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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_______________TO_______________
Commission file number 0-11011
CB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2340045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Jackson Square, Jackson, Michigan 49201-1446
(Address of principal executive offices) (Zip Code)
(517) 788-2701
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $7.50 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
has been required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of February 28, 1997, computed by reference
to the average of the closing bid and asked prices for such stock on that date
was $124,561,000.
The number of shares of the registrant's common stock outstanding as of
February 28, 1997 was 2,801,053.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or portions thereof, have been incorporated by
reference in this Annual Report on Form 10-K:
None
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PART I
ITEM 1. BUSINESS
GENERAL
CB Financial Corporation (the "Corporation") is a bank holding company
incorporated under the laws of the State of Michigan on January 21, 1981. The
principal assets of the Corporation are its stock ownership in its
subsidiaries, City Bank and Trust Company ("City Bank and Trust"), City Bank
and CB North, which are referred to herein collectively as the "Banks."
The Corporation became the sole shareholder of City Bank and Trust on
August 6, 1981. City Bank and Trust was organized as a private banking
corporation in 1848, became a Michigan banking corporation in 1865 and became a
national banking association in 1964. In June 1994, City Bank and Trust
converted to a Michigan banking corporation. City Bank and Trust is the oldest
continuously operating financial institution in Michigan. The main office and
six branches are located in Jackson, Michigan. Eight other branches are located
in Jackson County and two branches are located in the eastern part of Calhoun
County. City Bank and Trust operates 13 automated teller machines.
The Corporation became the sole shareholder of City Bank (formerly Clinton
Bank and Trust) on December 31, 1983. City Bank was organized in 1865 as a
national bank, and in 1979 converted to a Michigan banking corporation. City
Bank has 12 offices with its main office, auto bank and one branch located in
St. Johns, Michigan. In addition, City Bank has branches in Elsie, Laingsburg
and Fowler which are located in Clinton County. Six branches are located in the
Lansing area. City Bank operates ten automated teller machines.
On February 28, 1992, the Corporation acquired all of the common stock of
CCSB Corporation, a one-bank holding company of Charlevoix County State Bank
("CCSB") located in Charlevoix, Michigan. At the time of the acquisition, CCSB
was a Michigan banking corporation with its main office and one branch located
in Charlevoix, Michigan. In addition, CCSB operated offices in East Jordan,
located in Charlevoix County, as well as Eastport and Ellsworth which are
located in Antrim County.
On January 15, 1993, the Corporation acquired First of Charlevoix
Corporation, a one-bank holding company of First State Bank of Charlevoix
("FSBC"). At the time of the acquisition, FSBC was a Michigan banking
corporation with its main office located in Charlevoix, Michigan. In addition,
FSBC operated a branch in Boyne City and on Beaver Island.
Effective October 1, 1993, the Corporation merged CCSB and FSBC into one
bank, CB North. On December 17, 1994, CB North acquired three branch offices
from Republic Bank ("Republic Bank acquisition"). CB North continues as a
Michigan banking corporation with its main office and one branch located in
Charlevoix, Michigan. CB North operates eight additional branches located in
East Jordan, Eastport, Ellsworth, Boyne City, Traverse City, Bellaire, Central
Lake and on Beaver Island. CB North operates four automated teller machines.
All three subsidiary banks offer a full range of services to individuals,
corporations and other institutions. Banking services include checking,
savings, NOW accounts, money market deposit accounts, automated teller
machines, debit cards, time deposit accounts, safe deposit facilities, money
transfers and corporate cash management. The Banks provide secured and
unsecured personal loans, real estate loans, consumer installment loans, check
credit (overdraft) loans, line of credit loans, accounts receivable financing
and construction financing. The Banks offer electronic funds transaction
processing including direct deposit of social security and pension payments.
The trust department of City Bank and Trust offers a wide variety of
fiduciary services to individuals, corporations, non-profit organizations, and
government entities, including services as trustee for personal, corporate,
pension, profit-sharing and other employee benefit trusts. It also provides
securities custody services as an agent, acts as the personal representative
for estates and as a fiscal paying and escrow agent for corporate customers and
government entities. Pursuant to contractual arrangements permitted by Michigan
law, the trust department of City Bank and Trust provides trust services to
customers of City Bank and CB North.
City Bank and Trust makes available to its customers full and discount
brokerage services through a contract with a third party vendor independent of
the Bank.
Each Bank maintains correspondent bank relationships with several larger
banks, which involve check clearing operations, transfer of funds, loan
participations, the purchase and sale of federal funds, and other similar
services. The Corporation has no foreign operations or activities.
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MONETARY POLICIES
The commercial banking business is affected by the monetary and fiscal
policies of various regulatory agencies, including the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). Among the techniques
available to the Federal Reserve Board are open market operations in United
States Government securities; changing the discount rate for bank borrowings;
and imposing and changing the reserve requirements applicable to bank deposits
and to certain borrowings by banks and their affiliates (including parent
companies). These policies influence to a significant extent the overall growth
and distribution of bank loans, investments and deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. In view of the changing conditions
in the national economy and the money market, as well as the effect of acts by
monetary and fiscal authorities, including the Federal Reserve Board, no
predictions can be made by the Corporation as to future changes in interest
rates or credit availability.
SUPERVISION AND REGULATION
Bank holding companies and banks are subject to extensive regulation under
both federal and state law. To the extent the following material describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. A change in
applicable law or regulation could have a material effect on the business of
the Corporation.
1. Bank Holding Companies
The Corporation, as a bank holding company, is regulated under the Bank
Holding Company Act of 1956, as amended ("BHC Act"), and is subject to the
supervision of the Federal Reserve Board. The Corporation is registered as a
bank holding company with the Federal Reserve Board and is required to file
with the Federal Reserve Board an annual report and such additional information
as the Federal Reserve Board may require pursuant to the BHC Act. The Federal
Reserve Board may also make inspections and examinations of the Corporation and
its subsidiaries.
Under the BHC Act, bank holding companies such as the Corporation are
generally prohibited from engaging in activities other than banking and from
acquiring any company which is not a bank or bank holding company, unless such
company is engaged in activities which the Federal Reserve Board determines to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Under the BHC Act, bank holding companies generally
may not acquire the ownership or control of more than 5% of any class of voting
shares or substantially all of the assets of any company, including a bank or
bank holding company, without the prior written approval of the Federal Reserve
Board.
Before September 29, 1995, the BHC Act generally prohibited the Federal
Reserve Board from approving the direct or indirect acquisition, by a bank
holding company, such as the Corporation, the principal banking operations of
which are conducted in one state, of any voting shares of, interest in or all
or substantially all of the assets of a bank or bank holding company
conducting its principal banking operations in another state, unless the
statutory laws of the state in which the principal banking operations of the
bank holding company or bank to be acquired are conducted explicitly authorize
such an acquisition. Effective September 29, 1995, the BHC Act no longer
prevents the Federal Reserve Board from approving the acquisition of a bank
because of contrary State law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") has substantially changed the geographic constraints
applicable to the banking industry. Since September 29, 1995, the application
of a bank holding company located in one State (the "home State") to acquire a
bank located in any other State (the "host State") may be approved by the
Federal Reserve Board under the BHC Act notwithstanding any prohibition of such
acquisition in the law of the host State. The Riegle-Neal Act permits States to
require that a target bank have been in operation for a minimum period, up to
five years, and to impose non-discriminatory limits on the percentage of the
total amount of deposits with insured depository institutions in the State
which may be controlled by a single bank or bank holding company. In addition,
the Riegle-Neal Act imposes Federal deposit concentration limits (10% of
nationwide total deposits, and 30% of total deposits in the host State on
applications subsequent to the applicant's initial entry to the host State),
and adds new statutory conditions to Federal Reserve Board approval, i.e., the
applicant meets or exceeds all applicable Federal regulatory capital standards
and is "adequately managed."
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Also since September 29, 1995, any bank subsidiary (and, in certain
circumstances thrift subsidiary) of a bank holding company may receive deposits
to existing accounts, renew time deposits, and close, service and receive
payments on (but not disburse proceeds of) loans, as an agent for its
depository institution affiliates without being considered a branch of the
affiliate under any otherwise applicable law. Such agency activities must be
conducted on terms consistent with safe and sound banking practices.
The Riegle-Neal Act also authorizes, effective June 1, 1997, the
responsible Federal banking agency to approve applications for the interstate
acquisition of branches or mergers of depository institutions across State
lines, without regard to whether such activity is contrary to State law. Any
State may, however, by adoption of a non-discriminatory law after September 29,
1994 and before June 1, 1997, either elect to have this provision take effect
before June 1, 1997, or opt-out of the provision. The effect of opting out is
to prevent banks chartered by, or having their main office located in, such
State from participating in any interstate branch acquisition or merger. Each
State is permitted to prohibit interstate branch acquisitions (i.e.,
acquisition of a branch without acquisition of the entire target bank), to
examine acquired or de novo branches of out-of-State banks with respect to
compliance with certain host State laws, and to retain a minimum age
requirement of up to five years, a non-discriminatory deposit cap, and
non-discriminatory notice or filing requirements. The responsible Federal
agency will apply the same Federal concentration limits and capital and
management adequacy requirements noted above with respect to BHC Act
applications. Branches acquired in a host State by a State-chartered bank will
be subject to the activity limits and other laws of the host State to the same
extent as a branch of a bank chartered by the host State. Branches acquired in
a host State by an out-of-State national bank will be subject to community
reinvestment, consumer protection, fair lending and intrastate branching laws
of the host State (except to the extent the application of such laws to
national banks is preempted by Federal law or is determined by the Comptroller
of the Currency to be discriminatory), and to other non-tax laws of the host
State to the same extent as branches of a national bank having its main office
in the host State. The establishment of de novo branches by an out-of-State
bank will continue to require express statutory authority under the law of the
host State and of the chartering jurisdiction.
Among other things, the Riegle-Neal Act also preserves State taxation
authority, prohibits the operation by out-of-State banks of interstate branches
as deposit production offices, imposes additional notice requirements upon
interstate banks proposing to close branch offices in a low or moderate-income
area, and creates new Community Reinvestment Act evaluation requirements for
interstate depository institutions. The Act mandates new restrictions on
interstate activities of foreign banks, and requires public notice of, and
opportunity to comment on, any proposed ruling by a Federal banking agency
which would preempt certain State laws.
Under existing Michigan law and with the approval of the Commissioner of
the Michigan Financial Institutions Bureau ("FIB"), a Michigan-based bank or
bank holding company (such as the Corporation) may be acquired by a bank
holding company located in any state. Most states have adopted legislation that
permits out-of-state bank holding companies to acquire local banks and bank
holding companies.
Under Michigan law, if the capital of a Michigan state-chartered bank
(such as the subsidiary banks) has become impaired by losses or otherwise, the
Commissioner of the FIB may require that the deficiency in capital be met by
assessment upon the bank's shareholders pro rata on the amount of capital stock
held by each, and if any such assessment is not paid by any shareholder within
30 days of the date of mailing of notice thereof to such shareholder, cause the
sale of the stock of such shareholder to pay such assessment and the costs of
sale of such stock. The Commissioner may appoint a receiver for any bank
failing for two months after receiving such notice from the Commissioner either
to restore its capital or to take steps to liquidate its business.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and is entitled to a priority of payment. This
priority could apparently apply to guarantees of capital plans under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
The Federal Reserve Board has adopted capital adequacy guidelines to
provide a framework for supervisory evaluation of the capital adequacy of bank
holding companies. The guidelines measure four principal ratios: (1) primary
capital to total assets; (2) total capital to total assets; (3) qualifying
capital to weighted-risk assets; and (4) Tier 1 capital to total assets. In
addition to other elements not present in the case of the Corporation, primary
capital consists of common stock, surplus, undivided profits, reserves for loan
and lease losses and certain types and amounts of convertible debt instruments.
Total capital consists of primary capital plus certain limited-life preferred
stock (and related surplus), certain unsecured long-term debt, and certain
subordinated
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notes and debentures of subsidiary banks. Total assets for purposes of
ratios (1) and (2) consist of total assets plus the reserves for loan
and lease losses, less, at the discretion of the Federal Reserve Board,
amounts of intangible assets (including goodwill), all measured as of the end
of appropriate fiscal periods. For purposes of ratio (3), weighted-risk assets
consist of total risk-adjusted assets (as described below) less amounts
excluded from Tier 1 and Tier 2 capital, all measured as of the end of
appropriate fiscal periods. For purposes of ratio (4), total assets consist of
quarterly average total assets (net of the reserves for loan and lease losses)
less (i) goodwill, (ii) excess purchased mortgage servicing rights and
purchased credit card relationships, (iii) all other intangibles, (iv)
investments in subsidiaries deducted from Tier 1 capital, and (v) excess
deferred tax assets realizable only from future taxable income.
The Federal Reserve Board measures ratios (3) and (4) pursuant to its
risk-based capital adequacy guidelines. These guidelines are intended to make
regulatory capital requirements more sensitive to the risk profile of each bank
holding company, to factor off-balance-sheet exposures into capital adequacy
assessment, to minimize disincentives to holding liquid, low-risk assets, and
to further uniformity of capital measurement on a worldwide basis.
Under the risk-based guidelines, qualifying capital is measured against a
bank holding company's risk-weighted assets. Each asset on the balance sheet,
as well as a balance sheet equivalent amount of certain contingent liabilities
that are off-balance-sheet, is assigned to a broad risk category, ranging from
zero to 100%. The sum of these risk-weighted items is the bank holding
company's risk-weighted assets.
Qualifying capital consists of Tier 1 capital and Tier 2 capital (limited
to an amount equal to Tier 1 capital), less (i) aggregate investments in
banking or finance subsidiaries which are not consolidated for financial
accounting or regulatory purposes and in consolidated subsidiaries to the
extent designated by the Federal Reserve Board, and (ii) aggregate reciprocal
holdings of capital instruments of other banking organizations. Tier 1 capital
must comprise at least 4% of risk-adjusted assets and consists of common stock,
related surplus, and retained earnings, net of any treasury stock, less (i)
goodwill, (ii) all other identifiable intangible assets other than limited
amounts of readily marketable purchased mortgage servicing rights and purchased
credit card receivables, and (iii), deferred tax assets realizable only from
future taxable income, other than such assets not exceeding the lesser of the
Corporation's projected taxable income within one year of the relevant
quarter-end report date or 10% of Tier 1 capital (before deduction of any
disallowed deferred tax assets). Tier 2 capital consists of certain amounts of
the reserves for loan and lease losses, term subordinated debt and
intermediate-term preferred stock (including related surplus). The Federal
Reserve Board does not recognize unrealized appreciation of such assets in
capital ratio calculations. Unrealized net losses on marketable equity
securities are, however, excluded from Tier 1 capital.
Under current regulations, the following minima are prescribed for the
capital adequacy ratios: (1) primary capital to total assets, 5.5%; (2) total
capital to total assets, 6.0%; (3) qualifying capital (Tier 1 plus Tier 2) to
weighted-risk assets, 8.0%; and (4) Tier 1 capital to total assets, 3.0 to
5.0%.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities and to do so taking into account the size and activities of
depository institutions and the avoidance of undue reporting burdens.
2. Bank Subsidiaries
All of the Corporation's subsidiary banks are subject to regulation and
periodic examination primarily by the Commissioner of the FIB and, as insured
banks which are not members of the Federal Reserve System, by the Federal
Deposit Insurance Corporation ("FDIC"). Deposit accounts of all of the
subsidiary banks are insured to the extent provided by law by the Bank
Insurance Fund ("BIF") administered by the FDIC.
These agencies and federal and state laws extensively regulate various
aspects of the banking business including, among other things, permissible
types and amounts of loans, investments and other activities, branching,
interest rates on loans and on deposits, the maintenance of non-interest
bearing reserves on deposit accounts, and the safety and soundness of banking
practices. Bank regulations require each institution to adopt comprehensive
real estate lending policies, including underwriting standards and measurable
loan to value ratios consistent with safe and sound banking practices, and
documentation, approval and administration standards, all of which are reviewed
and approved annually by the institution's board of directors. The FDIC imposes
capital adequacy guidelines on each of the Corporation's subsidiary banks.
Subject to certain variations and exceptions, these guidelines are generally
similar to those of the Federal Reserve Board discussed above with respect to
bank holding companies.
