-----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, LLeGHGeP8GmUYS3Xsez6hLdgSTdbjO5sKOk5AbLcPGi/Q7l3wejiI+8c1hgd6fXd wUqg9srYYD5wa692I8/9HA== 0000950124-97-001982.txt : 19970401 0000950124-97-001982.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950124-97-001982 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB CORP /MI/ CENTRAL INDEX KEY: 0000779125 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 033-00737 FILM NUMBER: 97569290 BUSINESS ADDRESS: STREET 1: PO BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 BUSINESS PHONE: 6166277111 10KSB40 1 10KSB40 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington , D.C. 20549 FORM 10-KSB [X ] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to __________ Commission file number 0-28388 CNB CORPORATION (Name of Small Business Issuer 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) Issuer's telephone number (616) 627-7111 Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities registered under 12(g) of the Exchange Act: Common Stock, par value $2.50 per share (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 ------ ---- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X]. State issuer's revenues for its most recent fiscal year. $13,996,000 ----------- State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. 2 State the number of shares outstanding of each of the issuer's classes of common equity, as of the last practical date. Common 930,772 shares DOCUMENTS INCORPORATED BY REFERENCE Certain portion of the issuer's proxy statement for the annual meeting of shareholders scheduled for May 20, 1997 are incorporated herein by reference into Part III of this report and certain portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1996 are incorporated herein by reference into Part II of this report. 3 PART I ITEM I - DESCRIPTION OF BUSINESS CNB Corporation (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 (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, Consolidated 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 58% 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 10% of total loans. Agricultural lending is minimal and predominately real estate secured. 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. Banking services are delivered through a system of five full-service banking offices and three drive-in branches plus six 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 mutual fund, annuity and life insurance products to its customers. 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 3 4 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 therefrom 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 risk classes, and include certain off-balance-sheet items in the calculation of capital requirements. Tier 1 capital consists of shareholders' equity less intangible assets and unrealized gain or loss on securities available for sale, and Tier 2 capital consists of Tier 1 capital plus qualifying loan loss reserves. The capital ratios of the Bank exceed the minimum regulatory guidelines for well-capitalized institutions. The following table shows the Company's regulatory capital and capital ratios at December 31, 1996 and 1995, as well as the regulatory requirements for adequately-capitalized and well-capitalized institutions established by the FDIC. 4 5 At year end, consolidated and Bank actual capital levels (in millions) and minimum required levels were:
Minimum Required To Be Well Minimum Required (Adequately) Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Regulations ------------------- ----------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ------ ------ ----- ----- ------ 1996 Total capital to risk weighted assets $18.2 19.6% $7.4 8.00% $9.2 10.00% Tier I capital to risk weighted assets 17.1 18.3% 3.7 4.00% 5.6 6.00% Tier I capital to average assets 17.1 9.9% 6.9 4.00% 8.6 5.00% 1995 Total Capital to risk weighted assets 17.3 20.1% 6.9 8.00% 8.1 10.00% Tier I capital to risk weighted assets 16.2 18.9 3.4 4.00% 4.9 6.00% Tier I capital to average assets 16.2 10.1% 6.4 4.00% 7.9 5.00%
The above ratios, in conjunction with regulatory ratios, have qualified the Bank for the lowest FDIC insurance premium rate available to insured financial institutions. COMPETITION In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac, Presque Isle and Montmorency Counties, the Bank maintains the largest deposit base, or approximately 51.1% of deposit market share. The Bank is one of two principal banking institutions located within this market. The competing bank is a member of a multi-bank holding company with substantially more assets than the Company. There are also two credit unions, one savings and loan association and a brokerage firm. The Bank is the only independent community bank in the Cheboygan County market. On June 1, 1997, the Riegel - Neal Interstate Banking and Branching Efficiency Act will be fully implemented allowing full interstate banking in Michigan and other states which have opted into the program. As a result, the Company expects that it will see new competition in its market area from out of state financial institutions. Since the Bank's niche is as a community bank, it does not feel the addition of out of state banks to its service area will have a significant impact on its business. In order to successfully compete, management has developed a sales and service culture, stresses and rewards excellent customer service, and designs products to meet the needs of the customer. The Bank also utilizes its ability to sell loans in the secondary market. EMPLOYEES On December 31, 1996, the Bank employed 62 full-time and 14 part-time employees. This compares to 63 full-time and 14 part-time employees as of December 31, 1995. 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. 5 6 ITEM 2 - DESCRIPTION OF PROPERTY (a) The Company and the Bank have their primary office at 303 N. Main Street, Cheboygan, Michigan. In addition, the Bank owns and operates the following facilities: South Main drive-in, 991 1/2 South Main Street, Cheboygan; Downtown drive-in, 414 Division Street, Cheboygan; East Side drive-in, 816 East State Street, Cheboygan; Onaway Office, 20581 W. State Street, Onaway; Pellston Office, 200 Stimpson, Pellston; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw City; Indian River Office, 3990 Straits Hwy., Indian River. All properties are owned by the Bank free of any mortgages or encumbrances. All properties are in good condition. (B)(1) Not applicable (B)(2) The Bank makes first and second mortgage loans to its customers for the purchase of residential and commercial properties. Historically, the Bank has sold the majority of its residential mortgages 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 $23 million at December 31, 1996. (C) Not applicable ITEM 3 - LEGAL PROCEEDINGS Neither the Company nor the Bank are a party to any pending legal proceedings other than 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 this reporting period. PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a)(1)(I) 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. (ii) The information required by this item is included under the caption "Financial Highlights" on page 4 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996, which is hereby incorporated by reference. (a)(2)(I) The information required by this item is included in Note 7 on page 18 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996, which is hereby incorporated by reference. (ii) The number of common equity shares that could be sold pursuant to Rule 144 under the Securities Act adjusted for the 2 for 1 stock split of May 31, 1996, is 9,306. (iii) There are no public offerings pending. (b) There are approximately 603 holders of record of the common stock of the Company as of December 31, 1996. (c)(1) During 1996 the Company declared regular dividends of $1.33 per share plus a special dividend of $0.50. 6 7 In 1995 the Company declared regular dividends of $1.20 per share plus a special dividend of $.50. These per share statistics are retroactively adjusted for the 2 for 1 stock split of May 31, 1996. Subject to approval of the Board of Directors of the Company and applicable law, the Company anticipates that it will continue to pay a regular cash dividend equal to or greater than the prior years. Special dividends are considered each December based on the current year's earnings. These have resulted in a dividend payout ratio averaging 65.9% for the past three years. (2) 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. 2. The prospective rate of earnings retention must be consistent with the Company's capital needs, asset quality, and overall financial condition. ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation (Company) and its subsidiary, Citizens National Bank of Cheboygan (Bank). This discussion should be read in conjunction with the financial statements beginning on page nine and the related footnotes. FINANCIAL CONDITION CASH AND CASH EQUIVALENTS The balance maintained in cash and cash equivalents varies 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. This amount of clearings can vary by as much as $3 million in one day causing the Company's cash position to vary. SECURITIES Investment balances increased $2.4 million during 1996. Securities available for sale represent 13.3% of the portfolio. Currently the Company maintains a primarily short-term securities portfolio. Therefore, not many securities are needed in the available for sale classification to meet anticipated liquidity needs. The average life of the investment 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 monthly 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 during 1996 and 1995, in thousands of dollars.
