ------- ------- $24,455 $22,670 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 1,078 $ 1,055 Shareholders' equity 23,377 21,615 ------- ------- $24,455 $22,670 ======= =======
(Continued) 22. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------ ------ ------ (In thousands) Dividends from subsidiary $2,442 $2,346 $2,105 Operating expenses (44) (32) (29) ------ ------ ------ Income before income tax and equity in undistributed income of subsidiary 2,398 2,314 2,076 Income tax benefit 15 11 10 Equity in undistributed income of subsidiary 1,088 1,061 1,059 ------ ------ ------ NET INCOME $3,501 $3,386 $3,145 ====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------- ------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,501 $ 3,386 $ 3,145 Equity in undistributed net income of subsidiary (1,088) (1,061) (1,059) Change in other assets (4) (83) (27) ------- ------- ------- Net cash from operating activities 2,409 2,242 2,059 CASH FLOWS FROM FINANCING ACTIVITIES Dividends (2,349) (2,192) (2,078) Net shares issued - (66) 16 ------- -------- ------- Net cash from financing activities (2,349) (2,258) (2,062) ------- ------- ------- Net change in cash and cash equivalents 60 (16) (3) Cash at beginning of year 12 28 31 ------- ------- ------- CASH AT END OF YEAR $ 72 $ 12 $ 28 ======= ======= =======
(Continued) 23. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Earnings Per Share Interest Interest Net ------------------- Income Income Income Basic Diluted -------- -------- ------ ----- ------- 2001 First quarter $4,017 $2,168 $ 808 $ .68 $ .68 Second quarter 3,968 2,203 857 .72 .71 Third quarter 3,935 2,202 832 .69 .69 Fourth quarter * 3,868 2,315 1,004 .85 .84 2000 First quarter $3,721 $2,103 $ 762 $ .64 $ .63 Second quarter 3,855 2,211 831 .70 .69 Third quarter 4,042 2,300 886 .74 .73 Fourth quarter 4,067 2,251 907 .76 .76
* The increase in net income during the fourth quarter of 2001 is primarily the result of a significant decrease in interest expense as a result of the general decrease in the interest rate environment. The fourth quarter of 2001 was also positively impacted by an increase in noninterest income and a decrease in provision expense. 24. 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, 2001 and 2000, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. Crowe, Chizek and Company LLP South Bend, Indiana February 15, 2002 25. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 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 decreased $6.5 million from 2000 to 2001. During the year, $9.1 million of cash was provided from financing activities due to increases in deposits, while $3.7 million of cash was provided from operating activities. Investing activities utilized $19.3 million of cash during 2001. 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 increased $12.4 million during 2001. Securities available for sale represent 89.5% 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.
2001 2000 1999 ------- ------- ------- (In thousands) U.S. Government and agency securities $(4,056) $(1,129) $ 2,932 Tax exempt state and municipal 13,709 1,672 (3,788) Taxable state and municipal 2,782 (4,287) 2,627 ------- ------- ------- Total change in securities $12,435 $(3,744) $ 1,771 ======= ======== =======
26. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 Holdings in state and municipal securities increased during the year primarily as a result of better yielding investments. The chart below shows the percentage composition of the portfolio as of December 31.
2001 2000 ------ ------ U.S. Government and agency securities 48.41% 66.45% Tax exempt state and municipal 37.49 21.29 Taxable state and municipal 14.10 12.26 ------ ------ 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, 2001 was $901,000, 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 2002, management feels there will be sufficient liquidity to increase maturity of the investment portfolio, thereby potentially increasing the yield. LOANS Total loans increased $7.1 million or 5.5% during 2001. Substantial growth occurred in our consumer real estate lending which grew to $84.6 million in 2001 from $77.8 million in 2000, or a 8.7% 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 $21.8 million in loans for sale in 2001 and $4.6 million in 2000. 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 service area. The Company maintains a prudent loan policy and adheres to strong credit underwriting standards. All loans are domestic. An annual review of loan concentrations at December 31, 2001 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 8.7% of total loans. 27. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents the amount which management estimates is adequate to provide for probable 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 charge-offs, net of recoveries. The quality of the Company's loan portfolio compares well with its peer group with non-performing loans at 0.48% of total loans at December 31, 2001 and 0.21% at December 31, 2000. Net loans charged off were 0.05% of total loans during 2001 and 0.03% in 2000. The allowance for loan losses increased marginally in 2001 and 2000 for 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, ---------------------- 2001 2000 ---- ---- (Dollars in thousands) Nonaccrual loans $ - $181 Loans past due 90 days or more 647 81 Troubled debt restructurings - - ---- ---- Total nonperforming loans $647 $262 ==== ==== Percent of total loans .48% .21% ==== ====
28. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 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 $11.5 million or 6.0% during 2001. Money market deposits increased $7.9 million and interest-bearing demand deposits increased $2.7 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, 2001 the loan to deposit ratio was 65.9% compared to 66.1% for December 31, 2000. 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 2001 was $23.4 million compared to $21.6 million in 2000. The Company realized $3.5 million in income and paid out $2.3 million in dividends during 2001. The unrealized gain on securities available for sale increased equity $633,000. 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, 2001 the Company held $4.9 million in federal funds sold, $61.1 million in securities available for sale and $1.5 million in securities held to maturity maturing within one year. These short-term assets represents 33.0% of total deposits as of December 31, 2001. 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. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 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, 2001 and 2000. 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 (interest-bearing and non interest-bearing demand deposits, 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. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 MARKET RISK DISCLOSURE AT DECEMBER 31, 2001 (Dollars in thousands)
Fair Value 2002 2003 2004 2005 2006 Thereafter Total 12/31/01 ------- ------- ------- ------- ------- ---------- -------- ---------- RATE-SENSITIVE ASSETS Variable interest rate loans $ 9,216 $ 2,436 $ 2,210 $ 1,994 $ 1,999 $13,922 $ 31,777 $ 39,524 Average interest rate 8.68% 7.89% 7.63% 7.49% 7.73% 7.89% 6.41% Fixed interest rate loans 20,636 10,529 11,203 8,190 8,291 44,177 103,026 103,673 Average interest rate 8.66% 8.65% 8.35% 8.25% 7.83% 7.25% 7.98% Variable interest rate securities - - - - - 1,506 1,506 1,320 Average interest rate -% -% -% -% -% 3.50% 3.50% Fixed interest rate securities 24,886 21,441 11,393 4,330 2,756 1,974 66,780 66,912 Average interest rate 5.78% 6.14% 5.87% 5.81% 4.16% 8.06% 5.91% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits 32,919 - - - - - 32,919 32,919 Average interest rate -% -% -% -% -% -% -% Fixed interest rate savings and interest-bearing deposits 95,124 - - - - - 95,124 95,124 Average interest rate 2.44% -% -% -% -% -% 2.44% Fixed interest rate time deposits 54,901 17,828 1,989 1,131 697 - 76,546 78,068 Average interest rate 5.64% 4.13% 5.53% 5.75% 4.95% -% 5.28%
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 83,663 - - - - - 83,663 83,663 Average interest rate 3.32% -% -% -% -% -% 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%
31. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 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 10.0% 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 dividend payout ratio which has averaged 66.8% 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 declared to shareholders in 2001, 2000 and 1999. 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 demand deposits, savings and time deposits. 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 2001, net interest income increased slightly by $23,000. This can be attributed to the general decrease in interest rates which resulted in our yield on interest-earning assets decreasing more rapidly than our cost of funds. The overall yield on average interest-earning assets decreased more significantly than the cost of average interest-bearing liabilities. The Company experienced an increase in the yield on time deposits during 2001; this increase is expected to continue during most of 2002. During 2000, net interest income increased substantially due primarily to an increase in the Company's loan portfolio and an increase in the overall yield on interest-earning assets compared to the cost of interest-bearing liabilities. 32. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 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, 2001 December 31, 2000 December 31, 1999 --------------------------- ------------------------------- ----------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Int Rate Balance Int Rate Balance Int Rate -------- ------- ------ --------- -------- ------ -------- ------- ------ Interest-earning assets: Other interest- earning assets $ 13,294 $ 613 4.60% $ 8,215 $ 555 6.76% $ 10,026 $ 537 5.36% Total securities (1) 68,477 3,729 5.45 66,459 3,886 5.85 67,400 3,749 5.56 Loans, net 128,878 11,446 8.88 124,732 11,244 9.01 114,042 10,010 8.78 -------- ------- -------- ------- -------- ------- Total interest-earning assets 210,649 15,788 7.49% 199,406 15,685 7.87% 191,468 14,296 7.47% ------- ------- ------- Cash and due from banks 6,660 6,666 6,998 Premises and equipment, net 3,161 3,066 3,130 Allowance for loan losses (1,696) (1,614) (1,563) Other assets 5,839 4,224 4,037 -------- -------- -------- Total $224,613 $211,748 $204,070 ======== ======== ======== Interest-bearing liabilities: Interest-bearing demand deposits $ 15,151 $ 267 1.76% $ 15,664 $ 301 1.92% $ 15,905 $ 304 1.91% Savings deposits 73,316 2,233 3.05 72,730 2,641 3.63 73,293 2,482 3.39 Time deposits 78,842 4,400 5.58 70,793 3,878 5.48 65,168 3,291 5.05 -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities 167,309 6,900 4.12% 159,187 6,820 4.28% 154,366 6,077 3.94% ------- ------- ------- Non interest-bearing demand deposits 31,962 29,439 27,491 Other liabilities 2,370 2,279 2,093 Shareholders' equity 22,972 20,843 20,120 -------- -------- -------- Total $224,613 $211,748 $204,070 ======== ======== ======== Net interest income $ 8,888 $ 8,865 $ 8,219 ======= ======= ======= Net interest spread 3.37% 3.59% 3.53% ==== ===== ==== Net yield on interest-earning assets 4.22% 4.45% 4.29% ==== ===== ==== Ratio of interest- earning assets to interest-bearing liabilities 1.26x 1.25x 1.24x ======== ======== ========
(1) Yield computed using the average amortized cost for securities available for sale. 33. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 The table below shows the effect of volume and rate changes on net interest income on a pre-tax basis.