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Banking laws and regulations also restrict transactions by an insured bank
owned by a bank holding company, including loans to and certain purchases from
the parent holding company, non-bank and bank subsidiaries of the parent
holding company, principal shareholders, officers, directors and their
affiliates, and investments by the subsidiary banks in the shares or securities
of the parent holding company (or of any other non-bank or bank affiliates),
and acceptance of such shares or securities as collateral security for loans to
any borrower. A bank's regulators also review other payments, such as
management fees, made by subsidiary banks to affiliated companies.
The Banks are also subject to legal limitations on the frequency and
amount of dividends that can be paid to the Corporation. A Michigan state
chartered bank (such as the Banks) may not declare a cash dividend or a
dividend in kind except out of net profits then on hand after deducting all
losses and bad debts, and then only if it will have a surplus amounting to not
less than 20% of its capital after the payment of the dividend. Moreover, a
Michigan state chartered bank may not declare or pay any cash dividend or
dividend in kind until the cumulative dividends on its preferred stock, if any,
have been paid in full. Further, if the surplus of a Michigan state chartered
bank is at anytime less than the amount of its capital, before the declaration
of a cash dividend or dividend in kind, it must transfer to surplus not less
than 10% of its net profits for the preceding half-year (in the case of
quarterly or semi-annual dividends) or the preceding two consecutive half-year
periods (in the case of annual dividends).
The payment of dividends by the Corporation and the Banks are also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines. The
"prompt corrective action" provisions of FDICIA impose further restrictions on
the payment of dividends by an insured bank which fail to meet specified
capital levels and, in some cases, their parent bank holding companies.
FDICIA establishes five capital categories, and the federal banking
regulators, as directed by FDICIA, have adopted, subject to certain exceptions,
the following minimum requirements for each of such categories:
<TABLE>
<CAPTION>
TOTAL TIER 1
RISK-BASED RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO OTHER
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above Not subject to a capital directive.
Adequately
capitalized 8% or above 4% or above(1) 4% or above Does not meet definition of well-capitalized.
Undercapitalized Less than 8% Less than 4%(2) Less than 4%
Significantly
undercapitalized Less than 6% Less than 3% Less than 3%
Critically under-
capitalized -- -- A ratio of tangible equity to total
assets of 2% or less.
</TABLE>
(1)3% or above for institutions rated CAMEL 1 in most recent examination.
(2)Less than 3% for institutions rated CAMEL 1 in most recent examination.
Subject to certain exceptions, these capital ratios are generally
determined on the basis of periodic Reports of Condition and Income ("Call
Reports") submitted by each depository institution and the reports of
examination by each institution's appropriate federal bank regulatory agency.
FDICIA also requires the federal banking regulators to take prompt
corrective action in respect to a depository institution that does not meet
minimum capital requirements. The scope and degree of regulatory intervention
is linked to the capital category to which a depository institution is
assigned. A depository institution may be reclassified to a lower category than
is indicated by its capital position if the appropriate federal bank regulatory
agency determines the institution to be otherwise in an unsafe or unsound
condition or to be engaged in an unsafe or unsound practice. This could include
a failure by the institution, following receipt of a less-than-satisfactory
rating on its most recent examination report, to correct the deficiency.
Among other things, an undercapitalized depository institution is subject
to growth limitations and is required to submit capital restoration plans. A
depository institution's holding company must guarantee a capital restoration
plan, up to an amount equal to the lesser of 5% of the depository institution's
assets at the time it becomes undercapitalized or the amount of the capital
deficiency when the institution fails to comply with the plan. The federal
banking agencies may not accept a capital plan without
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determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. If a depository institution fails to submit an acceptable plan, or
fails in any material respect to implement an approved plan, it is treated
as if it is significantly undercapitalized.
In addition to these restrictions applicable to an undercapitalized
institution, a significantly undercapitalized depository institution may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, reduce total assets,
make changes in management personnel, prohibit payment of dividends by its
parent holding company, and require such holding company to divest or liquidate
any affiliate of the institution under certain circumstances. Subject to
certain exceptions, critically undercapitalized depository institutions are
required to be placed in conservatorship or receivership, generally within 90
days.
FDICIA added numerous other provisions, including new accounting, audit
and reporting requirements, new regulatory standards in areas such as asset
quality, earnings and compensation, and revised regulatory standards for, among
other things, powers of state chartered banks, branch closures, and reduction
of systemic risk in the payments system.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, payment of dividends by a bank may be prevented by the applicable
federal regulatory authority if such payment is determined, by reason of the
financial condition of such bank, to be an unsafe and unsound banking practice.
The Federal Reserve Board has issued a policy statement providing that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings.
These regulations and restrictions may limit the Corporation's ability to
obtain funds from the Banks for its cash needs, including funds for
acquisitions, payment of dividends and interest and the payment of operating
expenses.
Each of the Banks is subject to FDIC deposit insurance assessments paid to
the BIF. Pursuant to FDICIA, the FDIC is required to set deposit insurance
rates at a level that will maintain the BIF reserve ratio at a mandated level
and has implemented a risk-based assessment scheme. Under this arrangement,
each depository institution is assigned to one of nine categories (based upon
three categories of capital adequacy and three categories of perceived risk to
the BIF). The deposit insurance assessment ranges from 0 basis points for
well-capitalized institutions displaying little risk, to 27 basis points for
undercapitalized institutions displaying high risk. In addition, pursuant to
the federal Deposit Insurance Funds Act (enacted on September 30, 1996), banks
are also subject to assessments necessary to pay a portion of the interest on
Financing Corporation (FICO) bonds issued in connection with the federal
government's bail out of the thrift industry.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any insured bank or savings
association subsidiary of a holding company may be required to reimburse the
FDIC for any loss incurred or reasonably anticipated to be incurred by the FDIC
in connection with a default of any of such holding company's other insured
subsidiary banks or savings associations or from assistance provided to such
other subsidiaries in danger of default. This right of recovery by the FDIC
generally is superior to any claim of the shareholders of the depository
institution that is liable or any affiliate of such institution. The Banks are
subject to such cross-guarantees.
As part of the Omnibus Budget Reconciliation Act of 1993, Congress amended
the Federal Deposit Insurance Act to require receivers of failed depository
institutions to give priority to depositors over general creditors,
subordinated creditors and shareholders when distributing assets of a failed
bank. This depositor preference applies on a nationwide basis.
3. Regulation of Proposed Acquisitions
In general, any direct or indirect acquisition by the Corporation of any
voting shares of any bank which would result in the Corporation's direct or
indirect ownership or control of more than 5% of any class of voting shares of
such bank, and any merger or consolidation of the Corporation with another bank
holding company, will require the prior written approval of the Federal Reserve
Board under the BHC Act. In reaching its decision on an application for such
approval, the Federal Reserve Board must consider a number of factors,
including the effect of the proposed acquisition or merger on competition in
relevant geographic and product markets, the financial condition of both
parties, capital adequacy before and after the proposed acquisition, the
managerial resources and future prospects of the parties, the convenience and
needs of the communities to be served, and the prior record of both the
Corporation's existing bank subsidiaries and the bank to be acquired (or the
bank subsidiaries of the other party to the merger) under the Community
Reinvestment Act. Amendments made to the BHC Act by FDICIA further require the
Federal Reserve Board (a) to disapprove any application by a bank holding
company which fails to provide the Board
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with adequate assurances that it will furnish to the Board information on the
operations and activities of such bank holding company and its affiliates
determined by the Board to be appropriate to determine and enforce compliance
with the statute, and (b) in its consideration of managerial resources, to
include consideration of the competence, experience and integrity of the
officers, directors, and principal shareholders of the parties.
The merger or consolidation of an existing bank subsidiary of the
Corporation with another bank, or the acquisition by such a bank subsidiary of
assets of another bank, or the assumption of liability by such a bank
subsidiary to pay any deposits in another bank, will require the prior written
approval of the responsible federal bank regulatory agency under the Bank
Merger Act. In reaching its decision, the responsible federal bank regulatory
agency must consider a number of factors, including the effect of the proposed
transaction on competition in relevant geographic and product markets, the
financial and managerial resources and future prospects of the parties, capital
adequacy before and after the proposed transaction, the convenience and needs
of the communities to be served, and the prior record of both the Corporation's
existing bank subsidiaries and the other bank under the Community Reinvestment
Act. In addition, an application to, and the prior approval of, the Federal
Reserve Board may be required under the BHC Act in certain such cases.
In all of the foregoing cases, the required regulatory approvals are
subject to public notice and comment procedures. Adverse public comments
received, or adverse considerations raised by the regulatory agencies, may
delay or prevent consummation of the proposed transaction. In addition, such a
transaction generally may not be consummated before the 30th calendar day (or
if the Department of Justice has made no adverse comment to the Federal Reserve
Board thereon, such shorter period not less than 15 calendar days as the Board
may specify with the concurrence of the Department of Justice) after final
approval of the transaction by the federal regulatory agency. In some of the
foregoing cases, prior approvals of state bank regulatory authorities must also
be obtained prior to consummation of the proposed transactions.
FIRREA amended the BHC Act in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate a
savings association as a non-bank subsidiary of such bank holding company. A
bank holding company such as the Corporation may apply to the Board for
permission to acquire and operate a savings association engaged only in
deposit-taking, lending and other activities that the Board has determined to
be permissible for bank holding companies, in accordance with the procedures
and standards described above.
The direct or indirect acquisition of control of a savings association by
a bank holding company also requires the prior approval of the Director of the
Office of Thrift Supervision ("OTS") of the Department of the Treasury under
the Home Owners Loan Act ("HOLA"), and may also require prior approval of state
regulatory officials. In the case of an application by a bank holding company
such as the Corporation, which did not already control a savings association,
to acquire control of a single savings association, the OTS may deny the
application under the HOLA if it determines that the financial and managerial
resources and future prospects of the applicant and the savings association
involved are such that the acquisition would be detrimental to the savings
association or to the insurance risk of the applicable deposit insurance fund
of the FDIC. FDICIA amended HOLA to require the OTS to include, in its
determination of the managerial resources of the applicant and the association,
consideration of the competency, experience and integrity of the officers,
directors and principal shareholders of both parties. In addition, the OTS will
consider other factors in connection with such an application, including
capital adequacy before and after the proposed acquisition and potential
anti-competitive effects. Applications to acquire more than one savings
association, and applications by entities which are already savings and loan
holding companies, require the application by the OTS of different and more
restrictive standards in reaching its determination whether to approve such
applications.
The direct or indirect acquisition of control of a savings association by
a bank holding company such as the Corporation which does not already control a
savings association will cause the bank holding company to become a savings and
loan holding company. Each company becoming a savings and loan holding company
must register with and become subject to regulation, periodic reporting
requirements, and examination by the OTS. In the case of a bank holding company
which is also a savings and loan holding company, such OTS regulation is in
addition to continuing regulation by the Federal Reserve Board under the BHC
Act.
COMPETITION
Active competition exists in all principal markets in which the
Corporation and its subsidiary banks presently operate. This competition stems
from other commercial banks, savings and loan associations, securities brokers,
mutual funds, credit unions, finance companies, mortgage bankers, leasing
companies and various non-financial intermediaries.
8
<PAGE> 9
EMPLOYEES
The consolidated number of full-time equivalent employees for the
Corporation as of December 31, 1996, 1995 and 1994 was 401, 387 and 434,
respectively. The operations and business of the parent company, CB Financial
Corporation, are carried out primarily by its officers and employees.
ITEM 2. PROPERTIES
The executive offices of the Corporation are located at the main office of
City Bank and Trust, the lead bank of the holding company, in Jackson,
Michigan. City Bank and Trust leases approximately 57,000 square feet (about
five and one half floors or 45%) in an 11 story office building whose lease
expires in 2001 under the original term. CB Financial reimburses City Bank and
Trust on a prorata basis for approximately 20,000 square feet of space used by
functional areas with corporate responsibilities.
City Bank and Trust has six branch offices within the City of Jackson,
eight in surrounding townships and communities and two community branches
located in the eastern portion of Calhoun County, Michigan. All of these
branches are within a 25 mile radius of the main office. Of these 16 branch
offices, 12 are owned and four are leased whose terms expire at various times
through 2000. City Bank and Trust's offices range in size from approximately
800 square feet to 4200 square feet with nine of them providing drive-in
facilities. All of the branch offices are full-service facilities with the
exception of its CB Express Bank, which provides only drive-up banking,
including a drive-up ATM.
City Bank has its main office at 200 W. Higham Street, St. Johns,
Michigan, and occupies 8,300 square feet of a one story building. This office
and nine branch offices are owned by the Bank. Two other branches are leased.
Branch sizes vary from approximately 400 square feet to 8,000 square feet. All
of City Bank's branch offices are full-service facilities with the exception of
its Auto Bank in St. Johns, Michigan, which is a drive-up facility only.
CB North's main office is located in the central business district of
Charlevoix, Michigan and occupies a two story building with a basement. Eight
branch offices are owned and are full-service facilities. Two offices are
leased, one of which is a limited service office. Seven of the offices provide
drive-up banking service. The operations center occupies a portion of the M-66
branch which is located in the southeast section of Charlevoix.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is party to routine litigation arising in the normal
course of business. In the opinion of management, the liabilities arising from
these legal proceedings, if any, will not have a material effect upon the
Corporation's financial position or results of operations except as described
below.
In October 1993, a former employee filed suit in Jackson County, Michigan
Circuit Court against City Bank and Trust alleging wrongful discharge from her
employment. In June 1994, a jury trial resulted in a judgement against the Bank
in the amount of $293,438, plus costs, interest and mediation sanctions. The
Bank has appealed, and the case is pending in the Michigan Court of Appeals.
That Court has heard oral arguments. The parties await the court's decision.
The Corporation has established a contingency reserve of $400,000 relating to
any ultimate liability.
9
<PAGE> 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a vote of
the Corporation's security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------------------------------
<S> <C> <C>
Brian D. Bell 59 Chairman and Chief Executive Officer of CB Financial
Corporation since December 1995 (previously Chairman,
President and Chief Executive Officer since 1990);
President and Chief Executive Officer of City Bank
and Trust Company since 1987; Director of CB
Financial Corporation, City Bank and Trust Company,
City Bank, and (since 1993) CB North.
Steven W. Seely 46 President and Chief Operating Officer of CB Financial
Corporation since December 1995 (previously
Executive Vice President and Chief Operating Officer
since March 1995); Director of CB Financial
Corporation, City Bank and Trust Company, City Bank,
and CB North since December 1995; Vice President NBD
Bancorp Inc. 1985 to March 1995.
James E. Burtch 62 President and Chief Executive Officer of City Bank
since March 1995; President of City Bank from July
1994 - February 1995; Executive Vice President of
City Bank from November 1984 - June 1994; and
Director of City Bank since 1984.
Francis B. Flanders 62 Chairman, President and Chief Executive Officer of CB
North since April 1994; Chairman of CB North from
October 1993 thru March 1994; President, Chief
Executive Officer and Cashier of Charlevoix County
State Bank from February 1993 thru September 1993;
President and Chief Executive Officer of Charlevoix
County State Bank from March 1992 thru January 1993;
Second Vice-President of NBD Bank until March, 1992.
A. Wayne Klump 54 Treasurer of CB Financial Corporation since April
1982; Senior Vice President and Chief Financial
Officer of City Bank and Trust Company since 1991
(previously Senior Vice President and Controller
since 1987).
</TABLE>
Officers of the Corporation are elected in the spring of each year at the
annual organizational meeting of the Board of Directors to serve for the
ensuing year. There is no family relationship between any of the foregoing
individuals.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The common stock of CB Financial Corporation is traded on a limited basis
in the over-the-counter market. At December 31, 1996, there were 2,801,053
shares of common stock outstanding held by 2,082 shareholders of record. The
table below lists the range of high and low bid price during each quarter for
CB Financial Corporation's common stock, as obtained from the National
Quotation Bureau, Inc. and the quarterly dividend declared per share, in each
of the last three years. The prices are inter-dealer quotations and do not
reflect actual transactions nor commissions to brokers. Information with
respect to restrictions on dividend payments is presented in Note 16 of the
Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK DIVIDENDS DECLARED
HIGH LOW PER SHARE
- ------------------------------------------------------------------
<S> <C> <C> <C>
1996
FIRST QUARTER $33 1/2 $29 1/2 $.30
SECOND QUARTER 32 29 1/2 .30
THIRD QUARTER 30 1/2 29 1/2 .30
FOURTH QUARTER 36 30 1/2 .30
- ------------------------------------------------------------------
$1.20
1995
First Quarter $31 $27 $.30
Second Quarter 32 1/2 32 .30
Third Quarter 36 1/2 31 1/4 .30
Fourth Quarter 35 3/4 33 1/2 .30
- ------------------------------------------------------------------
$1.20
1994
First Quarter $33 $33 $.30
Second Quarter 33 32 .30
Third Quarter 33 31 1/2 .30
Fourth Quarter 30 29 1/2 .30
- ------------------------------------------------------------------
$1.20
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is set forth within Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," on the pages indicated below. Such information is incorporated
herein by reference.