1996 1995 -------- -------- U.S. Government and agency securities $4,168 $(3,748) Tax exempt obligations of states and political subdivisions (219) 3,766 Other taxable securities (1,530) 3,265 ------ ------ Total change in securities $2,419 $3,283 ====== ======
Holdings in U.S. Government and agency securities increased during the year primarily as a result of increases in 7 8 funds available through the growth of the deposit portfolio. The chart below shows the percentage composition of the portfolio as of December 31.
1996 1995 ------ ------ U.S. Government and agency securities 81.63% 77.91% Tax exempt obligations of states and political subdivisions 13.70 14.63 Other taxable securities 4.67 7.46 ------- ------- 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 loss on securities available for sale at December 31, 1996 was two thousand dollars, 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. Should the investments be held to maturity, no gain or loss will be experienced. The following table shows the maturity of the Bank's security portfolio at December 31, 1996 in thousands. Securities are shown as being due in accordance with the contractual scheduled principal repayments.
Due in Due in Due after one year one through five through Due after or less five years ten years ten years --------- ---------- --------- --------- U.S. Government and agency securities $17,947 $32,051 - - State & Political subdivisions 4,420 3,072 $3,580 - Other 180 - - - ------- ------- ------- ------ Total $22,547 $35,123 $3,580 $ 0 ======= ======= ======= ======
The Company maintains a conservative investment 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 1996, management felt that there was sufficient liquidity to increase the maturity of the investment portfolio, thereby increasing the potential yield. These plans are expected to continue through 1997. LOANS Total loans increased $8.6 million, or 9.75%, during 1996. Substantially all of this growth was in residential real estate mortgage loans due to an increasing demand for housing in this area. 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 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 $3.7 million in loans for sale in 1996 and $5.4 million in 1995. 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 our service area. The table below shows total portfolio loans outstanding, in thousands of dollars, at December 31, 1996 and 1995, and their percentage of the total loan portfolio. All loans are domestic. There is no individual industry with more 8 9 than a 10% concentration. However, all tourism related businesses, when combined, total 12.4% of total loans.
1 9 9 6 1 9 9 5 ------------------------ ---------------------- Portfolio loans: Balance % of total % of total Balance ------- ----------- ---------- -------- Commercial $27,742 28.68% $30,023 34.06% Residential mortgage 56,539 58.44 46,500 52.75 Construction mortgage 3,221 3.33 2,229 2.53 Consumer 9,239 9.55 9,395 10.66 ------- ------- ------- ------ Total loans $96,741 100.00% $88,147 100.00% ======= ======= ======= ======
The following table shows the maturity of the Bank's loan portfolio at December 31, 1996. Loans are shown as being due in accordance with the contractual scheduled principal repayments.
Due in Due Due in one 1 to 5 After 5 Year or less Years Years ------------- ----- ----- Fixed rate loans Commercial $ 5,961 $ 9,857 $ 499 Consumer 4,489 4,683 24 Residential mortgage 7,545 2,471 5,838 ------ ----- ----- Total fixed rate 17,995 17,011 6,361 Variable rate Commercial 14,576 70 Consumer 43 Residential mortgage 32,908 7,777 ------ ----- Total variable rate 47,527 7,847 ------ ----- ------ TOTAL LOANS $65,522 $24,858 $6,361 ======= ======= ======
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 and problem and delinquent loans) and establishes specific loss allowances on these loans. Historical loss information and local economic conditions 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 .14% of total loans at December 31, 1996 and 0.09% at December 31, 1995. Loans charged off were 0.05% of total loans during 1996 and 0.05% in 1995. The Company added to the allowance for loan losses in 1996 and 1995 an amount considered adequate to cover possible losses that are currently anticipated based on past experience and specific identification. 9 10 The following table shows the allocation of the allowance at December 31 in thousands of dollars.
% of loans to % of loans to 1996 Total Loans 1995 Total Loans -------- ----------- -------- ----------- Commercial $ 51 28.68% $ 88 34.06% Residential mortgage 49 58.44 43 52.75 Construction mortgage 0 3.33 0 2.53 Consumer 36 9.55 36 10.66 Unallocated 1,225 1,138 ----- ----- Total allowance $1,361 100.00% $1,305 100.00% ====== ======= ====== =======
Changes in Allowance for Loan Losses
1996 1995 -------- -------- Balance at beginning or period $1,305 $1,246 Charge-offs; Commercial 0 0 Residential mortgage 0 (43) Construction mortgage 0 0 Consumer (63) (26) -------- ------- Total charged-off (63) (69) Recoveries: Commercial 0 0 Residential mortgage 2 17 Construction mortgage 0 0 Consumer 17 11 ------- ------- Total recoveries 19 28 -------- ------- Net charged-off (44) (41) Provision for loan losses 100 100 ------- ------ Balance at end of period $1,361 $1,305 ======= ====== Net charge-offs to average loans 0.05% 0.05% ====== =====
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, in thousands of dollars, is shown in the table below.
12/31/96 12/31/95 Nonaccrual loans $ 70 $ - Loans past due 90 days or more 61 80 Troubled debt restructurings - - --------- --------- Total nonperforming loans $ 131 $ 80 ===== ====== Percent of total loans 0.14% 0.09% ======= =====
10 11 When reasonable doubt exists concerning the collectibility of interest or principal, a loan is placed on a non-accrual basis. Any interest accrued but not collected is reversed and charged against current earnings. Interest income which would have been recorded in 1996 under original terms on non-accrual loans outstanding at December 31, 1996 was immaterial. There was no interest income recorded in 1996 on non- accrual loans outstanding at December 31, 1996. At year-end 1996, the Company had approximately $586 thousand in loans for which payments are current, but known financial difficulties of the borrowers cause management concern about the ability to comply with existing loan repayment terms. These loans, along with any other loans classified for regulatory purposes that are not included in the table above, are subject to constant management attention and their classification is reviewed on a monthly basis. Under the guidelines of SFAS No. 114 and 118, "Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan-Income Recognition Disclosures, the Company had no impaired loans. 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 maintains its market share. Deposits increased $5.7 million or 3.86% during 1996. Money market savings accounted for $4.5 million of this increase. The Company considers a $5.7 million growth in deposits to be noteworthy considering the number of individuals who have moved their funds from banks into the equities markets. The majority of the Company's deposits are derived from core customers, relating to long term relationships with local personal, business and public customers. The Company has increased its market share to 51.1%. Deposit rates are monitored continually to assure that the Company pays a competitive rate. The Company does not support its growth through purchased or brokered deposits. The following table shows the average balances outstanding and average interest rates for each major deposit category for the year in thousands of dollars.