2001 Compared to 2000 2000 Compared to 1999 --------------------------- -------------------------- Volume Rate Net Volume Rate Net ------ ----- ----- ------ ---- ------ (In thousands) Other interest-earning assets $271 $(213) $ 58 $(107) $125 $ 18 Total securities 115 (272) (157) (53) 190 137 Loans, net 370 (168) 202 958 276 1,234 ---- ----- ----- ----- ---- ------ Total interest-earning assets 756 (653) 103 798 591 1,389 Interest-bearing demand deposits (10) (24) (34) (5) 2 (3) Savings deposits 21 (429) (408) (19) 178 159 Time deposits 448 74 522 296 291 587 ---- ----- ----- ----- ---- ------ Total interest-bearing liabilities 459 (379) 80 272 471 743 ---- ----- ----- ----- ---- ------ Net change in net interest income(a) $297 $(274) $ 23 $ 526 $120 $ 646 ==== ===== ===== ===== ==== ======
(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 and service charges. Non interest income from gains on the sale of residential real estate mortgages increased during 2001 due to a high volume of sales to the secondary market. This volume is expected to decline during 2002 as interest rates stabilize or increase. Non-interest income increased during 2000 due to an increase in service charges and fees on deposit accounts. 34. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 NON-INTEREST EXPENSE Total non-interest expenses increased during 2001 primarily due to an increase in salaries, wages and employee benefits. The Company continues to fund 100% of the employees health insurance and the Company offers a defined pension benefit and a 401(k) savings plan to their employees. Both of these benefit plans increased expenses during 2001 by $91,000. Expense increases related to these benefit plans are expected to continue in the future. 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 totaled $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 in 2000 from $1.2 million in 1999. FEDERAL INCOME TAXES Income tax expense decreased during 2001 to $1.4 million compared to $1.5 million in 2000. Tax-exempt interest income increased during 2001 to $834,000 compared to $491,000 for 2000. The effective tax rates for 2001, 2000 and 1999 are shown in the table below:
2001 2000 1999 ------ ------ ------ Income before tax (In thousands) $4,910 $4,882 $4,459 Income tax expense (In thousands) 1,409 1,496 1,314 Effective tax rate 28.7% 30.6% 29.5%
NET INCOME Consolidated net income was $3.5 million for 2001, a 3.4% increase over last year. This is primarily attributable to an increase in interest income on tax-exempt investments with a corresponding decrease in income tax expense. 35. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 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 materially 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 materially 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. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 OFFICERS AND COMMUNITY ADVISORS CITIZENS NATIONAL BANK OFFICERS AND COMMUNITY ADVISORS CNB CITIZENS NATIONAL RICHARD L. WINE ONAWAY PELLSTON CORPORATION BANK OFFICERS AND VICE PRESIDENT LAURA L. SHACK BARBARA ANDERSON OFFICERS COMMUNITY ADVISORS SUSAN L. CASWELL BANKING OFFICER & BANKING OFFICER & ASSISTANT VICE PRESIDENT BRANCH MANAGER BRANCH MANAGER ROBERT E. CHURCHILL ROBERT E. CHURCHILL STEPHEN J. CRUSOE RICHARD CONRAD CHAIRMAN & CHIEF CHAIRMAN & CHIEF ASSISTANT VICE PRESIDENT COMMUNITY ADVISOR EXECUTIVE OFFICER EXECUTIVE OFFICER MARIAN L. HARRISON INDIAN RIVER JAMES C. CONBOY, JR. JAMES C. CONBOY, JR ASSISTANT VICE PRESIDENT