<TABLE>
<CAPTION>
Pages in
Form 10-K
---------
<S> <C>
Consolidated Income Statement - Financial Statistics 12
Consolidated Average Balance Sheet 13
Trends in Average Assets and Sources of Funds 14
Financial Ratios 15
Average Balances - Effective Interest Differential Rates 16
Analysis of Changes in Volume and Rates on Net Interest Income 17
</TABLE>
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following financial review covers significant factors affecting the
Corporation's balance sheet and statement of income during the period of 1994
through 1996. The information provides a more comprehensive review of the
financial condition and operating results than could be obtained from reading
the financial statements, footnotes and financial statistics. The major
components of the Corporation's operating results in 1996, 1995 and 1994 are
presented in the accompanying tables 1-4 and are discussed in greater detail in
subsequent pages.
TABLE 1. CONSOLIDATED STATEMENT OF INCOME - FINANCIAL STATISTICS
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS AS OF DECEMBER 31,
EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Consumer Loans $ 13,808 $ 9,958 $ 8,947 $ 8,489 $ 6,763
Commercial Loans 17,653 16,179 12,338 10,138 7,064
Tax Exempt Loans 910 927 658 597 804
Real Estate Mortgage Loans 13,527 9,291 6,882 9,397 11,920
Securities Available for Sale:
U.S. Treasury 4,589 3,372 5,086 -- --
U.S. Government Agencies 5,089 2,065 2,629 -- --
States and Political Subdivisions 614 23 -- -- --
Other 5 5 79 -- --
Securities Held to Maturity -- 8,122 8,438 17,530 20,045
Money Market Assets 251 550 428 627 528
- -----------------------------------------------------------------------------------------------------------
Total Interest Income 56,446 50,492 45,485 46,778 47,124
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON:
Demand Deposits 2,785 3,907 4,095 4,216 4,775
Savings Deposits 3,751 3,272 3,314 3,615 4,013
Time Deposits 16,614 11,994 7,725 7,889 9,830
Other Liabilities 788 811 745 749 376
- -----------------------------------------------------------------------------------------------------------
Total Interest Expense 23,938 19,984 15,879 16,469 18,994
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 32,508 30,508 29,606 30,309 28,130
Provision for Possible Loan Losses 3,792 672 534 392 595
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 28,716 29,836 29,072 29,917 27,535
- -----------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Security Gains 510 82 942 1,787 2,030
Trust Income 2,150 2,012 2,008 2,015 2,014
Other Income 4,917 4,221 4,081 4,111 2,845
- -----------------------------------------------------------------------------------------------------------
Total Non-Interest Income 7,577 6,315 7,031 7,913 6,889
- -----------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and Employee Benefits 13,028 12,953 12,629 12,399 11,385
Occupancy and Furniture and Equipment 5,308 5,028 4,682 4,216 3,299
Restructuring Charge 1,102 2,278 -- -- --
Other Operating Expenses 9,714 9,124 9,211 9,150 7,367
- -----------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 29,152 29,383 26,522 25,765 22,051
- -----------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 7,141 6,768 9,581 12,065 12,373
Provision for Federal Income Tax 2,137 2,152 2,987 3,646 3,661
- -----------------------------------------------------------------------------------------------------------
Net Income before Cumulative
Effect of Change in Accounting 5,004 4,616 6,594 8,419 8,712
Change in Accounting, Net of Tax Effect of $557 -- -- -- 1,081 --
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 5,004 $ 4,616 $ 6,594 $ 7,338 $ 8,712
===========================================================================================================
PER SHARE DATA:
Net Income before Change in Accounting $ 1.79 $ 1.65 $ 2.35 $ 3.00 $ 3.11
Net Income 1.79 1.65 2.35 2.62 3.11
Cash Dividends Declared 1.20 1.20 1.20 1.18 1.14
Book Value at Year End 27.41 27.65 26.42 25.46 24.02
Market Price at Year End (Average Bid/Ask) 37.38 33.88 29.50 34.00 28.50
MISCELLANEOUS DATA:
Average Shares Outstanding 2,803,364 2,803,437 2,803,158 2,803,300 2,801,053
Actual Shares Outstanding at Year End 2,801,053 2,801,053 2,801,053 2,801,053 2,801,053
Number of Shareholders 2,082 2,094 2,157 2,137 2,124
Number of Full-Time Equivalent
Employees at Year End 401 387 434 431 403
</TABLE>
12
<PAGE> 13
TABLE 2. CONSOLIDATED AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Securities Available for Sale:
U.S. Treasury $ 76,067 $ 47,455 $ 67,418 $ -- $ --
U. S. Government Agencies 76,476 27,594 33,947 -- --
States and Political Subdivisions 10,523 385 -- -- --
Other 122 192 2,194 -- --
- -----------------------------------------------------------------------------------------------------
Total Securities Available for Sale 163,188 75,626 103,559 -- --
- -----------------------------------------------------------------------------------------------------
Securities Held to Maturity -- 141,236 148,908 258,857 253,882
- -----------------------------------------------------------------------------------------------------
Consumer Loans 150,429 110,674 101,509 90,726 65,333
Commercial Loans 197,296 172,512 152,257 134,677 90,725
Tax Exempt Loans 14,602 13,168 10,404 9,429 12,514
Real Estate Mortgage Loans 165,511 108,025 80,782 98,850 127,125
- -----------------------------------------------------------------------------------------------------
Subtotal Loans 527,838 404,379 344,952 333,682 295,697
Reserve for Possible Loan Losses (4,058) (3,977) (3,540) (3,663) (2,881)
- -----------------------------------------------------------------------------------------------------
Net Loans 523,780 400,402 341,412 330,019 292,816
- -----------------------------------------------------------------------------------------------------
Money Market Assets 5,245 10,051 10,441 16,798 14,759
- -----------------------------------------------------------------------------------------------------
Total Earning Assets 692,213 627,315 604,320 605,674 561,457
- -----------------------------------------------------------------------------------------------------
Cash and Due from Banks 31,519 32,003 33,724 38,383 30,475
Goodwill and Premium on Core Deposits 9,327 11,220 8,377 7,754 2,879
Other Assets, Net 27,466 26,748 26,235 25,537 19,792
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $760,525 $697,286 $672,656 $677,348 $614,603
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand and Other Non-Interest
Bearing Deposits $106,214 $100,968 $101,605 $ 99,741 $ 82,724
Interest-Bearing Demand Deposits 131,712 151,943 159,858 163,794 143,904
Savings Deposits 128,704 124,132 135,360 136,436 116,786
Time Deposits 293,943 223,346 181,889 184,902 187,979
- -----------------------------------------------------------------------------------------------------
Total Deposits 660,573 600,389 578,712 584,873 531,393
- -----------------------------------------------------------------------------------------------------
Short-Term Interest-Bearing Liabilities 8,951 7,009 4,362 8,454 14,164
Note Payable and Capital Leases 3,479 5,396 7,403 8,999 625
Other Liabilities 10,107 7,865 7,112 5,700 4,011
Shareholders' Equity 77,415 76,627 75,067 69,322 64,410
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $760,525 $697,286 $672,656 $677,348 $614,603
=====================================================================================================
</TABLE>
13
<PAGE> 14
TABLE 3. TRENDS IN AVERAGE ASSETS AND SOURCES OF FUNDS
<TABLE>
<CAPTION>
1996 INCREASE (DECREASE) 1995 INCREASE (DECREASE) 1994
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities Available for Sale:
U.S. Treasury and Government Agencies $152,543 $ 77,494 103.3% $ 75,049 $ (26,316) -26.0% $101,365
States and Political Subdivisions 10,523 10,138 2633.2 385 385 -- --
Other 122 (70) -36.5 192 (2,002) -91.2 2,194
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale 163,188 87,562 115.8 75,626 (27,933) -27.0 103,559
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity -- (141,236) -- 141,236 (7,672) -5.2 148,908
- -----------------------------------------------------------------------------------------------------------------------------------
Loans:
Consumer Loans 150,429 39,755 35.9 110,674 9,165 9.0 101,509
Commercial Loans 197,296 24,784 14.4 172,512 20,255 13.3 152,257
Tax Exempt Loans 14,602 1,434 10.9 13,168 2,764 26.6 10,404
Real Estate Mortgage Loans 165,511 57,486 53.2 108,025 27,243 33.7 80,782
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans 527,838 123,459 30.5 404,379 59,427 17.2 344,952
Reserve for Possible Loan Losses (4,058) (81) -2.0 (3,977) (437) -12.3 (3,540)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans 523,780 123,378 30.8 400,402 58,990 17.3 341,412
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Assets 5,245 (4,806) -47.8 10,051 (390) -3.7 10,441
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Earning Assets 692,213 64,898 10.3 627,315 22,995 3.8 604,320
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks 31,519 (484) -1.5 32,003 (1,721) -5.1 33,724
Other Assets 36,793 (1,175) -3.1 37,968 3,356 9.7 34,612
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $760,525 $63,239 9.1% $697,286 $24,630 3.7% $672,656
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest Bearing Deposits $106,214 $5,246 5.2% $100,968 $ (637) -.6% $101,605
Interest-Bearing Demand Deposits 131,712 (20,231) -13.3 151,943 (7,915) -5.0 159,858
Savings Deposits 128,704 4,572 3.7 124,132 (11,228) -8.3 135,360
Other Time Deposits 293,943 70,597 31.6 223,346 41,457 22.8 181,889
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 660,573 60,184 10.0 600,389 21,677 3.7 578,712
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Interest-Bearing Liabilities 8,951 1,942 27.7 7,009 2,647 60.7 4,362
Note Payable and Capital Leases 3,479 (1,917) -35.5 5,396 (2,007) -27.1 7,403
Other Liabilities 10,107 2,242 28.5 7,865 753 10.6 7,112
Shareholders' Equity 77,415 788 1.0 76,627 1,560 2.1 75,067
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $760,525 $63,239 9.1% $697,286 $24,630 3.7% $672,656
===================================================================================================================================
</TABLE>
14
<PAGE> 15
TABLE 4. FINANCIAL RATIOS
The following ratios are among those commonly used in analyzing bank
holding company financial statements.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Profitability Ratios:
Rate of Return on Average Earning Assets (1) .72% .73% 1.09% 1.20% 1.54%
Return on Average Assets before Change in Accounting .66 .66 .98 1.24 1.42
Return on Average Assets (1) .66 .66 .98 1.08 1.42
Return on Average Shareholders' Equity before
Change in Accounting 6.46 6.02 8.78 12.14 13.53
Return on Average Shareholders' Equity (1) 6.46 6.02 8.78 10.59 13.53
Net Interest Margin 4.75 4.94 4.99 5.12 5.15
Efficiency Ratio 66.84 68.84 70.46 66.89 NA(4)
Average Loans to Average Deposits 79.91 67.35 59.61 57.05 55.65
Assets Per Employee (FTE) At Year End (In Thousands) $2,057 $1,860 $1,660 $1,557 $1,601
Liquidity and Capital Ratios:
Average Shareholders' Equity to Average Assets 10.18% 10.99% 11.16% 10.23% 10.48%
Average Shareholders' Equity to Average Earning Assets 11.12 12.14 12.40 11.38 11.41
Average Primary Capital To Average Assets (2) 10.66 11.49 11.62 10.72 10.90
Tier 1 Capital to Risk-Adjusted Assets 11.86 15.66 15.12 18.40 19.91
Average Loans Times Average Shareholder's Equity 6.82X 5.28X 4.60X 4.81X 4.59X
Dividend Payment Ratio on Common Stock (3) 67.17% 72.82% 50.97% 45.04% 36.65%
</TABLE>
(1) Based on net income.
(2) Primary capital is total shareholders' equity plus the reserve for possible
loan losses. Average assets have been increased by the average of the
reserve for possible loan losses.
(3) Cash dividends declared on common stock as a percentage of net income.
(4) Information to calculate this ratio is not readily available and is not
comparable to subsequent years due to acquisitions in 1993 and 1994.
15
<PAGE> 16
TABLE 5. AVERAGE BALANCES - EFFECTIVE INTEREST DIFFERENTIAL RATES
(Interest Income and Rates on a Tax Equivalent Basis)
<TABLE>
<CAPTION>
1996 1995 1994
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLAR AMOUNTS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Money Market Assets $ 5,245 $ 251 4.79% $ 10,051 $550 5.47% $ 10,441 $ 428 4.10%
Securities Available for Sale:
U.S. Treasury 75,948 4,589 6.04 47,134 3,372 7.15 66,373 5,086 7.66
U.S. Government Agencies 77,664 5,089 6.55 27,439 2,065 7.53 33,295 2,629 7.90
States and Political Subdivisions (1) 10,185 872 8.56 381 33 8.66 -- -- --
Other 46 5 10.87 65 5 7.69 1,552 79 5.09
Securities Held to Maturity -- -- -- 141,236 8,404 5.95 148,908 8,775 5.89
Loans (2):
Consumer Loans 150,429 13,808 9.18 110,674 9,958 9.00 101,509 8,947 8.81
Commercial Loans 197,296 17,653 8.95 172,512 16,179 9.38 152,257 12,338 8.10
Tax Exempt Loans (1) 14,602 1,230 8.42 13,168 1,276 9.69 10,404 898 8.63
Real Estate Mortgage Loans 165,511 13,527 8.17 108,025 9,291 8.60 80,782 6,882 8.52
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS
AND INTEREST INCOME 696,926 57,024 8.18 630,685 51,133 8.11 605,521 46,062 7.61
- ------------------------------------------------------------------------------------------------------------------------------------
Reserve for Possible Loan Losses (4,058) (3,977) (3,540)
Cash and Due from Banks 31,519 32,003 33,724
Premises and Equipment, Net 14,597 16,104 15,538
Goodwill and Premium on Core Deposits 9,327 11,220 8,377
Unrealized Gains (Losses) on
Securities Available for Sale (655) 607 2,339
Other Assets 12,869 10,644 10,697
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $760,525 $697,286 $672,656
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-Bearing Demand Deposits $131,712 $ 2,785 2.11% $151,943 $3,907 2.57% $159,858 $ 4,095 2.56%
Savings Deposits 128,704 3,751 2.91 124,132 3,272 2.64 135,360 3,314 2.45
Time Deposits 293,943 16,614 5.65 223,346 11,994 5.37 181,889 7,725 4.25
Short-Term Interest-Bearing Liabilities 8,951 539 6.02 7,009 440 6.28 4,362 228 5.23
Note Payable 3,151 201 6.38 5,052 320 6.33 6,978 449 6.43
Capital Leases 328 48 14.63 344 51 14.83 425 68 16.00
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES AND INTEREST EXPENSE 566,789 23,938 4.22 511,826 19,984 3.90 488,872 15,879 3.25
- ------------------------------------------------------------------------------------------------------------------------------------
Demand and Other Non-Interest
Bearing Deposits 106,214 100,968 101,605
Other Liabilities 10,107 7,865 7,112
Shareholders' Equity 77,415 76,627 75,067
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $760,525 $697,286 $672,656
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense
Related to Earning Assets 3.43 3.17 2.62
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $33,086 $ 31,149 $ 30,183
====================================================================================================================================
NET INTEREST MARGIN 4.75% 4.94% 4.99%
====================================================================================================================================
</TABLE>
(1) The amounts are adjusted to a tax equivalent basis for Federal income tax.
(2) Non-accrual loans and overdrafts are included in the average balances and
fees on loans are included in interest income for computation of yields.
16
<PAGE> 17
TABLE 6. ANALYSIS OF CHANGES IN VOLUME AND RATES ON NET INTEREST INCOME
The following table sets forth, for the periods indicated, the effect of
volume and rate changes on net interest income on a tax equivalent basis. The
changes in interest attributable to volume are calculated by multiplying the
annual change in average balance times the prior year's rate. The rate
variance is calculated by multiplying the annual change in the average rate
times the prior year's volume. The volume/rate is calculated by multiplying
the change in average balance times the change in average rate.