1 9 9 6 1 9 9 5 -------------------------- ------------------------- Avg Bal Rate Avg Bal Rate ------- ---- ------- ---- Non interest-bearing demand $ 21,156 $ 19,859 Interest-bearing demand 14,051 2.40% 13,377 2.40% Savings deposits 25,288 2.89 26,630 2.88 Time deposits 92,602 5.00 82,263 4.88 --------- --------- $153,097 $142,129 ========= ========
Time deposits in amounts of $100,000 or greater, in thousands, by time to maturity at December 31, 1996 were: Up to 3 months $3,942 3 to 6 months 1,293 6 to 12 months 1,719 Over 12 months $2,777 ----- $9,731 ======
LIQUIDITY AND FUNDS MANAGEMENT LIQUIDITY Consistent with 1995 as detailed in the Consolidated Statements of Cash Flows, the Company continued to build its balance sheet with cash flows obtained from operations and increases in deposits. Net income combined with 11 12 noncash operating expenses provided approximately $3.3 million in liquidity. This liquidity combined with increases in deposits of $5.7 million, offset by dividends paid to shareholders, allowed for loan growth of $8.6 million. Excess liquidity was invested in Federal Funds which allowed the Company to obtain a strong yield without impairing liquidity. The Company serves a market that is very strongly tied to the summer tourist industry. Consequently, the Company experiences seasonal swings in liquidity. The bulk of commercial loan activity is in the spring and summer months as businesses prepare for the summer season. Deposit growth occurs during July, August and September, then may decline through the fall and winter months. As a result, the Company is usually very liquid from June to September. Investment security maturities are distributed evenly from October to May to meet the Company's liquidity needs during these months. The general economy in the state or the price of gasoline can affect the summer tourism industry resulting in changes in the Company's liquidity. The Company does not anticipate any significant changes in its seasonal pattern. The loan to deposit ratio increased to 62.86% at December 31, 1996 from 59.50% at December 31, 1995. Management continues to emphasize loan growth and would like to see this ratio at a minimum of 65%. This change in the asset mix from securities to higher yielding loans will increase the net interest margin over time. The Company did not borrow funds during 1996. FUNDS MANAGEMENT The following chart shows the Company's interest rate sensitivity as of December 31, 1996 in thousands of dollars
Repricing or maturing within -------------------------------------------- up to 4 to 12 1 to 5 over 3 months months years 5 years Total --------- ------- -------- -------- -------- Federal funds sold $ 4,050 $ 4,050 Taxable investment securities 6,139 $15,025 $31,185 52,349 Tax exempt investment securities 514 3,424 3,319 $1,644 8,901 Loans 29,580 35,942 24,858 6,361 96,741 ------ ------- ------ ----- ------ Total rate sensitive assets 40,283 54,391 59,362 8,005 162,041 ------ ------- ------ ----- ------- Interest bearing demand deposits 1,517 4,096 9,557 15,170 Savings 6,058 5,452 12,721 24,231 Money market savings 14,754 5,934 13,847 34,535 Time deposits 19,483 21,059 16,971 57,513 -------- ------- -------- ------ Total rate sensitive liabilities 41,812 36,541 53,096 $131,449 -------- ------- -------- -------- Gap $( 1,529) $17,850 $ 6,266 $ 8,005 --------- ------- ------- ------- Cumulative Gap $( 1,529) $16,321 $22,587 $30,592 ======== ======= ======= ======= Cumulative Ratio 96.34% 120.83% ====== =======
Management reviews the rate and term of any callable securities in the portfolio. The probability of call is used as the basis for determining a repricing date. Management believes that the difference between rate sensitive assets and rate sensitive liabilities ("Gap") overstates true interest sensitivity. Interest exposure is not as significant as expressed in the above schedule. Even though the Company has the contractual right to make a change in certain deposit rates, given our competitive position, management believes that liabilities do not need to be repriced as soon as rates begin to move. During 1996, the Company originated and retained $6.8 million in 15 year fixed rate mortgages. This has provided better utilization of our available funds and will contribute to increased interest income in the future. CAPITAL RESOURCES The capital ratios of the Company exceed the regulatory guidelines for well capitalized institutions. The Company 12 13 has maintained an average leverage ratio of 9.87% for the last three years. This strong capital position provides the Company with the flexibility to leverage its capital so as 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 65.9% 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. Dividends paid represent a yield of approximately 6.2% in 1996 and 6.5% in 1995. A two for one stock split was distributed to shareholders in 1996. 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 dividend. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest spreads were down from 1995 to 1996, but volumes were up. As a result, the Company experienced an increase in net interest income. An increase of $429 thousand is attributed to increased volumes. Declining rate spreads created a decrease of $131 thousand for a net change of $298 thousand. The Company continues to experience pressure for lower interest rates on loan products and higher interest rates on deposit products as competition increases. The net spread for the year ended December 31, 1996 was 3.69% compared to 3.85% during 1995. This pressure on interest margins will continue as increasing non-bank institutions, who do not have to follow the same regulatory guidelines as banks, compete for deposit and loan customers. The Company is attempting to change both the spread and mix as available funds are moved from securities to loans and remaining security maturities are lengthened. The table below shows the year to date daily average Consolidated Balance Sheet, revenue on earning assets,(on a pre-tax basis) or expense of interest bearing liabilities, and the annualized effective rate or yield for the period ending December 31, 1996, 1995 and 1994.
Yield Analysis of Consolidated Average Assets and Liabilities in thousands of dollars Year ended Year ended Year ended December 31, 1996 December 31,1995 December 31, 1994 -------------------------- -------------------------------- --------------------------- Average Yield/ Average Yield/ Average Yield Balance Int Rate Balance Int Rate Balance Int Rate ------- ----- ------ ---------- --- ------ ---------- --- ----- Interest earning assets: Federal funds sold $ 5,113 $ 273 5.34% $ 8,348 $ 486 5.82% $ 3,698 $ 152 4.11% Taxable securities 55,068 3,349 6.08 50,522 2,863 5.67 51,215 2,451 4.79 Tax exempt securities 8,324 402 4.83 5,190 264 5.09 4,032 208 5.16 Loans 93,188 8,934 9.59 86,158 8,456 9.81 84,302 7,463 8.85 ------- ----- ---- -------- ------- ---- ------- ----- ----- Total int. earning assets 161,693 12,958 8.01% 150,218 12,069 8.03% 143,247 10,274 7.17 ------ ------- ------ Cash and due from banks 5,447 5,198 5,077 Premises and equipment, net 1,929 1,984 2,126 Other assets 2,662 2,339 1,480 ------ -------- ------ Total $171,731 $159,739 $151,930 ======== ========= =========
13 14
Year ended Year ended Year ended December 31, 1996 December 31,1995 December 31, 1994 --------------------- --------------------- -------------------- Average Yield/ Average Yield/ Average Yield/ Balance Int Rate Balance Int Rate Balance Int Rate ------- --- ------ ------- --- ------ ------- --- ----- Interest bearing liabilities: Interest bearing demand deposits $ 14,051 337 2.40% $13,377 321 2.40% $13,739 332 2.42% Savings deposits 25,288 732 2.89 26,630 766 2.88 29,720 855 2.88 CDS $100,000 and over 11,809 608 5.15 9,213 453 4.92 6,204 223 3.59 Other time deposits 80,793 4,022 4.98 73,050 3,568 4.88 66,973 2,548 3.80 ------- ------ ---- ------- ------ ----- ------ ------ ---- Total interest bearing deposits 131,941 5,699 4.32% 122,270 5,108 4.18% 116,636 3,958 3.39% ----- ----- ----- Noninterest bearing deposits 21,156 19,859 19,222 Other liabilities 1,667 1,578 906 Shareholders' equity 16,967 16,032 15,166 -------- -------- -------- Total $171,731 $159,739 $151,930 ======== ======== ========= Net interest income $7,259 $6,961 $6,316 ====== ====== ====== Net interest spread 3.69% 3.85% 3.78% ===== ===== ===== Net yield on interest earning assets 4.49% 4.63% 4.41% ===== ===== ===== Ratio of interest earning assets to interest bearing liabilities 1.22% 1.23% 1.23% ===== ===== =====
The table below shows the effect of volume and rate changes on net interest income for the year-ended December 31, on a pre-tax basis, in thousands of dollars.