BARBARA J. JOPPICH PRESIDENT & CHIEF PRESIDENT & CHIEF SALLY J. LACROSS ASSISTANT VICE PRESIDENT & OPERATING OFFICER OPERATING OFFICER ASSISTANT VICE PRESIDENT BRANCH MANAGER JOHN F. EKDAHL JOHN F. EKDAHL PAUL F. SCHWIND PAUL FISHER SENIOR VICE PRESIDENT SENIOR VICE PRESIDENT INTERNAL AUDITOR COMMUNITY ADVISOR SUSAN A. ENO SUSAN A. ENO SUSAN J. CLEARY LARRY MIDDLETON SENIOR VICE PRESIDENT SENIOR VICE PRESIDENT LOAN OFFICER COMMUNITY ADVISOR JOHN P. WARD DOUGLAS W. DAMM VICTORIA J. HAND JOHN L. OLSZEWSKI SECRETARY VICE PRESIDENT & LOAN OFFICER COMMUNITY ADVISOR IRENE M. ENGLISH SENIOR LOAN OFFICER MICHELLE J. OSTWALD JEFF SWADLING TREASURER IRENE M. ENGLISH LOAN OFFICER COMMUNITY ADVISOR VICE PRESIDENT & FLORENCE CASWELL CONTROLLER ASSISTANT LOAN MACKINAW CITY KENNETH N. SHELDON OPERATIONS OFFICER SUSAN M. BRANDT VICE PRESIDENT BANKING OFFICER & EXAMINATION BRANCH MANAGER AUDREY JAGGI COMMUNITY ADVISOR
STAFF OF CITIZENS NATIONAL BANK
DOWNTOWN MAIN OFFICE DRIVE-IN MACKINAW CITY INDIAN RIVER Eugene Andrzejewski Kelli M. Reimann Cheboygan Susan M. Brandt Barbara J. Joppich Jaime Brandau Katherine M. Rhome Deborah L. Closs Jody L. Jacobs Kathleen A. Charboneau Ronald D. Rose Susan M. Bohn Jennifer M. LaHaie Carla Konwinski Kim Chapman Carla Roznowski Tammy Kirsch Joan T. Clarey LeRoy Ruotanen Amber LaPrairie Lora L. Clouser Bernard J. Schramm PELLSTON Susan Sova Patricia K. Comps Karen K. Schramm EAST SIDE Helen K. Stumpf Arlene Daniel Nancy Scott DRIVE-IN Barbara A. Anderson Kathryn A. Szarenski Trisha M. Dobias Sandra L. Shawl Cheboygan Sheri L. Kindell Mary E. Greenwood Kim Sinclair Debra Grice D'Anne E. Smith Helen R. Hart Sally A. Spray Merry Major-Brown ONAWAY Linda K. Johnson M. Teresa Sullivan Carolyn A. Scheele Miranda Lake Kathy S. Swackhamer Laura L. Shack Betty J. Lewis Christina Sweet SOUTH BRANCH Rachel Bischoff Steven R. Luttmann Lori Thorton DRIVE-IN Pamela A. Kolasa Randy J. Maltby Darlene L. Vallance Cheboygan Sara L. LaLonde Loretta Merchant Wendelin K. Whippo Lynn D. Porter Penny L. Newman Nicole M. Wichlacz Diane S. Mushlock Kathleen T. Robbins Sherry M. Wichlacz Diane S. Poirier Kathleen S. Wilson Laura Merchant
37. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2001, 2000 and 1999 DIRECTORS OF CNB CORPORATION & CITIZENS NATIONAL BANK ROBERT E. CHURCHILL Chairman & Chief Executive Officer, CNB Corporation Chairman & Chief Executive Officer, Citizens National Bank STEVEN J. BAKER, D.V.M. Indian River Veterinary Clinic JAMES C. CONBOY, JR. President & Chief Operating Officer, CNB Corporation President & Chief Operating Officer, Citizens National Bank KATHLEEN M. DARROW President, Darrow Bros. Excavating, Inc. Retired, formerly Group Sales & Special Events Coordinator for the Mackinac State Historic Park THOMAS J. ELLENBERGER Vice President & Secretary Albert Ellenberger Lumber Company VINCENT J. HILLESHEIM President, Anchor In Marina President, Lincoln Bridge Plaza, Inc. JOHN L. ORMSBEE Owner, Jack's Sales FRANCIS J. VANANTWERP, JR. President, Durocher Dock & Dredge, Inc. JOHN P. WARD Retired, formerly Senior Vice President, CNB Corporation and Citizens National Bank Secretary, CNB Corporation DIRECTORS EMERTI KENNETH A. HUBACKER, LYLE MCKINLEY, FRANCIS J. VANANTWERP, SR., JAMES H. TAYLOR, THOMAS A. ELLENBERGER, THOMAS J. FISHER HOW TO ORDER FORM 10-K Shareholders may obtain, without charge, a copy of Form 10-K or the 2001 Annual Report Summary & Highlights by writing John P. Ward, Secretary, CNB Corporation, P.O. Box 10, Cheboygan, Michigan 49721. 38.