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
AVERAGE AVERAGE VOLUME/ NET AVERAGE AVERAGE VOLUME/ NET
(IN THOUSANDS) BALANCE RATE RATE CHANGE BALANCE RATE RATE CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income:
Loans:
Consumer Loans $ 3,577 $ 182 $ 91 $ 3,850 $ 805 $ 189 $ 17 $ 1,011
Commercial Loans 2,324 (743) (107) 1,474 1,638 1,944 259 3,841
Tax Exempt Loans 139 (167) (18) (46) 239 110 29 378
Real Estate Mortgage Loans 4,944 (475) (233) 4,236 2,322 65 22 2,409
Securities Available for Sale:
U. S. Treasury and Government Agencies 5,691 (738) (712) 4,241 (1,695) (463) (120) (2,278)
States and Political Subdivisions 873 (1) (33) 839 33 -- -- 33
Other (2) 4 (2) -- (75) 34 (33) (74)
Securities Held To Maturity (8,404) -- -- (8,404) (455) 89 (5) (371)
Money Market Assets (263) (69) 33 (299) (16) 143 (5) 122
- ------------------------------------------------------------------------------------------------------------------------------------
Total 8,879 (2,007) (981) 5,891 2,796 2,111 164 5,071
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing Demand Deposits (520) (695) 93 (1,122) (201) 14 (1) (188)
Savings Deposits 115 352 12 479 (280) 259 (21) (42)
Time Deposits 3,802 621 197 4,620 1,762 2,042 465 4,269
Short Term Interest-Bearing Liabilities 118 (15) (4) 99 138 46 28 212
Note Payable and Capital Leases (132) 15 (5) (122) (131) (12) (3) (146)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,383 278 293 3,954 1,288 2,349 468 4,105
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Interest Income $ 5,496 $(2,285) $(1,274) $ 1,937 $ 1,508 $ (238) $(304) $ 966
====================================================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Net income for 1996 amounted to $5,004,000, an increase of $388,000 or
8.4% compared to $4,616,000 earned in 1995. Net income for 1995 decreased
$1,978,000 or 30.0% from the $6,594,000 reported for 1994. Earnings per share
on net income based on the average number of shares outstanding was $1.79,
$1.65 and $2.35 for 1996, 1995 and 1994, respectively. The operating results
for 1996 and 1995 reflect pre-tax restructuring charges of $1,102,000 and
$2,278,000, respectively, which are explained in greater detail in the section
on non-interest expenses. Without these expenses in 1996 and 1995, net income
would have been $5,731,000 and $6,250,000, respectively, a decrease of $519,000
in 1996 from 1995 after a reduction of $344,000 in 1995 from 1994. The
provision for possible loan losses in 1996 was $3,792,000, an increase of
$3,120,000 over the $672,000 recorded in 1995. Securities gains were $510,000
in 1996 compared to $82,000 and $942,000 in 1995 and 1994, respectively.
The return on average assets was .66%, .66% and .98%, respectively, for
1996, 1995 and 1994. Return on average assets in 1996 and 1995 based on
earnings before the restructuring charge would have been .75% and .90%. Return
on average equity amounted to 6.46% in 1996 versus 6.02% in 1995 and 8.78% in
1994. This ratio before the restructuring charge in 1996 and 1995 would have
been 7.40% and 8.16%. Excluding the effect of the restructuring charge in the
past two years, the fluctuation in return on average assets and average equity
reflects the movement in securities gains, the provision for loan losses and
other factors explained in subsequent sections of management's discussion.
17
<PAGE> 18
NET INTEREST INCOME
Net interest income, an important indicator of the Corporation's
profitability, is the difference between the income received on earning assets
and the interest expense on interest-bearing liabilities. Earning assets are
financed by a large base of interest-bearing funds, consisting of retail and
wholesale deposits and short-term borrowings. In addition to interest-bearing
funds, earning assets are also supported by net non-interest-related funds that
consist of demand deposits and shareholders' equity, the total of which is
reduced by non-interest-earning assets such as cash and due from banks, items
in process of collection, premises and equipment, goodwill and premium on core
deposits and other non-earning assets. Variations in the volume and mix of
earning assets, interest-bearing funds and non-interest-earning funds, as well
as their relative sensitivity to interest rate movement, are the most important
factors affecting net interest income.
Table 5, Average Balances-Effective Interest Differential Rates, presents
average daily balances, interest income on a tax equivalent basis for Federal
income tax and interest expense as well as rates earned and paid on the
Corporation's major asset and liability items, for the years 1996, 1995 and
1994. Net interest income on a tax equivalent basis for Federal income tax was
$33,086,000 in 1996 compared to $31,149,000 in 1995 and $30,183,000 in 1994.
Net interest income on a Federal tax equivalent basis is the largest source of
earnings for the Corporation, accounting for 81.4% of total income before
provision for possible loan losses in 1996 compared to 83.1% in 1995 and 81.1%
in 1994.
Additional information relative to the effect that changes in volume and
rates had on net interest income is presented in Table 6. Information in
Tables 2 and 3 will assist with a comparative analysis of changes in the
average balance sheet over the period of 1994 through 1996.
Average earning assets, excluding the reserve for possible loan losses
were $696.3 million for 1996, $631.3 million for 1995 and $607.9 million for
1994, an increase overall of $88.4 million. Average loans outstanding in 1996
amounted to $527.8 million, a growth of $123.4 million over the $404.4 million
for 1995 which increased $59.4 million from the $345.0 million in 1994.
Excluding the unrealized gains and losses, total investment securities
consisting of Securities Available for Sale and Held to Maturity averaged
$163.8 million in 1996, $216.3 million in 1995 and $250.1 million in 1994.
Money market assets consisting of Federal Funds Sold and other liquid
short-term investments averaged $5.2 million in 1996 versus $10.1 million in
1995 and $10.4 million in 1994. Total deposits averaged $660.6 million in
1996, $600.4 million in 1995 and $578.7 million in 1994. A more detailed
explanation of the fluctuation in earning assets and interest-bearing
liabilities are presented in subsequent sections of management's discussion and
analysis.
The net interest margin on a tax equivalent basis for Federal income tax
was 4.75%, 4.94% and 4.99% for 1996, 1995 and 1994, respectively, a decline of
24 basis points over the intervening period. The effective yield on total
average earning assets was 8.18%, 8.11% and 7.61%, a steady improvement of 57
basis points over the past three years. Effective interest rates on total
interest-bearing liabilities were 4.22% for 1996, 3.90% in 1995 and 3.25% in
1994, an increase of 97 basis points which reflects a steady trend for higher
rates within the economy. Higher balances for time deposits and higher
effective interest rates on interest-bearing liabilities over the past three
years contributed to the decline in net interest margin.
Beginning in mid-1993 and continuing throughout 1994, the economy steadily
improved and interest rates increased. During this period of economic
expansion, the Federal Reserve was proactive in attempting to counteract the
inflationary pressure and raised short-term interest rates seven times from 3%
to 6% with the last increase in February, 1995. Since the second quarter of
1995, as the economy displayed signs of softening and inflation remained at
acceptable levels, the Federal Reserve continued its proactive posture and
attempted to stimulate the economy by lowering short-term interest rates 25
basis points in each of July and December, 1995 and January, 1996.
RESERVE AND PROVISION FOR POSSIBLE LOAN LOSSES
Loan losses cannot be predicted with certainty. Consequently, the
Corporation adheres to a loan review process focused on the quality of the loan
portfolio in order to evaluate the adequacy of the reserve for possible loan
losses. In assessing the adequacy of the reserve, management relies
predominately on its ongoing review of the loan portfolio and whether any loans
should be charged-off. In evaluating the reserve, consideration is given to
current loan volume; historical net loan loss experience; a migration analysis
within specific loan categories; the level and composition of non-accrual, past
due and renegotiated or reduced rate loans (troubled debt refinancing); the
condition of borrow-
18
<PAGE> 19
ers experiencing particular financial difficulties; current and anticipated
economic conditions; and an evaluation of each borrower's credit-worthiness.
Based on these factors, management determines the amount of the provision
which is needed to maintain an adequate reserve for possible loan losses.
The amount of the provision for possible loan losses, which is recorded
as a current expense, may be greater or less than the actual net charged-off
loans in any fiscal period.
The adequacy of the Corporation's reserve for possible loan losses is
evaluated monthly. A new software package was installed in the third quarter of
1996 and is used to analyze coverage by specific loan categories. Much of the
loan growth experienced over the past few years has occurred in residential
real estate mortgage loans. The average balance for residential real estate
mortgage loans was $165.5 million for 1996, $108.0 million for 1995 and $80.8
million for 1994. Total net charge-offs of mortgage loans in the past five
years amounted to $66,000 which all occurred in the period of 1992 through
1994. Due to the low level of losses, residential mortgage loans require a
lower reserve and allow for a greater portion of the reserve to be allocated to
indirect automobile loans.
TABLE 7. ANALYSIS OF THE RESERVE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $3,934 $ 3,865 $3,617 $3,273 $ 2,364
- -------------------------------------------------------------------------------------------------------
Loans Charged-Off:
Consumer Loans 1,889 588 414 284 169
Commercial, Financial and Agricultural Loans 312 215 329 102 27
Real Estate Mortgage Loans -- -- 10 25 55
- -------------------------------------------------------------------------------------------------------
Total Charge-Offs 2,201 803 753 411 251
- -------------------------------------------------------------------------------------------------------
Recoveries:
Consumer Loans 539 141 141 88 85
Commercial, Financial and Agricultural Loans 104 59 37 10 19
Real Estate Mortgage Loans -- -- -- 24 --
- -------------------------------------------------------------------------------------------------------
Total Recoveries 643 200 178 122 104
- -------------------------------------------------------------------------------------------------------
Net Charge-Offs 1,558 603 575 289 147
- -------------------------------------------------------------------------------------------------------
Provision Charged to Expense 3,792 672 534 392 595
Addition Due to Acquisition -- -- 289 241 461
- -------------------------------------------------------------------------------------------------------
Net Change in Reserve 2,234 69 248 344 909
- -------------------------------------------------------------------------------------------------------
Reserve for Possible Loan Losses at
December 31 $6,168 $ 3,934 $ 3,865 $ 3,617 $ 3,273
=======================================================================================================
Total Loans at End of Year $609,021 $438,883 $393,119 $335,498 $310,229
Average Total Loans 527,838 404,379 344,952 333,682 295,697
As a Percent of Year-End Loans:
Net Loan Charge-Offs .26% .14% .15% .09% .05%
Provision for Possible Loan Losses .62 .15 .14 .12 .19
Reserve Balance at Year-End 1.01 .90 .98 1.08 1.06
As a Percent of Average Total Loans:
Net Loan Charge-Offs .30 .15 .17 .09 .05
Provision for Possible Loan Losses .72 .17 .15 .12 .20
Average Reserve Balance .77 .98 1.03 1.10 .97
</TABLE>
TABLE 8. ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
(DOLLAR AMOUNTS IN THOUSANDS) RESERVE PERCENT RESERVE PERCENT RESERVE PERCENT RESERVE PERCENT RESERVE PERCENT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural Loans $1,894 30.7% $ 513 13.0% $ 677 17.5% $1,041 28.8% $ 1,126 34.4%
Real Estate Mortgage Loans 197 3.2 41 1.0 33 .9 162 4.5 206 6.3
Consumer Loans 3,259 52.8 832 21.2 490 12.7 375 10.3 298 9.1
Unallocated 818 13.3 2,548 64.8 2,665 68.9 2,039 56.4 1,643 50.2
- ------------------------------------------------------------------------------------------------------------------------
Total $6,168 100.0% $3,934 100.0% $3,865 100.0% $3,617 100.0% $ 3,273 100.0%
========================================================================================================================
</TABLE>
19
<PAGE> 20
Table 7 presents an analysis of the reserve for possible loan losses and
selected ratios for the five years ended December 31, 1996. The provision for
possible loan losses was $3,792,000, $672,000 and $534,000 for 1996, 1995 and
1994, respectively. Loan losses for the fourth quarter of 1996 and January and
February, 1997 were higher than anticipated. Management reevaluated the
provision and reserve for loan losses and recorded a provision for loan losses
of $2,374,000 in the fourth quarter of 1996. The ratio of the reserve for
possible loan losses to total loans outstanding at each year-end was 1.01% for
1996, .90% for 1995 and .98% for 1994.
Net charge-offs of loans amounted to $1,558,000 in 1996, $603,000 in 1995
and $575,000 in 1994. During the past five years, gross charge-offs of loans
totaled $4,419,000, while recoveries were $1,247,000 for a recovery ratio of
approximately 28.2%.
Net charge-offs of consumer loans were $1,350,000, $447,000 and $273,000
in 1996, 1995 and 1994, respectively. The percentage of net charge-offs for
consumer loans to total net charge-offs was 86.6% in 1996, 74.1% in 1995 and
47.5% in 1994. The increase in net charge-offs for consumer loans resulted
from greater volume of loans and certain non-recurring deviations in credit
underwriting standards that have been addressed.
Additional information relative to impairment of loans is presented in
Note 7 to the Notes to Consolidated Financial Statements.
Securities and Exchange Commission (SEC) disclosure guidelines require the
reserve for possible loan losses to be allocated to major loan categories.
Nevertheless, the entire reserve is available to cover losses from any loan
category. Table 8 presents the allocation of the reserve for possible loan
losses for the five years ended December 31, 1996.
In 1997, management currently projects gross charge-offs of loans to total
$1,805,000 with $1,625,000 projected for consumer loans and $180,000 projected
for commercial loans. No charge-offs are projected for mortgage loans in 1997.
The preceding statements of projected charge-offs for 1997 are forward looking,
and the Corporation's actual future net charge-offs and other related results
may differ from those currently projected. Such differences between currently
projected results and actual future results could be caused by a variety of
factors, including the economy; levels of unemployment; impact of significant
events within market areas served by the subsidiary banks, such as plant
closings, mergers and consolidations, downsizing and relocations; and other
pertinent factors, all of which are beyond the control of management.
NON-INTEREST INCOME
Non-interest income is comprised of trust department income, service
charges on deposit accounts, fees for providing other services to customers,
securities gains and other income. Total non-interest income was $7,577,000 in
1996, $6,315,000 in 1995 and $7,031,000 in 1994. An explanation of the major
components of total non-interest income is presented below.
Trust income amounted to $2,150,000 for 1996, $2,012,000 for 1995 and
$2,008,000 for 1994, an increase of $142,000 or 7.1% over the preceding period.
Trust income is derived from providing fiduciary, investment management,
custodial and related services to corporate, personal and institutional
clients. Fees are based on market value of assets administered, portfolio
purchases and sales, income collection transactions and other services
rendered. The increase from 1994 is attributed to a revised schedule of fees,
focus on maintaining profitable accounts, higher administrative fees based on
valuation of managed assets and new business. Income derived from administering
employee benefit plans for corporate customers improved due to a broader array
of products offered through a venture with a correspondent bank.
Service charges on deposit accounts totaled $3,258,000, $2,704,000 and
$2,276,000 for 1996, 1995 and 1994, respectively, an overall increase of
$982,000 or 43.1%. The steady increase resulted from a revised schedule of
service charges implemented in the second quarter 1995. In the first quarter
of 1996, a revision in fees for merchant customers to clear credit card
transactions improved earnings. Since mid-1995, the Corporation has attempted
to incorporate a cross-sales culture to generate multi-relationship accounts
for each customer and offered additional product features, such as using
balances in other deposit categories, to reduce or eliminate checking account
service charges. Interest rates affect the earnings credit allowance factor
used to compute service charges on business checking accounts. The earnings
credit factor used for the month of December for 1996, 1995 and 1994 was 5.04%,
5.16% and 5.69%, respectively. Periods with a lower earnings credit factor
will generate greater service charges on business accounts with the same level
of balances and account activity. Conversely, periods with a higher earnings
credit factor will generate lower service charges on business accounts with the
same level of balances and account activity.
20
<PAGE> 21
To meet liquidity requirements of the parent and subsidiary banks and to
implement strategies of asset-liability management, the Corporation sold
investment securities in each of the last three years. The subsidiary banks
have experienced considerable loan growth during 1994 through 1996 which
required funding above the source of funds provided by the increase in
deposits. Accordingly, securities sold from Available for Sale amounted to
$112.9 million in 1996, $13.0 million in 1995 and $23.5 million in 1994. Total
security gains booked in each of the last three years was $510,000, $82,000 and
$942,000, respectively.
Other operating income includes fees collected for providing other
services to customers and other miscellaneous income items. Total other
operating income was $1,659,000 in 1996, $1,517,000 in 1995 and $1,805,000 in
1994. Total residential mortgage loans sold in the secondary market in 1996
were $13.0 million compared to $11.0 million in 1995 and $19.8 million in 1994.