1996 Compared to 1995 1995 Compared to 1994 -------------------------- ---------------------------- Volume Rate Net Volume Rate Net ------- ---- --- ------- ----- --- Federal funds sold $(175) $(38) $(213) $251 $ 83 $334 Taxable securities 268 218 486 (34) 446 412 Tax exempt securities 152 (14) 138 59 (3) 56 Taxable loans 678 (200) 478 167 826 993 --- ----- --- --- ---- ----- Total interest income $ 923 $ (34) $889 $443 $1,352 $1,795 Interest bearing demand deposits $ 16 $ 0 $ 16 $ (9) $ (2) $ (11) Savings deposits (39) 5 (34) (89) 0 (89) CDS $100,000 and over 133 22 155 131 99 230 Other interest bearing deposits 384 70 454 247 773 1,020 ---- ----- ---- ---- ----- ----- Total interest expense 494 97 591 280 870 1,150 --- ----- ---- ----- ---- ----- Net change in net interest income (a) $ 429 $(131) $298 $163 $482 $645 ===== ====== ==== ==== ==== ====
(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. OTHER INCOME Noninterest income continues to improve, although at a slower rate than in previous years, increasing 0.19% in 1996. The Company continues to search for new opportunities for noninterest income. Fee income from traditional checking and savings products is declining and being replaced with fees from ATM, ACH and other automated services. Consequently, service charges on deposit accounts increased only 2.1% while average deposits increased 7.7%. Earnings from the sale of mutual funds and other new services added in the past few years are 14 15 increasing slowly. These new fees will play an important part in replacing traditional fees. Because the Company has decided, for the time being, to retain 15 year residential mortgages, our fee income for servicing sold loans has declined while interest income will be increased over the life of these loans. OTHER EXPENSE Noninterest expense, exclusive of the FDIC assessment paid, increased 3.61%. A change in the FDIC assessment rates reduced this expense from $157 thousand in 1995 to $2 thousand in 1996. Salaries and wages were up 4.15%. Pension and other employee benefits are down 4.32% due to favorable workman's compensation ratings, reduced health care costs and reduced pension expense due to earnings on plan assets. Furniture and equipment expense increased 9.5% due in part to the remodeling of the main office during 1996. FEDERAL INCOME TAXES Income tax expense increased 5.9% from December 31, 1995 to 1996 primarily as a result of the increase in pre-tax income. The Company's effective tax rate decreased to 30.1% in 1996 from 30.9% in 1995. There was no significant change in the Company's income tax position from 1995 to 1996. The effective tax rates for 1996, 1995 and 1994 are shown in the table below:
1996 1995 1994 ---- ---- ---- Income before tax ($000) $3,723 $3,424 $2,635 Income tax expense 1,122 1,059 808 Effective tax rate 30.1% 30.9% 30.7%
NET INCOME Consolidated net income was $2,601,000 for 1996, compared to $2,365,000 for 1995. Return on consolidated average assets for 1996 was 1.51%, compared to 1.48% in 1995. Return on average shareholders' equity was 15.33% in 1996 compared to 14.75% in 1995. Earnings per share for 1996, 1995, and 1994 were $2.79, $2.54, and $1.96. Increases were due mostly to increases in net interest income as other income and other expenses experienced very little change. This is explained in more detail elsewhere in this report. ITEM 7 - FINANCIAL STATEMENTS The financial statements, notes to financial statements, and independent auditor's reports for the years ended December 31, 1996 and 1995, listed below are incorporated by reference in this report from the corresponding portions set forth in pages 9 to 23 of the Company's annual report to shareholders for the year ended December 31, 1996. With the exception of the portions of the Company's annual report to shareholders for the year ended December 31, 1996 specifically incorporated herein by reference, such report shall not be deemed filed as part of this annual report on Form 10-KSB. Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income - for each of the three years ended December 31, 1996 Consolidated Statements of Shareholders' Equity - for each of the three years in the period ended December 31, 1996 Consolidated Statements of Cash Flows - for each of the three years in the period ended December 31, 1996 Notes to the Consolidated Financial Statements Report of Independent Auditors Financial Highlights The consolidated financial statements for the year ended December 31, 1996 incorporated by reference herein, have been prepared in accordance with GAAP. All necessary accruals and adjustments have been made which in the opinion of management are necessary in order to make the financial statements not misleading. 15 16 FINANCIAL HIGHLIGHTS
IN THOUSANDS OF DOLLARS, WHERE APPLICABLE 1996 1995 1994 OPERATING STATISTICS Interest income $ 12,958 $ 12,069 $ 10,274 Interest expense 5,699 5,108 3,958 Net interest income 7,259 6,961 6,316 Income before income taxes 3,723 3,424 2,635 Net income 2,601 2,365 1,827 Earnings per share 2.79 2.54 1.96 Return on average assets (ROA) 1.51% 1.48% 1.20% Return on average shareholders' equity (ROE) 15.33% 14.75% 12.04% BALANCE SHEET STATISTICS Securities 61,250 58,831 55,549 Loans 96,741 88,147 83,705 Deposits 153,868 148,149 136,000 Total assets 173,085 166,560 152,962 CAPITAL STATISTICS Shareholders' equity 17,053 16,251 15,302 Book value per share 18.32 17.46 16.44 Cash dividend per share 1.88 1.70 1.25 Dividend payout ratio 67.09% 66.92% 63.65% Average equity to average total assets 9.88% 10.04% 9.98% CREDIT QUALITY Net charge-offs to gross loans 0.05% 0.05% 0.06% Nonperforming assets to gross loans 0.14 0.09 0.35 Allowance for loan losses to gross loans 1.41 1.48 1.49 Allowance for loan losses to nonperforming assets 10.39X 16.33X 4.29X
Per share data has been restated to reflect the 1996 stock split. 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 1996 and 1995. The Company had 603 shareholders as of December 31, 1996. The prices and dividends per share have been restated to reflect the 1996 stock split.