Gains on loans sold amounted to $36,000 in 1996, $66,000 in 1995 and $138,000
in 1994. Additional income recognized in 1996 from mortgage servicing rights
on mortgage loans sold was $122,000, the first year for applying this
accounting principle. Non-recurring income realized in 1996 was $140,000 for
recovery of expenses and settlements from prior years. There were no material
non-recurring income items booked in 1995. In 1994, the Corporation sold a
former bank facility which resulted in a gain of $224,000.
NON-INTEREST EXPENSES
Non-interest expenses consist of salaries, employee benefits, occupancy
and equipment costs, FDIC deposit insurance premium expenses, restructuring
charges and other operating expenses. These expenses totaled $29.2 million for
1996, $29.4 million for 1995 and $26.5 million for 1994.
The Corporation devotes considerable effort to the delivery of quality
service while controlling personnel expenses. The consolidated number of
full-time equivalent employees (FTE) at year-end 1996 was 401. The Corporation
had 387 FTE employees at year-end 1995 which reflected 38 open positions for an
authorized level of 425 FTE employees. The number of FTE employees at year-end
1994 was 434.
Salaries and wages, the largest single component of non-interest expenses,
amounted to $10,575,000 in 1996, an increase of $272,000 or 2.6% over the 1995
level of $10,303,000. Salaries increased $348,000 or 3.5% in 1995 over the
$9,955,000 posted in 1994. The increase in salaries and wages in 1996 and
1995 over the preceding years reflects hiring replacement staff at higher
salaries. A program to compensate employees at market rates was implemented in
1996 to be phased in over a period of four years in conjunction with normal
annual performance reviews. Those increases were partially offset by the
reduction in the number of FTE employees in 1996 and 1995.
Employee benefits include payroll related taxes, retirement plan
contributions and health care costs. These expenses were $2,453,000,
$2,650,000 and $2,674,000 for 1996, 1995 and 1994, respectively. The
Corporation's contribution for its Money Purchase Pension Plan and 401(k) Plan,
net of forfeitures, amounted to $686,000 in 1996, $773,000 in 1995 and $700,000
in 1994. Select-Flex benefit expenses, net of employees' co-pay, consists of
coverage for health and dental care, life insurance and long-term disability,
and amounted to $722,000, $791,000 and $815,000 for 1996, 1995 and 1994,
respectively. Payroll related taxes were $839,000 in 1996, $853,000 in 1995 and
$821,000 in 1994. The expense for service and interest costs for
post-retirement health care costs was $229,000 in 1996 compared to $242,000 in
1995 and $217,000 in 1994 which covered all active eligible employees hired
prior to April 1, 1993 and the retirees on that date. Other post-retirement
benefit costs recorded in 1996 and 1995 were $94,000 and $80,000. Additional
information relative to employee benefit plans and associated expenses is
presented in Note 12 of the Notes to Consolidated Financial Statements.
Net occupancy and furniture and equipment expenses were $5,308,000 in 1996
compared to $5,028,000 in 1995 and $4,682,000 in 1994. Depreciation and
amortization expenses for premises, furniture and equipment totaled $2,157,000
in 1996, $1,925,000 in 1995 and $1,902,000 in 1994. Depreciation expense on
computer hardware and software was $431,000, $438,000 and $319,000 for 1996,
1995 and 1994, respectively. The increase in depreciation in 1996 reflects
$335,000 to accelerate amortization of leasehold improvements which was
partially offset by lower depreciation resulting from closing six offices.
Additional expenditures were incurred in the past three years to refurbish
facilities as well as upgrade furniture and equipment to enhance productivity
and efficiency.
Regulatory actions by the FDIC can have a material effect on the deposit
insurance premiums paid by the Corporation's subsidiary banks and on the
Corporation's consolidated non-interest expenses. See Item 1. "Business -
Supervision and Regulation," of this Form 10-K Report. The FDIC adopted a
risk-based assessment system, effective January 1, 1994, under which each
commercial bank is assigned to one of nine categories, based upon three capital
21
<PAGE> 22
categories and three categories of perceived risk. In May, 1995, the balance
of BIF exceeded the 1.25% reserve ratio which resulted in the FDIC lowering the
deposit insurance assessment rates to 4 basis points for well capitalized banks
displaying little risk to 27 basis points for less than adequately capitalized
banks displaying high risk. Effective January 1, 1996, because the BIF
continued to exceed the 1.25% reserve ratio, the FDIC lowered the insurance
assessment rate to zero for the most highly rated well capitalized banks to 27
basis points for less than adequately capitalized banks displaying high risk.
However, such banks were required to pay a minimum annual fee of $2,000 with a
consolidated total of $6,000 recorded for 1996. For the fourth quarter 1995,
the subsidiary banks' FDIC insurance assessment rate was reduced which lowered
the FDIC insurance premium expense by $272,000 for October - December, 1995.
The amount of the BIF in excess of the 1.25% reserve ratio was refunded to all
insured banks which resulted in a refund of $350,000 recorded in September,
1995 as a reduction to FDIC premium expense. FDIC insurance premium expense
which is reported as a separate line item on the income statement, totaled
$6,000 in 1996, $685,000 in 1995 and $1,266,000 in 1994. The remaining
variation in FDIC insurance premium expense has a direct correlation to the
level of total deposits. In 1996, the FDIC announced a special assessment
effective January 1, 1997, to service the debt on the Financing
Corporation (FICO) bonds of 1.3 basis points on deposits which is not tied to
the FDIC risk classification. Significant changes in the deposit insurance
assessment rate imposed by the FDIC could have a material effect on the
earnings of the Corporation such as the experience in 1995 and 1996.
During the second quarter of 1996, the Corporation recorded a
restructuring charge of $1,102,000 which resulted primarily from costs
associated with closing eight financial centers. At the time of recording the
1996 restructuring charge, it was anticipated that the restructuring charge
would be recovered by the Corporation through lower operating costs over a 2-3
year period.
During 1995, the Corporation recorded a restructuring charge of
$2,278,000. A total of 39 employees, each of whose combined age and years of
service was 70 or more, accepted early retirement which resulted in an expense
of $1,604,000 for severance salaries, benefits and post-retirement health care.
A write-down of the excess purchase price over assets acquired of $674,000 was
taken as a restructuring charge in the fourth quarter 1995 which resulted from
the First State Bank of Charlevoix and Republic Bank acquisitions. (See Item 1.
"Business - General," of this Form 10-K Report.)
Other operating expenses amounted to $9,708,000 in 1996, $8,439,000 in
1995 and $7,945,000 in 1994. The increase in these expenses reflects increased
operating costs for expanded volumes of business and introduction of new
customer products. For example, expenses with a material increase in 1996 and
1995 over the preceding years included marketing and public relations of
$28,000 and $132,000; stationary and supplies of $108,000 in 1996; postage and
courier services of $62,000 and $99,000; professional services of $67,000 in
1996; internal audit fees of $254,000 in 1996; employee relations and hiring
expense with a decrease of $13,000 in 1996 after an increase of $116,000 in
1995; and loan expenses based on loan volume increased $103,000 in 1996 over
1995. In 1995, internal messengers and the internal audit function were
out-sourced and the resulting increase in fees was offset by a reduction in
other expenses such as salaries, employee benefits, equipment depreciation and
vehicle operating expense. In 1996, the Corporation recorded an expense to
settle a lawsuit for $111,000 and an additional expense of $400,000 to
establish a contingency reserve for another lawsuit pending a decision by the
Michigan Court of Appeals. (See Item 3. "Legal Proceedings," of this Form 10-K
Report.)
PROVISION FOR FEDERAL INCOME TAX
The provision for Federal income tax in 1996 was $2,137,000 compared to
$2,152,000 in 1995 and $2,987,000 in 1994. The variation in the provision in
1996 from 1995 and in 1995 from 1994 resulted from a movement in pre-Federal
tax earnings, the level of tax exempt income and the tax effect of the goodwill
amortization for CB North. The Corporation's effective federal tax rate which
is the percent of the Federal tax provision to pre-Federal tax earnings was
29.2% for 1996, 31.8% for 1995 and 31.2% for 1994. Additional information
relative to the various components of the Federal income tax provision is
presented in greater detail in Note 14 of the Notes to Consolidated Financial
Statements.
The Corporation, like other depository institutions, is required to
maintain a sizeable non-earning reserve balance at the Federal Reserve Bank.
The average reserves, excluding vault cash, were $3,754,000 in 1996, $3,434,000
in 1995 and $4,459,000 in 1994. The average yield on earning assets was 8.18%,
8.11% and 7.61% for 1996, 1995 and 1994, respectively. The amount of income
lost on these required reserves for each year before Federal income tax was
22
<PAGE> 23
approximately $307,100, $278,500 and $339,300 for 1996, 1995 and 1994. This
was equivalent to $.08, $.07 and $.08 per share after taxes for 1996, 1995 and
1994, computed using the effective tax rate for each year. The lost income
actually represents an indirect tax on the Corporation's shareholders since
almost all of the net earnings of the Federal Reserve System are remitted to
the U.S. Treasury.
ANALYSIS OF BALANCE SHEET AND IMPACT UPON OPERATING RESULTS
A summary of the amount and percent of change in the components of the
consolidated average balance sheet in 1996, 1995 and 1994 is presented in Table
3.
MONEY MARKET ASSETS
The average balance of Money Market Assets was $5.2 million in 1996 versus
$10.1 million in 1995 and $10.4 million in 1994. Additional information
relative to the average balance and effective yield for Money Market Assets is
presented in Tables 3 and 5. Table 6 provides additional information relative
to the effect that changes in volume and rates had on the income from Money
Market Assets.
SECURITIES
The Corporation adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" in January, 1994. SFAS No. 115 requires: (1)
debt securities that the Corporation has the positive intent and ability to
hold to maturity are to be classified as "Investment Securities Held to
Maturity" and reported at amortized cost; (2) debt and equity securities that
are purchased and held principally for the purpose of selling in the near term
are to be classified as "Trading Account Securities" and reported at fair
value, with unrealized gains and losses included in earnings; and (3) debt and
equity securities not classified as "Held to Maturity" or "Trading Account" are
to be classified as "Securities Available for Sale" and reported at fair value.
Fair value adjustments for Securities Available for Sale are excluded from
earnings and reported in a separate component of shareholders' equity, net of
tax.
In January 1994, the Corporation transferred all debt securities with a
maturity of less than two years and all equity securities to Available for
Sale. The reason the Corporation transferred these securities to Available for
Sale was to provide flexibility to meet liquidity needs, enhance yield and
implement strategies of the Asset-Liability Management Committee. The
Corporation has never operated a trading account or acquired securities for
trading purposes. As securities were acquired after the adoption of SFAS No.
115, a determination was made to classify such securities as either Available
for Sale or Held to Maturity.
On November 15, 1995, the Financial Accounting Standards Board issued
implementation guidance to SFAS No. 115 that allowed a one-time opportunity
through December 31, 1995 to reclassify securities as Available for Sale from
the Held to Maturity classification. Effective December 19, 1995, the
Corporation transferred all securities from Held to Maturity of $145.1 million
to Available for Sale.
Prior to the adoption of SFAS No. 115, the Corporation had classified
certain securities as Held for Sale. Due to the significant changes in
accounting principles for securities classified as Available for Sale and Held
for Sale, the securities classified as Held for Sale in 1993 were reclassified
in 1994 as Held to Maturity. Table 9 presents the Securities Available for
Sale and Held to Maturity for the five years ended December 31, 1996.
The average balance for the total securities portfolio consisting of
Available for Sale (fair value) and Held to Maturity (book basis) was $163.2
million in 1996, $216.9 million in 1995 and $252.5 million in 1994, a decline
of $89.3 million over the intervening period which was used to fund the loan
growth. As of December 31, 1996 and 1995, U.S. Treasury Securities Available
for Sale were $52.5 million and $161.4 million, a decline of $108.9 million.
U.S. Government Agencies Available for Sale were $74.9 million and $39.0
million at December 31, 1996 and 1995, an increase of $35.9 million. The
increase in U.S. Government Agencies resulted from a strategy of
asset-liability management to increase the holdings of U.S. Government Agency
Securities which offered higher interest rates than U.S. Treasury Securities.
Securities issued by States and Political Subdivisions Available for Sale had
an average balance of $10.5 million in 1996 compared to $385,000 in 1995, due
to the reclassification from Held to Maturity in mid-December, 1995. At
December 31, 1996 and 1995, Securities of States and Political Subdivisions
Available for Sale amounted to $9.5 million and $11.2 million. Some holdings
for other Securities Available for Sale which consisted primarily of common
stocks of Michigan banks and Michigan bank holding companies were sold in 1995
with the remainder sold in 1996. The gains recorded from these transactions
amounted to $97,000 in 1996 and $18,000 in
23
<PAGE> 24
1995. The average balance of Other Securities Available for Sale was $122,000
in 1996 compared to $192,000 in 1995 and $2,194,000 in 1994.
The average balance for total Securities Held to Maturity amounted to
$141.2 million in 1995 and $148.9 million in 1994. U.S. Treasury and
Government Agency Securities Held to Maturity had an average balance of $130.4
million in 1995 and $133.6 million in 1994. The average balance for Securities
of State and Political Subdivisions was $10.9 million in 1995 and $15.3 million
in 1994.
The combined 1995 average balance for U.S. Treasury and Government Agency
Securities Available for Sale was $152.5 million which represents 93.5% of the
total securities portfolio. As a result of the significant holdings of U.S.
Treasury and Government Agency Securities, the Corporation maintains a high
quality of investment securities that are available to meet liquidity needs.
The maturity distribution and weighted average yields on a tax equivalent
basis of the major components of Securities Available for Sale, excluding
unrealized gains or losses, at December 31, 1996 are shown in Table 10.
Additional information relative to the average balance and effective yield
for the securities portfolio is presented in Tables 2, 3 and 5. Table 6
presents an analysis of the effect changes in volume and rates had on the
earnings of the securities portfolio. Further analysis of the securities
portfolio and the unrealized gains and losses is presented in Note 4 of the
Notes to Consolidated Financial Statements. The unrealized gains and losses of
the securities portfolio are not expected to cause a material change in future
income or securities yields.
TABLE 9. SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE AS OF DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury $ 52,525 $161,390 $ 59,645 -- --
U. S. Government Agencies 74,900 39,008 29,773 -- --
States and Political Subdivisions 9,462 11,186 -- -- --
Other -- 161 197 -- --
- --------------------------------------------------------------------------------------------------
Total Securities Available for Sale $136,887 $211,745 $ 89,615 -- --
==================================================================================================
<CAPTION>
SECURITIES HELD TO MATURITY* As of December 31,
(In Thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
U.S. Treasury -- -- $132,316 $195,659 $157,515
U. S. Government Agencies -- -- 3,511 40,751 40,288
States and Political Subdivisions -- -- 12,159 20,948 49,941
Other -- -- -- 1,897 3,622
- --------------------------------------------------------------------------------------------------
Total Securities Held to Maturity -- -- $147,986 $259,255 $251,366
==================================================================================================
</TABLE>
* Amount classified as Held for Sale in 1992 and 1993 were reclassified as Held
to Maturity in 1994. Securities previously classified as Held to Maturity were
reclassified as Available for Sale in December 1995.
TABLE 10. WEIGHTED AVERAGE YIELD OF SECURITIES AVAILABLE FOR SALE
The maturity distribution and weighted average yields on a tax equivalent
basis of the three major components of the Securities Available for Sale,
excluding unrealized gains or losses, at December 31, 1996 are shown below.
<TABLE>
<CAPTION>
U.S. GOVERNMENT STATES AND POLITICAL
U.S. TREASURY AGENCIES SUBDIVISIONS
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maturities:
Within 1 Year $11,225 7.33% $ 2,011 8.32% $2,909 8.97%
After 1 through 5 Years 40,543 5.56 32,005 6.16 5,992 9.30
After 5 through 10 Years 995 6.35 41,931 6.54 296 7.35
- ------------------------------------------------------------------------------------------
Total $52,763 5.95% $75,947 6.43% $9,197 9.13%
==========================================================================================
</TABLE>
* The weighted average yield has been adjusted to a tax equivalent basis using
a Federal income tax rate of 34 percent without consideration for the corporate
preference disallowance under Internal Revenue Code Section 291.
24
<PAGE> 25
TABLE 11. LOAN PORTFOLIO
Loans outstanding, at the end of each of the five years ended 1992 through
1996, are shown in the following table according to type of loan.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural Loans $195,850 32.2% $163,234 37.2% $166,331 42.3% $126,278 37.6% $ 85,907 27.7%
Tax-Exempt Loans 15,972 2.6 14,263 3.2 14,674 3.7 9,750 2.9 10,153 3.3
Real Estate Construction
Loans 33,322 5.5 19,347 4.4 4,286 1.1 6,642 2.0 8,057 2.6
Real Estate Mortgage
Loans 192,516 31.6 121,361 27.7 99,691 25.4 96,190 28.7 126,400 40.7
Consumer Loans, Net
of Unearned Interest 171,361 28.1 120,678 27.5 108,137 27.5 96,638 28.8 79,712 25.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total $609,021 100.0% $438,883 100.0% $393,119 100.0% $335,498 100.0% $310,229 100.0%
=================================================================================================================================
</TABLE>
TABLE 12. CONCENTRATION OF LOANS BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
DECEMBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT PERCENT
- -----------------------------------------------------------
<S> <C> <C>
Industry Segment:
Residential Real Estate $211,701 34.8%
Consumer 171,361 28.1
Finance, Insurance and Real Estate 65,132 10.7
Wholesale and Retail 46,124 7.6
Services/Professional/Business/Health 54,326 8.9
Manufacturing 28,573 4.7
Transportation 4,488 .7
Schools and Municipals 15,972 2.6
Other 11,344 1.9
- -----------------------------------------------------------
Total $609,021 100.0%
===========================================================
</TABLE>
LOANS
Total loans outstanding at year end were $609.0 million for 1996 compared
to $438.9 million for 1995 and $393.1 million for 1994, an increase overall of
$215.9 million or 54.9%. Table 11 presents total loans outstanding for each
major loan category for the five years ended December 31, 1996. Average total
loans outstanding amounted to $527.8 million for 1996, $404.4 million for 1995
and $345.0 million for 1994.
Consumer loans were $171.4 million, $120.7 million and $108.1 million as
of December 31, 1996, 1995 and 1994, respectively, an increase of $63.3 million
or $58.6% over the intervening period of 1994 - 1996. The average balance for
consumer loans amounted to $150.4 million for 1996, $110.7 million for 1995 and
$101.5 million for 1994, an increase of $48.9 million or 48.2% over the past
three years. The increase is a direct result of strategies developed over the
past two years to increase consumer loan volume. During 1995 and 1996, new
products and programs were introduced to specifically attract home equity loans
which increased $3.5 million in 1996. In addition, the Corporation adopted an
aggressive campaign to penetrate the indirect automobile financing market.
Loan growth of approximately $50.0 million was realized in 1996. The loan
growth from indirect automobile financing provides increased profit
opportunities which are accompanied by a potential for increased delinquencies
and charge-offs such as those that occurred in 1996. During 1996, two of the
Corporation's subsidiaries experienced problems in generating targeted loan
growth and adhering to underwriting standards for consumer loans. Management
has initiated steps to balance consumer loan growth with higher credit
standards by mandating continued adherence to strict underwriting standards.
Operational efficiencies were initiated in 1996 through a centralized loan
services department, installation of an automated credit scoring system to
assist with lending decisions, aggressive adjustment practices and adherence to
underwriting standards.
Commercial loans outstanding as of December 31, 1996, 1995 and 1994 were
$217.0 million, $177.9 million and $167.9 million, respectively, an overall
increase of $49.1 million or 29.2%. Average commercial loans were $197.3
mil-
25
<PAGE> 26
lion for 1996, $172.5 million for 1995 and $152.3 million in 1994, a growth
of $45.0 million or 29.5% over the intervening period. The increase in
commercial loans was a result of loan demand by existing customers and new
business relationships.
Residential real estate mortgage loans recorded significant increases in
1996 and outstandings for the three years ended December 31, 1996 were $204.7
million, $126.0 million and $102.4 million, respectively, an increase of $102.3
or 99.9% over the past three years. Average residential mortgage loans
outstanding were $165.5 million, $108.0 million and $80.8 million for 1996,
1995 and 1994, a growth of $84.7 million or 104.8%. In the period of 1994
through 1996, the Corporation retained originations of variable rate and 15
year fixed rate residential mortgage loans as a strategy of asset-liability
management. Total residential mortgage loans sold amounted to $13.0 million in
1996, $11.0 million in 1995 and $19.8 million in 1994 which resulted in gains
of $158,000 in 1996, $66,000 in 1995 and $138,000 in 1994. The gain in 1996
includes $122,000 of originated mortgage servicing rights which prior to the
adoption of FASB No. 122 were not recognized at the time of sale. Gains on
loans sold are included with the amount reported as other income.
Additional information relative to the average balance and effective yield
for the major categories of the loan portfolio is presented in Tables 2, 3 and
5. Table 6 presents an analysis of the effect changes in volume and rates had
on the earnings of the various loan categories. The maturity distribution and
interest rate sensitivity for various segments of the loan portfolio is
presented in Table 13.
TABLE 13. MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOAN PORTFOLIO
Table 13 presents the remaining maturity distribution and interest rate
sensitivity for commercial loans, tax exempt loans and real estate construction
loans, according to scheduled repayments of principal.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
DUE IN
1 YEAR 1 TO 5 OVER 5
(IN THOUSANDS) OR LESS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, Financial and Agricultural Loans $117,150 $54,717 $23,983 $195,850
Tax-Exempt Loans 7,160 2,174 6,638 15,972
Real Estate Construction Loans 31,033 232 2,057 33,322
- --------------------------------------------------------------------------------------
Total $155,343 $57,123 $32,678 $245,144
======================================================================================
Variable Interest Rates:
Commercial, Financial and Agricultural Loans $16,762 $ -- $ 16,762
Tax-Exempt Loans 73 4,243 4,316
Real Estate Construction Loans 232 287 519
- --------------------------------------------------------------------------------------
Total $17,067 $ 4,530 $ 21,597
======================================================================================
Fixed Interest Rates:
Commercial, Financial and Agricultural Loans $37,955 $23,983 $ 61,938
Tax-Exempt Loans 2,101 2,395 4,496
Real Estate Construction Loans -- 1,770 1,770
- --------------------------------------------------------------------------------------
Total $40,056 $28,148 $ 68,204
======================================================================================
</TABLE>
NON-PERFORMING LOANS AND OTHER ASSETS
The Corporation's financial statements are prepared on the accrual basis
of accounting except loans which have been placed in a non-accrual status.
Restructured loans are those for which concessions, including reduction of
interest rates or extended repayment terms, have been granted due to the
borrower's weakened financial condition. Interest on restructured loans is
accrued using the restructured interest rates.
Commercial loans are placed in a non-accrual status when management has
serious doubts regarding the collection of principal and interest or when
payment of interest or principal is 90 days or more past due unless the
collection of principal and interest is not considered in doubt. Amounts
received on non-accrual commercial loans may be
26
<PAGE> 27
recorded as interest or applied against principal depending upon management's
estimation of the collection of the loan. Consumer loans are placed in a
non-accrual status when the loan is 90 days past due, upon repossession
of the collateral or when management has serious doubts regarding the
collection of principal and interest. Real estate mortgage loans are placed
in a non-accrual status when foreclosure proceedings have commenced.
The aggregate amount of non-performing loans and other assets for the five
years ended December 31, 1996, is presented in Table 14. Non-performing loans
comprise (1) loans accounted for on a non-accrual basis, (2) loans
contractually past due 90 days or more as to interest or principal payments 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. For purposes of this summary, loans renewed on
market terms existing at the time of renewal are not considered renegotiated
loans. Other non-performing assets are carried at the lower of cost or fair
value and consist of other real estate acquired through loan foreclosures or
other workout situations and other assets acquired through repossession.
TABLE 14. ANALYSIS OF NON-PERFORMING LOANS AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Non-accrual $1,993 63.6% $1,591 75.0% $1,063 61.7% $1,647 61.7% $ 879 46.3%
Past Due 512 16.3 417 19.7 324 18.8 488 18.3 419 22.1
Renegotiated -- -- 8 .3 -- -- 84 3.1 -- --
- ---------------------------------------------------------------------------------------------------------------------
Subtotal Loans 2,505 79.9 2,016 95.0 1,387 80.5 2,219 83.1 1,298 68.4
Other Real Estate Owned 438 14.0 -- -- 324 18.8 452 16.9 548 28.9
Other Assets Acquired
by Repossession 190 6.1 106 5.0 13 .7 -- -- 53 2.7
- ---------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $3,133 100.0% $2,122 100.0% $1,724 100.0% $2,671 100.0% $1,899 100.0%
=====================================================================================================================
Non-performing Assets
As a Percent of:
Total Loans, Gross .51% .48% .44% .80% .61%
Total Assets .38 .29 .24 .40 .29
Equity Capital Plus
Reserve for Possible
Loan Losses 3.78 2.61 2.21 3.56 2.69
</TABLE>
The following table presents the changes in the balance of other
non-performing assets for the five years ended December 31, 1996.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 106 $ 337 $ 452 $ 601 $ 181
Additional Amount Due to Acquisition -- -- -- -- 854
Additions 2,609 110 68 337 522
Disposition and Reductions (2,087) (341) (183) (486) (956)
- -----------------------------------------------------------------------------
Balance at End of Year $ 628 $ 106 $ 337 $ 452 $ 601
=============================================================================
</TABLE>
27
<PAGE> 28
TABLE 15. INTEREST LOST ON NON-ACCRUAL LOANS
Table 15 shows the effect that non-accrual loans had upon interest revenue
for the five years ended as of December 31, 1996. There has been no loss of
revenue on past due or renegotiated loans for the years presented in the table.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross amount of interest that would have
been recorded at original rate $ 188 $ 151 $ 77 $ 147 $ 106
Interest that was reflected in revenue (95) (62) (19) (63) (31)
- --------------------------------------------------------------------------------
Reduction of Interest Income $ 93 $ 89 $ 58 $ 84 $ 75
================================================================================
Per Share (after tax effect of 34%) $ .02 $ .02 $ .01 $ .02 $ .02
</TABLE>
POTENTIAL PROBLEM LOANS
In addition to the loans classified as non-performing, there are other
potential problem loans of $341,000 at December 31, 1996, that management is
closely monitoring the borrower's ability to comply with repayment terms, but
existing conditions did not warrant either a classification as non-accrual or
partial charge-off.
CAPITAL EXPENDITURES
The Corporation had capitalized expenditures for banking premises and
leasehold improvements of $496,000 in 1996, $472,000 in 1995 and $722,000 in
1994. In 1996, City Bank spent $326,000 to remodel its corporate headquarters
in order to lease 10,700 square feet (57%) of the building. A portion of the
remodeling costs will be recaptured over the five year lease. In 1995, City
Bank relocated its corporate headquarters and spent $414,000 in improvements to
the building. The Republic Bank acquisition added $477,000 to bank premises in
1994. The remaining amounts in 1994 through 1996 were made to enhance customer
services, efficiency and functionality of bank facilities.
Capitalized furniture and equipment expenditures amounted to $870,000 in
1996, $748,000 in 1995 and $1,317,000 in 1994. Major acquisitions in 1996 for
furniture and equipment included $326,000 for computer mainframe hardware and
software, $177,000 for personal computer equipment and software as well as
$247,000 for new departments, relocating other departments and one branch
facility.
In 1995, major acquisitions were made of $131,000 for personal computers,
$136,000 to upgrade the mainframe and $152,000 for City Bank to refurbish its
new corporate headquarters. Other furniture and equipment expenditures were
made in each of the last three years to replace equipment or add new equipment
to improve productivity. The Republic Bank acquisition in 1994 provided
$182,000 in furniture and equipment. Other major acquisitions in 1994 included
$491,000 for new computer mainframe equipment and software and $227,000 for
ATM's. The remaining $417,000 of capitalized additions to furniture and
equipment in 1994 was incurred by the subsidiary banks that operated 45
financial center offices.
28
<PAGE> 29
DEPOSITS
Table 16 presents the average balance for the major deposit categories and
the effective interest rate paid for the five years ended December 31, 1996.
TABLE 16. AVERAGE DEPOSITS AND EFFECTIVE INTEREST RATES
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996 1995 1994 1993 1992
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
(DOLLAR AMOUNTS IN THOUSANDS) BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and Other
Non-Interest Bearing
Deposits $106,214 -- % $100,968 -- % $101,605 -- % $ 99,741 -- % $ 82,724 -- %
Interest-Bearing Demand
Deposits 131,712 2.11 151,943 2.57 159,858 2.56 163,794 2.57 143,904 3.32
Savings Deposits 128,704 2.91 124,132 2.64 135,360 2.45 136,436 2.65 116,786 3.44
Negotiated Rate Time
Deposits 43,563 5.56 25,715 5.75 15,598 4.21 10,583 3.25 12,984 3.84
Other Time Deposits 250,380 5.67 197,631 5.33 166,291 4.25 174,319 4.33 174,995 5.33
- -----------------------------------------------------------------------------------------------------------------------------------
Total $660,573 $600,389 $578,712 $584,873 $531,393
===================================================================================================================================
</TABLE>
Total deposits for the three years ended December 31, 1996 were $735.8
million, $622.5 million and $620.6 million, respectively, an increase of $115.2
million or 18.6% over the three year period. Average total deposits
outstanding were $660.6 million in 1996 compared to $600.4 million in 1995 and
$578.7 million in 1994, a growth of $81.9 million or 14.2% overall. In 1996,
the Corporation developed strategies to attract deposits from its primary
markets. Special certificate of deposit products with maturities of 10, 20, 30
and 40 months were successful in obtaining new deposits. Existing customers
also took advantage of the higher rates on these special products and
transferred funds from other deposit categories. During 1995, the Corporation
developed a marketing campaign to introduce new retail tiered interest rate
checking and savings products which were also successful in attracting
additional balances. Simultaneously, the Corporation introduced strategies to
improve its multi-account relationship with existing customers.
Non-interest-bearing demand deposits recorded an average balance
outstanding of $106.2 million, $101.0 million and $101.6 million for 1996, 1995
and 1994, respectively. As a percentage of average total deposits, the
non-interest-bearing deposits were 16.1%, 16.8% and 17.6% for 1996, 1995 and
1994.
Interest-bearing demand deposits had an average balance of $131.7 million,
$151.9 million and $159.9 million for 1996, 1995 and 1994. Average savings
accounts amounted to $128.7 million in 1996 compared to $124.1 million in 1995
and $135.4 million in 1994. The combined reduction for these two deposit
products over the past 3 years of $34.8 million or 11.8% resulted from
depositors shifting some funds to the special certificate of deposits with
higher interest rates. Effective interest rates paid on interest-bearing
demand deposits were 2.11%, 2.57% and 2.56% for 1996, 1995 and 1994,
respectively, which reflects the effect of converting these deposits to a
tiered interest rate product. Savings accounts recorded effective interest
rates paid of 2.91% in 1996, 2.64% in 1995 and 2.45% in 1994 which also
reflects converting these accounts to a tiered interest rate product.
Average negotiated rate time deposits were $43.6 million for 1996, $25.7
million for 1995 and $15.6 million for 1994. Effective interest rates paid
amounted to 5.56% for 1996, 5.75% for 1995 and 4.21% for 1994, an increase of
135 basis points over the three year period. The Corporation attracted
additional deposits to assist with funding the loan growth, especially from the
public sector, by aggressively pricing its products.
The average balance for all other time deposits totaled $250.4 million for
1996, $197.6 million for 1995 and $166.3 million for 1994, an improvement of
$84.1 million or 50.6%. The effective interest rates paid on other time
deposits were 5.67%, 5.33% and 4.25% for 1996, 1995 and 1994, respectively, an
increase overall of 142 basis points.
29
<PAGE> 30
The maturity schedule for time deposits of $100,000 or more outstanding as
of December 31, 1996 is reported in Table 17. Additional information relative
to the effect that changes in volume and rates had on interest expense for the
various deposit categories is presented in Table 6.
TABLE 17. MATURITIES OF CONSOLIDATED TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996
- ----------------------------------------------------
<S> <C>
Amount Maturing In:
Three months or less $ 79,595
Three to six months 17,188
Six to twelve months 13,619
Over twelve months 12,373
- ----------------------------------------------------
Total $122,775
====================================================
</TABLE>
SHORT-TERM LIABILITIES
Short-term interest-bearing liabilities consists of Federal Funds
Purchased and Demand Notes Issued to the U.S. Treasury. The average balance
for these short-term interest-bearing liabilities was $9.0 million in 1996
compared to $7.0 million in 1995 and $4.4 million in 1994. Tables 2, 3 and 5
provide information relative to the average balance and effective interest rate
for these short-term liabilities. Table 6 reports the effect that changes in
volume and rates had on the interest expense for these short-term liabilities.