1996 1995 CASH CASH MARKET PRICE DIVIDENDS MARKET PRICE DIVIDENDS QUARTER HIGH LOW DECLARED HIGH LOW DECLARED 1st $28.50 $26.50 $0.325 $27.50 $26.50 $0.275 2nd 30.00 28.50 0.350 27.50 26.25 0.275 3rd 32.00 32.00 0.350 26.00 25.75 0.325 4th 32.00 32.00 0.850 26.00 25.00 0.825
16 17 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ASSETS In thousands of dollars except per share data 1996 1995 Cash and due from banks $ 6,054 $ 7,340 Federal funds sold 4,050 7,950 -------- --------- TOTAL CASH AND CASH EQUIVALENTS 10,104 15,290 Securities available for sale 8,165 12,001 Securities held to maturity (market value $53,416 in 1996 and $47,144 in 1995) 53,085 46,830 -------- --------- TOTAL SECURITIES 61,250 58,831 LOANS 96,741 88,147 Less allowance for loan losses 1,361 1,305 -------- --------- LOANS, NET 95,380 86,842 -------- --------- Premises and equipment, net 2,679 1,945 Accrued interest receivable and other assets 3,672 3,652 -------- --------- TOTAL ASSETS $173,085 $166,560 ======== ======== LIABILITIES DEPOSITS Non-interest bearing $ 22,419 $ 20,778 Interest bearing 131,449 127,371 -------- --------- TOTAL DEPOSITS 153,868 148,149 Accrued interest payable and other liabilities 2,164 2,160 -------- --------- TOTAL LIABILITIES 156,032 150,309 -------- -------- SHAREHOLDERS' EQUITY Common stock -- $2.50 par value; 1,000,000 shares authorized; 930,772 shares issued and outstanding in 1996 and 1995 2,327 2,327 Additional paid-in capital 4,979 4,979 Retained earnings 9,749 8,893 Unrealized gain (loss) on securities available for sale, net of tax of ($1) in 1996 and $27 in 1995 (2) 52 -------- --------- TOTAL SHAREHOLDERS' EQUITY 17,053 16,251 -------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $173,085 $166,560 ======== ========
See accompanying notes to consolidated financial statements. 17 18 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, INTEREST INCOME: In thousands of dollars except per share data 1996 1995 1994 Loans, including fees $ 8,934 $ 8,456 $ 7,463 Securities: Taxable 3,349 2,864 2,451 Tax-exempt 402 264 208 Federal funds sold 273 485 152 ------- ------- ------- TOTAL INTEREST INCOME 12,958 12,069 10,274 INTEREST ON DEPOSITS 5,699 5,108 3,958 ------- ------- ------- Net Interest Income 7,259 6,961 6,316 Provision for loan losses 100 100 36 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,159 6,861 6,280 ------- ------- ------- OTHER INCOME Service charges on deposit accounts 628 615 593 Loan sales and servicing fees 140 182 180 Other service charges, collections and exchanges 83 88 95 Other operating income 187 151 135 ------- ------- ------- TOTAL OTHER INCOME 1,038 1,036 1,003 ------- ------- ------- OTHER EXPENSES Salaries and wages 2,032 1,951 1,882 Pension and other employee benefits 686 717 745 Net occupancy expense of bank premises 219 216 208 FDIC insurance premiums 2 157 299 Furniture and equipment 323 295 317 Printing and Supplies 147 140 136 Other operating expenses 1,065 997 1,061 ------- ------- ------- TOTAL OTHER EXPENSES 4,474 4,473 4,648 ------- ------- ------- INCOME BEFORE INCOME TAXES 3,723 3,424 2,635 Income tax expense 1,122 1,059 808 ------- ------- ------- NET INCOME 2,601 $ 2,365 $ 1,827 ======= ======= ======= EARNINGS PER SHARE $ 2.79 $ 2.54 $ 1.96 ======= ======= =======
See accompanying notes to consolidated financial statements. 18 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED GAIN (LOSS) ON ADDITIONAL SECURITIES TOTAL COMMON PAID IN RETAINED AVAILABLE SHAREHOLDERS' STOCK CAPITAL EARNINGS FOR SALE, NET EQUITY In thousands of dollars except per share data BALANCE -- JANUARY 1, 1994 $2,327 $4,979 $ 7,447 $ 0 $14,753 Adoption of SFAS No. 115, net (2) (2) Net income 1,827 1,827 Cash dividends - $1.25 per share (Note 1) (1,163) (1,163) Net change in unrealized gain (loss) on securities available for sale, net (113) (113) ------- ------ ------- ----- ------- BALANCE -- DECEMBER 31, 1994 2,327 4,979 8,111 (115) 15,302 Net income 2,365 2,365 Cash dividends - $1.70 per share (Note 1) (1,583) (1,583) Net change in unrealized gain (loss) on securities available for sale, net 167 167 ------- ------ ------- ----- ------- BALANCE -- DECEMBER 31, 1995 2,327 4,979 8,893 52 16,251 Net income 2,601 2,601 Cash dividends - $1.875 per share (Note 1) (1,745) (1,745) Net change in unrealized gain (loss) on securities available for sale, net (54) (54) ------- ------ ------- ----- ------- BALANCE -- DECEMBER 31, 1996 $2,327 $4,979 $ 9,749 $ (2) $17,053 ======= ====== ======= ===== =======
See accompanying notes to consolidated financial statements. 19 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, In thousands of dollars 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,601 $ 2,365 $ 1,827 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES: Depreciation 267 230 248 Accretion and amortization of investment securities (net) 312 722 1,317 Provision for loan losses 100 100 36 Loans originated for sale (3,710) (5,361) (7,506) Proceeds from sales of loans originated for sale 3,727 5,396 7,565 Gain on sales of loans (17) (35) (59) (Increase) decrease in other assets 15 (121) (250) Increase (decrease) in other liabilities (26) 200 (124) -------- -------- -------- TOTAL ADJUSTMENTS 668 1,131 1,227 -------- -------- -------- NET CASH FROM OPERATING ACTIVITIES 3,269 3,496 3,054 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 5,780 Purchase of securities available for sale (2,029) (1,978) Proceeds from maturities of securities held to maturity 31,853 27,054 28,655 Purchase of securities held to maturity (38,417) (28,829) (34,339) Net (increase) decrease in portfolio loans (8,638) (4,483) 1,956 Premises and equipment expenditures (1,001) (135) (70) -------- -------- -------- NET CASH FROM INVESTING ACTIVITIES (12,452) (8,371) (3,798) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 5,719 12,149 2,633 Dividends paid (1,722) (1,282) (1,000) -------- -------- -------- NET CASH FROM FINANCING ACTIVITIES 3,997 10,867 1,633 -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (5,186) 5,992 889 -------- -------- -------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,290 9,298 8,409 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,104 $ 15,290 $ 9,298 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 5,693 $ 5,028 $ 4,033 Income taxes $ 1,056 $ 1,050 $ 5,944
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES Upon adoption of SFAS No. 115 at January 1, 1994, the Company transferred $5,119 from investment securities to securities available for sale and transferred $46,237 from investment securities to investment securities held to maturity. In November 1995, the Financial Accounting Standards Board ("FASB") issued its Special Report, "A Guide to Implementation of SFAS No. 115 on Accounting for Certain Investments in Debt and Equity Securities" ("Guide"). As permitted by the Guide, the Company made a one-time reassessment and transferred securities from the held to maturity portfolio to the available for sale portfolio. At the date of transfer, these securities had an amortized cost of $4,941 and fair value of $4,978. See accompanying notes to consolidated financial statements. 20 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of CNB Corporation (the Company) and its wholly owned subsidiary, Citizens National Bank (the Bank), conform to generally accepted accounting principles and to general practice within the banking industry. The following describes the significant accounting and reporting policies which are employed in the preparation of the consolidated financial statements. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. NATURE OF OPERATIONS AND CONCENTRATIONS OF CREDIT RISK: The Corporation is a one-bank holding company which conducts no direct business activities. All business activities are performed by the Bank. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. It maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles and personal expenditures, and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit vehicles, 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 nine offices located in Cheboygan, Presque Isle, and Emmet Counties in Northern Lower Michigan. USE OF ESTIMATES: To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from these estimates. Areas involving the use of management's estimates and assumptions include the allowance for loan losses, fair values of certain securities and other financial instruments, the determination and carrying value of impaired loans, the carrying value of loans held for sale, the carrying value of other real estate, the determination of other-than-temporary reductions in the fair value of securities, recognition and measurement of loss contingencies, and depreciation of premises and equipment. Estimates that are more susceptible to change in the near term include the fair value of financial instruments and the allowance for loan losses. CASH FLOW REPORTING: Cash and cash equivalents are defined as cash and due from banks and federal funds sold. Net cash flows are reported for customer loan and deposit transactions and short term borrowings with a maturity of 90 days or less. 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 separately in shareholders' equity, net of tax. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on sales are determined using the specific identification method. Interest and dividend income, adjusted by amortization of purchase premiums and discounts, is included in earnings. LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or market value in the aggregate. Net unrealized losses are recorded in a valuation allowance by charges to income. LOANS: Loans are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. 21 22 Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Payments received on such loans are reported as principal reductions. ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-off that occurs. A problem loan is charged-off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Under SFAS No. 114 and No. 118, a loan is considered to be impaired when it is probable that the Corporation will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses may be allocated to impaired loans. The effect of adopting these standards was included in the provision for loan losses for 1995, and was not considered material. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial conditions indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual and renegotiated loans and non-performing and past-due asset disclosures. SERVICING RIGHTS: Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights." Prior to adopting SFAS No. 122, servicing right assets were recorded only for purchased rights to service mortgage loans. Subsequent to adopting this standard, servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. The effect of adopting this standard was not material to the consolidated financial statements. Excess servicing receivables are reported when a loan sale results in servicing in excess of normal amounts, and is expensed over the life of the servicing on the interest method. PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated on the straight-line method over asset useful lives. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially reported at estimated fair value at 22 23 acquisition. When the real estate is acquired, any excess of the related loan balance over the estimated fair value is charged to the allowance for loan losses. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in other expense. 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 benefit plan with 401(k) features covers substantially all employees. The plan allows participants compensation deferrals, with up to 2% of such deferrals matched at 100% and the next 2% of such deferrals matched at 50%. Expense of the defined benefit plan is reported by spreading the expected contributions to the plan less long-term earnings on plan assets over the employee's service period. Expense of the defined contribution plan is based on the annual contributions. Expense for employee compensation under stock option plans is based on APB Opinion 25, with expense preported only if options are granted below market prices at grant date. Proforma disclosures of net income and earnings per share are provided as if the fair value method of SFAS No. 123 were used for stock-based compensation. 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. STOCK SPLITS AND DIVIDENDS: In May 1996 shareholders of the Company approved an Amendment to the Articles of Incorporation to decrease the par value from $5.00 to $2.50 per share and to increase the authorized shares from 500,000 to 1,000,000. In addition, a two-for-one stock split was declared in 1996. Stock splits are recorded by adjusting par value. Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Fractional shares are paid in cash for all stock dividends. Cash dividends per share are based on the number of shares outstanding at the date of declaration, retroactively adjusted for stock dividends and splits. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on-and-off balance sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. EARNINGS AND DIVIDENDS PER SHARE - Earnings per share of common stock is based on weighted-average outstanding shares during the year plus dilutive common stock equivalents using the average stock price. Common equivalent shares are shares which may be issuable to employees upon exercise of outstanding stock options. Diluted earnings per share is calculated assuming any conversions occurred at the start of the year and uses ending market price, if more dilutive. The number of shares used to calculate net income per share has been adjusted for all stock dividends and was 930,772 for 1996, 1995 and 1994. RECLASSIFICATION - Some items in prior financial statements have been reclassified to conform with the current presentation. 23 24 NOTE 2 - SECURITIES The amortized cost and fair values of securities (in thousands) at year end, were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AVAILABLE FOR SALE COST GAINS LOSSES VALUE DECEMBER 31, 1996 U.S. Government and agency $ 7,988 $ 7 $ 10 $ 7,985 Other 180 180 ------- ------ ------ ------- TOTALS $ 8,168 $ 7 $ 10 $ 8,165 ======= ====== ====== ======= DECEMBER 31, 1995 U.S. Government and agency $11,448 $ 86 $ 11 $11,523 State and municipal 295 3 298 Other 180 180 ------- ------ ------ ------- TOTALS $11,923 $ 89 $ 11 $12,001 ======= ====== ====== ======= HELD TO MATURITY DECEMBER 31, 1996 U.S. Government and agency $42,013 $ 271 $ 75 $42,209 State and municipal 11,072 142 7 11,207 ------- ------ ------ ------- TOTALS $53,085 $ 413 $ 82 $53,416 ======= ====== ====== ======= DECEMBER 31, 1995 U.S. Government and agency $34,307 $ 270 $ 18 $34,559 State and municipal 12,523 74 12 12,585 ------- ------ ------ ------- TOTALS $46,830 $ 344 $ 30 $47,144 ======= ====== ====== =======
There were no sales of securities during 1996 or 1995. Contractual maturities of debt securities (in thousands) at year-end 1996 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 Due in one year or less $ 4,178 $4,178 $18,369 $18,499 Due from one to five years 3,990 3,987 31,136 31,242 Due from five to ten years 1,474 1,481 Due after ten years 2,106 2,194 ------- ------ ------- ------- TOTALS $ 8,168 $8,165 $53,085 $53,416 ======= ====== ======= =======