The effective interest rates paid on these short-term liabilities were 6.02%,
6.28% and 5.23% for 1996, 1995 and 1994.
RATE SENSITIVITY ANALYSIS
The relationship between earning assets and liabilities considered to be
interest-sensitive within given maturity ranges is called the asset or
liability funding gap depending on whether such interest-sensitive assets
exceed or are exceeded by interest-sensitive liabilities. The magnitude of the
funding gap in the various calendar periods provides a general indication of
the extent to which future earnings, primarily net interest income, may be
affected by interest rate changes. At December 31, 1996, total earning assets
exceeded interest-bearing liabilities by $125.6 million. These assets were
funded by non-interest-bearing demand deposit accounts and equity capital.
Table 18 summarizes the rate sensitivity analysis of earning assets and
interest-bearing liabilities.
30
<PAGE> 31
TABLE 18. RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
1-90 91-180 181-365 1-5 OVER 5
(IN THOUSANDS) DAYS DAYS DAYS YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer Loans $ 34,030 $ 9,739 $ 19,035 $ 96,882 $ 11,675 $171,361
Commercial Loans 98,767 9,269 6,470 15,870 4,913 135,289
Commercial Real Estate Loans 52,597 2,880 4,285 20,425 17,483 97,670
Mortgage Loans 13,007 7,695 18,777 83,785 81,437 204,701
- -------------------------------------------------------------------------------------------------------------
Total Loans 198,401 29,583 48,567 216,962 115,508 609,021
- -------------------------------------------------------------------------------------------------------------
Securities Available for Sale 4,204 3,006 8,936 78,538 43,222 137,907
- -------------------------------------------------------------------------------------------------------------
Money Market Assets 6,744 -- -- -- -- 6,744
- -------------------------------------------------------------------------------------------------------------
Earning Assets 209,349 32,589 57,503 295,500 158,730 753,672
- -------------------------------------------------------------------------------------------------------------
Interest -Bearing Demand Deposits 11,460 11,346 23,034 84,182 -- 130,022
Savings Deposits 6,239 6,177 12,539 99,815 -- 124,770
Time Deposits 133,443 54,676 67,751 113,328 966 370,164
Other Interest-Bearing Liabilities 866 480 960 594 180 3,081
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 152,008 72,679 104,284 297,919 1,146 628,037
- -------------------------------------------------------------------------------------------------------------
Net Asset (Liability)
Funding Gap 57,341 (40,090) (46,781) (2,419) 157,584 125,635
- -------------------------------------------------------------------------------------------------------------
Cumulative Net Asset (Liability)
Funding Gap $ 57,341 $ 17,251 $(29,530) $(31,949) $125,635 $ --
=============================================================================================================
</TABLE>
1. This table presents earning assets and interest-bearing liabilities by
maturity or the earliest repricing opportunity.
2. Unrealized gains and losses on Securities Available for Sale have been
excluded from this presentation.
3. Interest-bearing demand deposits and savings accounts were spread on the
basis of Interest Rate Risk (IRR) guidelines of the regulatory agencies
which allows a portion to be allocated to the 1-5 year maturity period
and the remaining amount allocated evenly to the 1-90 day,
91- 180 day, 181-273 day, and 274-365 day periods. The amounts for the
later two maturity periods were combined into the 181-365 day maturity
period for the presentation in the table.
LIQUIDITY
The Corporation manages liquidity at two levels, the parent organization
and its subsidiaries. The Corporation's primary source of funds are dividends
received from its subsidiary banks. The Corporation manages its liquidity
position to provide the cash necessary to pay any dividends declared to
shareholders and satisfy other operating requirements. The amount of dividends
paid to the Corporation by the subsidiary banks was $9,837,000 in 1996,
$6,763,000 in 1995 and $8,759,000 in 1994. The amount of dividends eligible
for distribution from subsidiary banks to the Corporation as of December 31,
1996 without regulatory approval, is approximately $15,900,000. Additional
information relative to the restriction of dividends is presented in Note 16 of
the Notes to Consolidated Financial Statements.
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits and
take advantage of interest rate market opportunities. Bank liquidity is
considered in terms of the nature and mix of the bank's sources and uses of
funds. For the Corporation, the major sources of liquidity are money market
assets, loan repayments and investments. The average balance for money market
assets amounted to $5.2 million in 1996, $10.1 million in 1995 and $10.4
million in 1994. At December 31, 1996, 1995 and 1994, these assets were $6.7
million, $1.8 million, and $14.8 million, respectively. Securities Available
for Sale totaled $136.9 million as of December 31, 1996.
Large deposits of $100,000 or more generally are more volatile and,
therefore, are closely monitored for volume and interest rate. In 1996,
certificates of deposit of $100,000 or more increased substantially to assist
with funding of loan growth. These deposits had balances of $122.8 million,
$36.7 million and $27.7 million at December 31, 1996, 1995 and 1994,
respectively. The level of commitments for loans and letters of credit issued
by the Corporation remains well within its capacity to fund them from available
resources, including a viable customer base served by the subsidiary banks.
The management of interest rates on earning assets and interest-bearing
liabilities is critical to the preservation of the Corporation's stability
during periods of fluctuating interest rates. Emphasis is placed on
maintaining a controlled rate sensitivity position to minimize risk due to
changing interest rates. A maturity schedule of the Securities
31
<PAGE> 32
Available for Sale as of December 31, 1996, presented in Note 4 of the Notes
to Consolidated Financial Statements, will assist in analyzing the Corporation's
liquidity position. Management believes that the Corporation has sufficient
liquidity to meet presently known cash flow requirements arising from ongoing
business transactions.
CAPITAL
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of customers, shareholders and bank
regulators. A strong capital position helps the Corporation withstand adverse
economic developments and take advantage of profitable business opportunities
when they arise. Capital provides the foundation for growth and expansion.
Shareholders' equity as of December 31, 1996, 1995 and 1994 was
$76,779,000, $77,458,000 and $74,009,000, respectively. Shareholders' equity
decreased $679,000 in 1996 after increases of $3,449,000 in 1995 and $2,686,000
in 1994, an aggregate increase of $5,456,000 or 7.6% from the $71,323,000 as of
January 1, 1994. Unrealized losses on Securities Available for Sale recorded
within capital as of December 31, 1996 and 1994 were $674,000 and $547,000. As
of December 31, 1995, unrealized gains of Securities Available for Sale
included in capital totaled $1,647,000.
The adequacy of capital can best be evaluated by comparing it to the
guidelines established by banking regulatory authorities. Those guidelines are
described under the caption "Supervision and Regulation, 1. Bank Holding
Companies" included in Item 1. "Business," of this Form 10-K Report and in Note
20 of the Notes to Consolidated Financial Statements appearing herein.
The Corporation does not have any outstanding preferred stock or
convertible debt instruments or subordinated notes. Therefore, the
Corporation's primary capital and total capital consists of shareholders'
equity and the reserve for possible loan losses. For the three years ended
December 31, 1996, the Corporation's average primary capital, as a percentage
of average assets, was 10.66%, 11.49% and 11.62%. These ratios exceed the
minimum standards established by the regulatory authorities. The Corporation's
total risk-based capital approximated 12.91% in 1996, 16.59% in 1995 and 16.05%
in 1994 which greatly exceeds the guidelines established by the regulatory
authorities. The Corporation's Tier 1 Capital Leverage Ratio (Tier 1 capital
to adjusted average total assets) was 8.32%, 9.44% and 9.37% as of December 31,
1996, 1995 and 1994 compared to minimum regulatory requirement of 3.0 - 5.0%.
Dividends declared by the Corporation totaled $3,362,000 in 1996 compared
to $3,361,000 in 1995 and 1994. The dividend payout ratio, which is dividends
declared divided by net income, was 67.17%, 72.82% and 50.97% for 1996, 1995
and 1994, respectively. The annual cash dividends per share were $1.20 for
each of the past three years. Since the dividend declared and cash dividends
per share remained the same in each of the last three years, the lower net
income in 1996 and 1995 resulted in a higher dividend payout ratio.
32
<PAGE> 33
TABLE 19. QUARTERLY DATA
<TABLE>
<CAPTION>
1996
FOURTH THIRD SECOND FIRST
(IN THOUSANDS EXCEPT PER SHARE DATA) TOTAL QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME $ 56,446 $ 15,324 $ 14,378 $ 13,657 $ 13,087
INTEREST EXPENSE 23,938 6,745 6,120 5,687 5,386
- ---------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 32,508 8,579 8,258 7,970 7,701
PROVISION FOR POSSIBLE LOAN LOSSES 3,792 2,374 573 580 265
SECURITY GAINS 510 19 114 12 365
TOTAL OTHER NON-INTEREST INCOME 7,067 1,840 1,747 1,767 1,713
TOTAL NON-INTEREST EXPENSES 29,152 7,524 6,811 8,095 6,722
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR FEDERAL INCOME TAX 7,141 540 2,735 1,074 2,792
PROVISION FOR FEDERAL INCOME TAX 2,137 115 840 306 876
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 5,004 $ 425 $ 1,895 $ 768 $ 1,916
=========================================================================================================
PER SHARE DATA:
NET INCOME $ 1.79 $ .15 $ .68 $ .28 $ .68
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,803,364 2,804,451 2,802,810 2,802,890 2,803,746
<CAPTION>
1995
FOURTH THIRD SECOND FIRST
(IN THOUSANDS EXCEPT PER SHARE DATA) TOTAL QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 50,492 $ 13,078 $ 12,567 $ 12,460 $ 12,387
Interest Expense 19,984 5,309 5,070 4,894 4,711
- ---------------------------------------------------------------------------------------------------------
Net Interest Income 30,508 7,769 7,497 7,566 7,676
Provision for Possible Loan Losses 672 164 165 164 179
Security Gains 82 52 1 17 12
Total Other Non-Interest Income 6,233 1,582 1,675 1,578 1,398
Total Non-Interest Expenses 29,383 7,971 7,587 6,842 6,983
- ---------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 6,768 1,268 1,421 2,155 1,924
Provision for Federal Income Tax 2,152 495 410 671 576
- ---------------------------------------------------------------------------------------------------------
Net Income $ 4,616 $ 773 $ 1,011 $ 1,484 $ 1,348
=========================================================================================================
Per Share Data:
Net Income $ 1.65 $ .28 $ .36 $ .53 $ .48
Average Number of Common Shares Outstanding 2,803,437 2,804,711 2,804,671 2,802,970 2,802,854
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. The following audited consolidated financial statements and report of
Independent Public Accountants are set forth in this Form 10-K on the
pages indicated:
Page Numbers
------------
Consolidated Balance Sheet 34
Consolidated Statement of Income 35
Consolidated Statement of Shareholders' Equity 36
Consolidated Statement of Cash Flows 37
Notes to Consolidated Financial Statements 38-48
Report of Independent Public Accountants 49
B. The following additional data is set forth in the following pages:
Report of Management 50
33
<PAGE> 34
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents:
Cash and Due from Banks $ 44,719 $ 37,068
Money Market Assets 6,744 1,790
- -------------------------------------------------------------------------------
Total Cash and Cash Equivalents 51,463 38,858
- -------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury 52,525 161,390
U.S. Government Agencies 74,900 39,008
States and Political Subdivisions 9,462 11,186
Other -- 161
- -------------------------------------------------------------------------------
Total Securities Available for Sale 136,887 211,745
- -------------------------------------------------------------------------------
Loans:
Consumer Loans 171,361 120,678
Commercial Loans 216,987 177,921
Tax Exempt Loans 15,972 14,263
Real Estate Mortgage Loans 204,701 126,021
- -------------------------------------------------------------------------------
Subtotal Loans 609,021 438,883
Reserve for Possible Loan Losses (6,168) (3,934)
- -------------------------------------------------------------------------------
Net Loans 602,853 434,949
- -------------------------------------------------------------------------------
Premises and Equipment, Net 13,351 15,350
Other Real Estate Owned 438 --
Income Earned Not Received 5,711 6,996
Goodwill and Premium on Core Deposits, Net 8,768 9,937
Other Assets 5,566 2,048
- -------------------------------------------------------------------------------
TOTAL ASSETS $825,037 $719,883
===============================================================================
LIABILITIES:
Deposits:
Demand Deposits $110,848 $110,459
Interest-Bearing Demand Deposits 130,022 141,591
Savings Deposits 124,770 130,254
Time Deposits 370,164 240,156
- -------------------------------------------------------------------------------
Total Deposits 735,804 622,460
- -------------------------------------------------------------------------------
Short-Term Interest-Bearing Liabilities 386 6,515
Note Payable and Capital Leases 2,694 4,611
Accrued Expenses 4,403 3,868
Dividend Payable 840 840
Other Liabilities 4,131 4,131
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 748,258 642,425
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred Stock-no par value, 100,000 shares
authorized, none outstanding -- --
Common Stock-$7.50 par value, 5,000,000 shares
authorized, 2,801,053 shares outstanding 21,008 21,008
Capital Surplus 8,073 8,073
Undivided Profits 48,372 46,730
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Tax Effect (674) 1,647
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 76,779 77,458
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $825,037 $719,883
===============================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
34
<PAGE> 35
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans:
Consumer Loans $ 13,808 $ 9,958 $ 8,947
Commercial Loans 17,653 16,179 12,338
Tax Exempt Loans 910 927 658
Real Estate Mortgage Loans 13,527 9,291 6,882
- --------------------------------------------------------------------------------------------------------
Total Interest and Fees on Loans 45,898 36,355 28,825
- --------------------------------------------------------------------------------------------------------
Interest on Securities Available for Sale:
U. S. Treasury 4,589 3,372 5,086
U. S. Government Agencies 5,089 2,065 2,629
States and Political Subdivisions 614 23 --
Other 5 5 79
- --------------------------------------------------------------------------------------------------------
Total Interest on Securities Available for Sale 10,297 5,465 7,794
- --------------------------------------------------------------------------------------------------------
Interest on Securities Held to Maturity -- 8,122 8,438
Interest on Money Market Assets 251 550 428
- --------------------------------------------------------------------------------------------------------
Total Interest Income 56,446 50,492 45,485
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Demand Deposits 2,785 3,907 4,095
Interest on Savings Deposits 3,751 3,272 3,314
Interest on Time Deposits 16,614 11,994 7,725
Interest on Other Liabilities 788 811 745
- --------------------------------------------------------------------------------------------------------
Total Interest Expense 23,938 19,984 15,879
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 32,508 30,508 29,606
Provision for Possible Loan Losses 3,792 672 534
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 28,716 29,836 29,072
- --------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Trust Income 2,150 2,012 2,008
Service Charges on Deposit Accounts 3,258 2,704 2,276
Fees for Other Services to Customers 1,220 1,381 1,200
Security Gains 510 82 942
Other Income 439 136 605
- --------------------------------------------------------------------------------------------------------
Total Non-Interest Income 7,577 6,315 7,031
- --------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and Wages 10,575 10,303 9,955
Employee Benefits 2,453 2,650 2,674
Occupancy Expenses 2,839 2,544 2,368
Furniture and Equipment Expenses 2,469 2,484 2,314
FDIC Insurance Premiums 6 685 1,266
Restructuring Charge 1,102 2,278 --
Other Operating Expenses 9,708 8,439 7,945
- --------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 29,152 29,383 26,522
- --------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 7,141 6,768 9,581
Provision for Federal Income Tax 2,137 2,152 2,987
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 5,004 $ 4,616 $ 6,594
========================================================================================================
Per Share Data:
Net Income $ 1.79 $ 1.65 $ 2.35
Average Number of Common Shares Outstanding 2,803,364 2,803,437 2,803,158
</TABLE>
The accompanying notes are an integral part of this statement.