Securities with a carrying value of $1,000,000 were pledged at December 31, 1996, 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 1996 and 1995, the amortized cost of securities (in thousands) issued by the state of Michigan and all of its political subdivisions totaled $5,279 and $9,236 with an estimated fair value of $5,329 and $9,362. At year end 1996, the amortized cost of securities (in thousands) issued by the state of Illinois and all of its political subdivisions totaled $3,153 with an estimated fair value of $3,209. 24 25 NOTE 3 - LOANS Year-end loans (in thousands) were as follows: 1996 1995 Residential real estate loans $56,699 $46,689 Commercial real estate loans 21,331 21,487 Consumer loans 9,239 9,395 Commercial loans 9,632 10,765 Net deferred fees and costs (160) (189) ------- ------- 96,741 88,147 Allowance for loan losses (1,361) (1,305) ------- ------- $95,380 $86,842 ======= ======= Activity in the allowance for loan losses (in thousands) is summarized as follows: 1996 1995 Beginning balance $ 1,305 $ 1,246 Provision for loan losses 100 100 Charge-offs (63) (69) Recoveries 19 28 ------- ------- Ending Balance $ 1,361 $ 1,305 ======= ======= The Company had no impaired loans for 1996 and 1995. There were no loans held for sale at year-end 1996 and 1995. NOTE 4 - LOAN SERVICING Mortgages loans serviced for others are not reported as assets. These loans totaled $22,770,530 and $23,579,532 at year-end 1996 and 1995. Related escrow deposit balances were $34,770 and $5,312. NOTE 5 - PREMISES AND EQUIPMENT Year-end premises and equipment (in thousands) were as follows. 1996 1995 Real estate and buildings $ 3,215 $ 2,626 Furniture and fixtures 2,724 2,340 ------- ------- Total cost 5,939 4,966 Less accumulated depreciation (3,260) (3,021) ------- ------- $ 2,679 $ 1,945 ======= ======= Depreciation expense amounted to $266,794, $229,273 and $248,171 in 1996, 1995 and 1994, respectively. NOTE 6 - DEPOSITS Time deposit accounts individually exceeding $100,000 total $9,731,726 and $10,680,565 at year-end 1996 and 1995. At year-end 1996, stated maturities of time deposits with a remaining term greater than one year (in thousands) were: 1997 $40,199 1998 10,557 1999 2,618 2000 2,737 2001 1,402 ------- Total $57,513 ======= 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 thousands) in the financial statements: 1996 1995 Present values using actuarial assumptions Accumulated benefit obligation, substantially vested $ 1,626 $ 1,573 ======= ======= Projected benefit obligation using compensation service rendered to date (2,453) (2,354) Plan assets at fair value 2,489 2,352 ------- ------- Funded status 36 (2) Unrecognized transition obligation (136) (147) Unrecognized prior service cost (46) (49) Unrecognized net loss 288 302 ------- ------- Net pension asset $ 142 $ 104 ======= ======= 25 26 Net pension expense and related year-end assumptions consist of the following: 1996 1995 1994 Service cost-benefits earned $ 106 $ 100 $ 109 Interest cost on benefit obligation 184 173 167 Actual return on plan assets (191) (158) (169) Net amortization and deferral (4) (3) ----- ----- ----- Pension expense $ 95 $ 115 $ 104 ===== ===== ===== Weighted average discount rate 8.00% 8.00% 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 Empire National Bank as trustee of the plan. Plan assets are invested in diversified mutual funds issued by the Frank Russell Investment Company. DEFERRED COMPENSATION PLAN The Company has adopted a deferred compensation plan to provide retirement benefits to the 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 $144,712, $151,015 and $166,740 in 1996, 1995 and 1994 respectively. The Company has also purchased insurance on the lives of participating directors with the Company as the owner and beneficiary of the policies. 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 20% of their compensation. During 1996, 1995 and 1994, 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 $56,143, $54,246 and $52,945 in 1996, 1995 and 1994 respectively. STOCK OPTION PLAN The shareholders approved an incentive stock option plan in May, 1996 and authorized 50,000 options for future grant. Under this plan, options may be issued at market prices to employees. During 1996, 12,500 options were granted at an exercise price of $32.00 per share. The right to exercise the options vests over a one-year period and the options have a term of 10 years. Accordingly, at December 31, 1996, 37,500 options were available for future grant and none of the shares granted in 1996 were exercisable at December 31, 1996. SFAS No. 123, which became effective for 1996, 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. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. Accordingly, compensation cost actually recognized for stock options was $0 for 1996. The fair value of options granted during 1996 is estimated using the following weighted-average information: risk-free interest rate of 6.5%, expected life of 5 years, expected volatility of stock price of .054% and expected dividends of 5.75% per year. Net income as reported $2,601 Pro forma net income $2,597 Earnings per share as reported $ 2.79 Pro forma earnings per share $ 2.79 In future years, the pro forma effect of not applying this standard is expected to increase as additional options are granted. 26 27 NOTE 8 - INCOME TAXES Income tax expense consists of:
1996 1995 1994 Current $1,166 $1,017 $895 Deferred (44) 42 (87) ------ ------ ---- $1,122 $1,059 $808 ====== ====== ====
Year-end deferred tax assets and liabilities consist of:
1996 1995 Deferred tax assets: Allowance for loan losses $ 315 $ 296 Deferred loan fees 35 55 Other real estate 37 37 Excess servicing fees 22 39 Other 2 1 ------ ------ Total deferred tax assets 411 428 ------ ------ Deferred tax liabilities: Pension $ 22 $ 9 Unrealized appreciation of securities available for sale 0 27 Fixed assets 35 38 Accretion 53 37 ------ ------ Total deferred tax liabilities 110 111 ------ ------ Net deferred tax asset $ 301 $ 317 ====== ======
The effective tax rate differs from the statutory federal income tax rate as follows:
1996 1995 1994 Statutory rate applied to income before taxes $1,266 $1,164 $896 Add (deduct) Tax-exempt interest income (139) (102) (99) Other (5) (3) 11 ------ ------ ---- $1,122 $1,059 $808 ====== ====== ====
NOTE 9 - RELATED PARTIES Related parties include executive officers, directors and significant shareholders, and their affiliates. Loans to such related parties over $60,000 at year-end 1996 (in thousands) were as follows: Balance outstanding, December 31, 1995 $ 980 New loans and rewrites 8,163 Payments and payoffs (7,676) Other (90) ------- Balance outstanding, December 31, 1996 $ 1,377 =======
Related party deposits totaled $932,933 and $819,283 at year-end 1996 and 1995. NOTE 10 - 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 results of operations. At year end 1996 and 1995, reserves of $1,060,000 and $1,001,000 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 27 28 a fee. Since many of the commitments are expected to expire without being used, the total commitments does 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 in thousands of financial instruments with off-balance-sheet risk at year-end follows: 1996 1995 Commitments to extend credit $14,736 $10,603 Standby letters of credit 29 29
Substantially all of these commitments are at variable or uncommitted rates. NOTE 11- 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 are not considered significant to this presentation. The estimated year-end values of financial instruments (in thousands) were:
1996 1995 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and cash equivalents $10,104 $10,104 $15,290 $15,290 Securities available for sale 8,165 8,165 12,001 12,001 Securities held to maturity 53,085 53,416 46,830 47,144 Loans, net 95,380 95,541 86,842 86,941 -------- -------- -------- -------- $166,734 $167,226 $160,963 $161,376 ======== ======== ======== ======== Financial liabilities: Demand and savings deposits $107,129 $107,129 $100,989 $100,989 Time deposits 46,739 46,930 47,160 47,407 -------- -------- -------- -------- $153,868 $154,059 $148,149 $148,396 ======== ======== ======== ========
NOTE 12 - REGULATORY MATTERS 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. 28 29 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%
At year end, consolidated and Bank actual capital levels (in millions) and minimum required levels were:
MINIMUM REQUIRED TO BE WELL MINIMUM (ADEQUATELY) REQUIRED CAPITALIZED FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTUAL PURPOSES ACTION REGULATIONS ---------------- --------------- ------------------ 1996 AMT RATIO AMT RATIO AMT RATIO Total capital to risk weighted assets........ $18.2 19.6% $7.4 8.00% $9.2 10.00% Tier I capital to risk weighted assets....... 17.1 18.3% 3.7 4.00% 5.6 6.00% Tier I capital to average assets............. 17.1 9.9% 6.9 4.00% 8.6 5.00% 1995 Total capital to risk weighted assets........ $17.3 20.1% $6.9 8.00% $8.1 10.00% Tier I capital to risk weighted assets....... 16.2 18.9% 3.4 4.00% 4.9 6.00% Tier I capital to average assets............. 16.2 10.1% 6.4 4.00% 7.9 5.00%
The Company and Bank were categorized as well capitalized at year-end 1996. NOTE 13 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS The Company's primary source of funds to pay dividends to shareholders is the dividends it receives from the Bank. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 1996, $2,306,901 of retained earnings were available for dividend declaration without prior regulatory approval. Following are condensed parent company financial statements (in thousands of dollars). CONDENSED BALANCE SHEETS December 31, 1996 and 1995
1996 1995 Assets: Cash..................................... $ 11 $ 9 Investment in subsidiary................. 17,047 16,241 Other assets............................. 798 768 ------- ------- Total assets............................. $17,856 $17,018 ======= =======
29 30
1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY: Dividend payable $ 791 $ 768 Other liabilities 12 Shareholders' equity 17,053 16,250 ------- ------- Total liabilities and shareholders' equity $17,856 $17,018 ======= =======
CONDENSED STATEMENTS OF INCOME Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 Dividends from subsidiary $1,764 $1,590 $1,176 Operating expense 35 19 14 ------ ------ ------ Income before income tax and equity in undistributed income of subsidiary 1,729 1,571 1,162 Income tax benefit 12 7 5 Equity in undistributed income of subsidiary 860 787 660 ------ ------ ------ Net income $2,601 $2,365 $1,827 ====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 Cash flow from operating activities: Net income $ 2,601 $ 2,365 $ 1,827 Equity in undistributed net income of subsidiary (860) (787) (660) Change in other assets (30) (300) (162) Change in other liabilities 13 2 (1) ------- ------- ------- Net cash from operating activities 1,724 1,280 1,004 Cash flow from financing activities: Dividends paid (1,722) (1,282) (1,000) ------- ------- ------- Net cash from financing activities (1,722) (1,282) (1,000) Net change in cash and cash equivalents 2 (2) 4 Cash at beginning of year 9 11 7 ------- ------- ------- Cash at end of year $ 11 $ 9 $ 11 ======= ======= =======
NOTE 14 -IMPACT OF NEW ACCOUNTING STANDARD Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. This pronouncement is effective for some transactions in 1997 and others in 1998. While the effect on the financial statements has not yet been determined, it is not anticipated to have a material impact on the Company's financial position or results of operation in 1997. 30 31 INDEPENDENT AUDITOR'S REPORT [CROWE CHIZEK LOGO] Board of Directors and Shareholders CNB Corporation Cheboygan, Michigan We have audited the accompanying consolidated balance sheets of CNB Corporation as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Grand Rapids, Michigan January 17, 1997 31 32 ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not changed its independent public accounting firm since its inception in 1985. PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The 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 20, 1997, which is hereby incorporated by reference. ITEM 10 - 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 20, 1997, which is hereby incorporated by reference. ITEM 11 - 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 20, 1997, which is hereby incorporated by reference. ITEM 12 - CERTAIN RELATION SHIPS 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 20, 1997, which is hereby incorporated by reference. ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K. Number Exhibit 3(I) Articles of Incorporation. Previously filed as an exhibit to the registrant's Form 10-SB filed April 26, 1996. 3(ii) By-laws. Previously filed as an exhibit to the registrant's Form 10-SB filed April 26, 1996. (11) Statement regarding computation of per share earnings. This information is disclosed in Note 1 to the Company's Annual Financial Statements for the year ending December 31, 1996 and is incorporated herein by reference. (13) Annual Report. The following financial statements, notes to financial statements, and independent auditor's reports of the Company and its subsidiary are filed as part of this report: Independent Auditor's Report Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income for each of the three years ended December 31, 1996 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended 32 33 December 31, 1996 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements Financial Highlights (21) Subsidiaries of the Registrant. Previously filed as an exhibit to the registrant's Form 10-SB filed April 26, 1996. (27) Financial Data Schedule 33 34 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNB CORPORATION Date - March 27, 1997 Date - March 27, 1997 ________________________ ________________________ /s/ Robert E. Churchill /s/ Jean K. Hunt President and Chief Executive Officer Vice President/Chief Financial Officer In accordance with the Exchange Act, this report has been sighed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. ___________________________________ March 27, 1997 /s/ Robert E. Churchill, Director ___________________________________ March 27, 1997 /s/ Kathleen M. Darrow, Director ___________________________________ March 27, 1997 /s/ Thomas J. Ellenberger, Director ___________________________________ March 27, 1997 /s/ Thomas J. Fisher, Director ___________________________________ March 27, 1997 /s/ John L. Ormsbee, Director ___________________________________ March 27, 1997 /s/ John P. Ward, Director ___________________________________ March 27, 1997 /s/ Vincent J. Hillesheim 35 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ 27 -- Financial Data Schedule
EX-27 2 EXHIBIT 27
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 6,054 0 4,050 0 8,165 53,085 53,416 96,741 1,361 173,085 153,868 0 2,164 0 0 0 2,327 14,726 173,085 8,934 3,751 273 12,958 5,699 5,699 7,259 100 0 4,474 3,723 3,723 0 0 2,601 2.79 2.79 8.01 70 61 0 0 1,305 63 19 1,361 1,361 0 1,225
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