35
<PAGE> 36
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHARES OF COMMON STOCK:
Shares Outstanding as of December 31 2,801,053 2,801,053 2,801,053
====================================================================================
COMMON STOCK:
Balance at December 31 $ 21,008 $ 21,008 $ 21,008
- ------------------------------------------------------------------------------------
CAPITAL SURPLUS:
Balance at December 31 8,073 8,073 8,073
- ------------------------------------------------------------------------------------
UNDIVIDED PROFITS:
Balance at January 1 46,730 45,475 42,242
Net Income 5,004 4,616 6,594
Cash Dividends Declared ($1.20 per share) (3,362) (3,361) (3,361)
- ------------------------------------------------------------------------------------
Balance at December 31 48,372 46,730 45,475
- ------------------------------------------------------------------------------------
UNREALIZED GAINS (LOSSES) ON
SECURITIES AVAILABLE FOR SALE:
Balance at January 1 1,647 (547) --
Change in Unrealized Gains (Losses) on Securities
Available for Sale, Net of Tax Effect (2,321) 2,194 (547)
- ------------------------------------------------------------------------------------
Balance at December 31 (674) 1,647 (547)
- ------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $76,779 $77,458 $74,009
====================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
36
<PAGE> 37
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Interest and Fees Received $ 65,748 $ 57,976 $ 52,890
Interest Paid (23,809) (19,129) (15,583)
Cash Paid to Suppliers and Employees (26,570) (23,731) (23,692)
Income Taxes Paid (3,310) (2,728) (3,229)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 12,059 12,388 10,386
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from Sales of Securities Available for Sale 113,407 13,109 24,419
Proceeds from Maturities/Calls of Securities Available for Sale 29,160 33,000 21,700
Proceeds from Maturities/Calls of Securities Held to Maturity -- 2,112 35,789
Purchase of Securities Available for Sale (71,312) (19,953) (61,393)
Net Increase in Loans (171,696) (46,366) (29,244)
Net (Increase) Decrease in Other Real Estate Owned (438) 352 110
Purchase of Branches -- -- 13,608
Capital Expenditures (512) (992) (2,466)
Cash Acquired in Purchase of Branches -- -- 268
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (101,391) (18,738) 2,791
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayment of Note Payable (1,900) (1,900) (1,900)
Net Increase (Decrease) in Deposits and Short-Term Liabilities 107,216 (4,174) 1,381
Cash Dividends Paid (3,362) (3,361) (3,361)
Payment of Capital Lease Obligations (17) (15) (103)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 101,937 (9,450) (3,983)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 12,605 (15,800) 9,194
Cash and Cash Equivalents at Beginning of Year 38,858 54,658 45,464
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 51,463 $ 38,858 $ 54,658
=====================================================================================================================
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income $ 5,004 $ 4,616 $ 6,594
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Depreciation and Amortization 2,157 1,925 1,902
Amortization (Accretion) of Net Premium (Discount) on Purchased Subsidiaries 1,169 1,954 841
Amortization of Discount and Premiums on Investment Securities, Net 596 996 1,251
Provision for Possible Loan Losses 3,792 672 534
Security Gains (510) (82) (942)
(Increase) Decrease in Income Earned Not Received 1,285 285 (522)
Increase in Other Assets 400 368 819
Gain on Sale of Other Real Estate Owned -- (29) (1)
Loss on Sale of Premises and Equipment 354 -- --
Increase (Decrease) in Interest Payable 128 855 346
Increase (Decrease) in Income Taxes Payable (1,173) (576) (241)
Increase (Decrease) in Accrued Expenses (1,143) 1,404 (195)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 12,059 $ 12,388 $ 10,386
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CB Financial Corporation and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles and reporting practices prescribed for the banking industry. Such
policies require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting policies are described in the
following paragraphs.
CONSOLIDATION
The consolidated financial statements of the Corporation include the
accounts of CB Financial Corporation (the parent company) and its wholly-owned
subsidiaries. The subsidiaries are City Bank and Trust Company (CB & T) located
in Jackson, Michigan, City Bank (CB) located in St. Johns, Michigan and CB
North (CBN)located in Charlevoix, Michigan. All material inter-company accounts
and transactions have been eliminated in the consolidated financial statements.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and money market assets. Effective December 19, 1995,
a non-cash transfer of $145,074,000 attributable to reclassifying debt
securities from Held to Maturity to Available for Sale was made.
MONEY MARKET ASSETS
Federal Funds Sold and short term interest bearing cash balances are
classified as Money Market Assets.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
CB Financial Corporation on December 19, 1995, reclassified all Held to
Maturity securities to Available for Sale. Previously these securities were
carried at historical cost, adjusted for amortization of premiums and accretion
of discounts. The decision to reclassify was made in conjunction with the
Financial Accounting Standards Board's issuance of an implementation guide
which allowed a one time opportunity to reassess and reclassify securities. In
connection with this reclassification unrealized gains of $1,170,000 were
recorded in Available for Sale securities and in Shareholders' Equity on a net
of tax basis.
In May, 1993, the Financial Accounting Standards Board issued Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This Statement, effective January 1, 1994, requires investments to be
categorized as follows: 1.) Held to Maturity securities which include debt
securities that the Corporation has the positive intent and ability to hold to
maturity and are reported at amortized cost, 2.) Trading securities which would
include debt and equity securities which are bought and held principally for
the purpose of selling them in the near term and are reported at fair value
with unrealized gains and losses included in earnings, and 3.) Available for
Sale securities which include debt and equity securities not classified in
either of the other two categories and are reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. The Corporation adopted this standard
effective January 1, 1994 by reclassifying $119,682,000 in securities as
Available for Sale and recording a net impact of adoption as an increase to
shareholders' equity of approximately $3,885,000 (net of tax of $2,001,000).
Gains realized on the sale of investment securities are determined on the
specific identification method and are reported in security gains.
Premiums are deducted and discounts are added to interest income on
investment securities using methods that approximate the level yield method.
LOANS
Loans are reported as the principal amount outstanding, net of unearned
income. Mortgage loans held for sale are carried at the lower of aggregate cost
or market. Interest income on loans is recorded on an accrual basis until an
interest or principal payment is more than 90 days past due and/or, in the
opinion of management, there is a question as to the ability of the debtor to
meet the terms of the contract. At the time a loan is placed in a non-accrual
status, unpaid interest is reversed against interest income of the current
period. Loans are returned to an accrual status when factors indicating
doubtful collectibility no longer exist.
In May 1995, Statement of Financial Accounting Standards (SFAS) No. 122
"Accounting for Mortgage Servicing Rights" was issued effective for fiscal
years beginning after December 15, 1995. The Statement
38
<PAGE> 39
requires capitalization of servicing rights on mortgage loans, when the loans
are to be sold and the servicing retained. This Statement was adopted by the
Corporation effective January, 1996. The capitalization of servicing rights
resulted in $122,000 of gross income recorded by the Corporation in 1996.
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses is maintained at a level considered
by management to be adequate to absorb reasonably foreseeable loan losses. In
estimating potential loan losses and determining the adequacy of the reserve,
management evaluates current economic conditions, individual loans, actual loan
loss experience, changes in the character and size of the loan portfolio and
other pertinent factors. Ultimate loan losses may vary from current estimates
and the amount of the provision, which is a current expense, may be greater
than or less than actual net charge-offs. Adjustments are recorded to the
reserve in the period in which they become known. Loans deemed uncollectible
are charged against the reserve. The provision and recoveries of loans
previously charged-off are added to the reserve.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) represents properties acquired through
foreclosure or deed in lieu of foreclosure and former banking property no
longer used in the Corporation's business. Real estate loans are transferred to
OREO upon obtaining equitable or legal title to the property. OREO is carried
at the lower of carrying value (loan balance plus prior periods' unpaid
interest) or fair market value at the date acquired. Any write-down of the
carrying value to the fair market value arising at the acquisition of the
property is charged to the reserve for possible loan losses. OREO property is
appraised annually, if applicable, according to regulatory guidelines.
Subsequent write-downs to fair market value, operating expenses and losses on
the sale of the property are charged to operating expenses. Any gain on the
sale of the property is credited to other income.
PREMISES AND EQUIPMENT
Premises and equipment, including property acquired through capital
leases, are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using straight-line and accelerated methods and is
charged to operations over the estimated useful lives of the assets. The
estimated useful lives are 19 to 40 years for buildings and 3 to 7 years for
equipment.
Amortization of leasehold improvements is computed based on the estimated
useful lives of the improvements. Amortization of property acquired through
capital leases is computed over the terms of the respective leases.
Maintenance and repairs are expensed as incurred.
GOODWILL AND PREMIUM ON CORE DEPOSITS
Goodwill consists of purchase price and related acquisition costs in
excess of the fair value of the identifiable net assets acquired. Premium on
Core Deposits consists of the premium paid on core deposits acquired. The
Corporation evaluates the carrying value of goodwill and premium on core
deposits for potential impairment on an ongoing basis. The unamortized balance
of goodwill and premium on core deposits is evaluated based on the results of
operations and changes in the deposit portfolio. The Corporation also
considers future anticipated operating results, trends and other circumstances
in making such evaluations.
In December 1995, the Corporation wrote off $674,000 pretax, of excess
purchase price over assets acquired relating to the earlier acquisitions.
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of." This new accounting standard
requires impairment losses on long-lived assets to be recognized when an
asset's book value exceeds its expected future cash flows (undiscounted). The
adoption of this accounting standard did not impact the Corporation's financial
position or results of operations.
FEDERAL INCOME TAX
CB Financial Corporation files a consolidated Federal income tax return.
Deferred income taxes represent the effect of cumulative temporary differences
between income and expense items reported for financial statement and tax
purposes, and between the basis of various assets and liabilities for financial
statement and tax purposes. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of evidence, it is deemed more likely than
not that the asset will not be realized.
39
<PAGE> 40
EARNINGS PER SHARE CALCULATION
The earnings per share calculation presented in the statement of income
reflects the effect of the number of shares that have been granted under the
Stock Plan and the Director Plan (discussed in greater detail in Note 17) based
upon the treasury stock method.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1996, Statement of Financial Accounting Standard (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued effective for fiscal years beginning after December
31, 1996. The Statement provides accounting and reporting guidance for
transfers and servicing of financial assets and extinguishments of liabilities.
This Statement is not expected to have a material impact.
2. ACQUISITIONS
On December 17, 1994 the Corporation acquired, through its subsidiary CB
North, three banking offices of Republic Bank and the related loans and
deposits of approximately $22.9 million and $47.7 million, respectively, in
Bellaire, Central Lake and Traverse City, Michigan. The acquisition was
accounted for under the purchase method. The excess of cost over fair value of
net assets acquired consisted of $553,000 of goodwill and $3,548,000 of premium
on core deposits. The goodwill and premium on core deposits are being amortized
over fifteen and ten years, respectively. The operating results of these
branches are included in the Corporation's consolidated financial statements
since the date of the acquisition.
As of December 31, 1996 and 1995, the accumulated amortization on goodwill
and premium on core deposits was $4,429,000 and $3,261,000, respectively.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation is required by regulatory agencies to maintain legal
reserve requirements based on the level of balances in deposit categories. Cash
balances restricted from usage due to these requirements were $9,108,000 and
$8,188,000 at December 31, 1996 and 1995, respectively.
4. SECURITIES
In the opinion of management, there were no securities at December 31,
1996 or 1995 which would constitute a material credit risk for the Corporation.
The reconciliation of cost basis to estimated market values of Securities
Available for Sale is as follows:
<TABLE>
<CAPTION>
GROSS ESTIMATED
COST UNREALIZED MARKET
(IN THOUSANDS) BASIS GAIN LOSS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
U.S. Treasury $ 52,763 $ 208 $ 446 $ 52,525
U.S. Government
Agencies 75,947 79 1,126 74,900
States and
Political Subdivisions 9,197 265 -- 9,462
- ---------------------------------------------------------------------------------------------------------------------------
Total $137,907 $ 552 $1,572 $136,887
===========================================================================================================================
<CAPTION>
GROSS ESTIMATED
COST UNREALIZED MARKET
(IN THOUSANDS) BASIS GAIN LOSS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1995:
U.S. Treasury $159,784 $ 1,925 $ 319 $161,390
U.S. Government
Agencies 38,656 466 114 39,008
States and
Political Subdivisions 10,745 443 2 11,186
Other 62 99 -- 161
- ---------------------------------------------------------------------------------------------------------------------------
Total $209,247 $ 2,933 $ 435 $211,745
===========================================================================================================================
</TABLE>
The cost basis and estimated market value for Securities Available for Sale by
maturity are as follows:
<TABLE>
<CAPTION>
ESTIMATED
COST MARKET
(IN THOUSANDS) BASIS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
At December 31, 1996:
Due in one year or less $ 16,145 $ 15,198
Due after one year
through five years 78,540 78,467
Due after five years
through ten years 43,222 43,222
- ---------------------------------------------------------------------------------------------------------------------------
Total $137,907 $136,887
===========================================================================================================================
<CAPTION>
ESTIMATED
COST MARKET
(IN THOUSANDS) BASIS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
At December 31, 1995:
Due in one year or less $ 30,380 $ 30,732
Due after one year
through five years 166,921 168,887
Due after five years
through ten years 11,650 11,832
Due after ten years 296 294
- ---------------------------------------------------------------------------------------------------------------------------
Total $209,247 $211,745
===========================================================================================================================
</TABLE>
Securities having a par value of $18,575,000 on December 31, 1996, were
pledged where required by law to secure certain liabilities and public deposits
totaling $3,076,000, including deposits of the Treasurer, State of Michigan of
$463,000.
Other than securities of the U.S. Government and its agencies and
corporations, there were no securities of any one issuer aggregating ten
percent of consolidated shareholders' equity at December 31, 1996.
40
<PAGE> 41
5. LOANS
The Corporation grants commercial and consumer loans to primarily
customers throughout the central and the northwest regions of Michigan's lower
peninsula. The Corporation has a diversified loan portfolio. A substantial
portion of its debtors' ability to honor their contracts is dependent upon the
economic conditions as well as manufacturing, retail, agricultural and service
industries operating in these regions.
A schedule of non-performing assets consisting of non-accrual loans, OREO
and other assets acquired through repossession is presented in the following
chart.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1996 1995
- ---------------------------------------
<S> <C> <C>
Non-accrual Loans $1,993 $1,591
Other Real Estate Owned 438 --
Assets Acquired
Through Repossession 190 106
- ---------------------------------------
Total $2,621 $1,697
=======================================
</TABLE>
6. LOANS TO RELATED PARTIES
Certain directors and executive officers of the Corporation and its
subsidiaries, including their families and companies in which they have
significant ownership, had loans outstanding with the subsidiaries aggregating
$36,630,000 and $28,653,000 at December 31, 1996 and 1995, respectively,
exclusive of consumer loans. In 1996, additions to these loans were
$73,027,000 and reductions were $68,049,000. These loans were made in the
ordinary course of business on substantially the same terms as those prevailing
at that time for comparable transactions with other persons and did not involve
more than the normal risk of collectibility or present other unfavorable
features. As of December 31, 1996, none of the related party loans were in a
non-accrual status.
7. RESERVE FOR POSSIBLE LOAN LOSSES
An analysis of transactions in the reserve for possible loan losses is
summarized below.
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 3,934 $3,865 $3,617
- -----------------------------------------------------------
Losses Charged to Reserve (2,201) (803) (753)
Recoveries Credited to Reserve 643 200 178
- -----------------------------------------------------------
Net Losses Charged to Reserve (1,558) (603) (575)
- -----------------------------------------------------------
Provision for Credit Losses 3,792 672 534
Addition Due to Acquisition -- -- 289
- -----------------------------------------------------------
Net Change in Reserve 2,234 69 248
- -----------------------------------------------------------
Balance at December 31 $ 6,168 $3,934 $3,865
===========================================================
As a percent of Total Loans 1.01% .90% .98%
===========================================================
</TABLE>
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards Board No. 114, "Accounting by Creditors for Impairment of
a Loan," and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." Statement No. 114 addresses the
accounting for a loan when it is probable that all principal and interest
amounts due will not be collected in accordance with its contractual terms.
Certain loans, such as loans carried at the lower-of-cost or market or small
balance homogeneous loans (e.g., credit card, retail credit), are exempt from
reporting under the Statement's provisions. The Corporation generally
identifies non-performing loans as "impaired loans."
On a quarterly basis, the Corporation identifies impaired loans and the
extent to which such loans are impaired. Impairment is recognized to the
extent the recorded investment of an impaired loan exceeds the calculated
present value of future estimated cash flows or the observable market price.
Collateral-dependent loans, primarily real estate, are separately measured for
impairment by determining the fair value of the collateral less estimated costs
to sell.
The allocated reserve associated with impaired loans is considered in
management's determination of the adequacy of the Corporation's allowance
for credit losses. The adoption of these accounting standards did not have a
significant effect on the Corporation's net income or its allowance for credit
losses.
At December 31, 1996, the recorded investment in loans considered impaired
was $958,000. These loans have a carrying value equal to their fair value. The
average recorded investment in impaired loans was approximately $1,627,000 for
the year ended December 31, 1996. The Corporation recognized interest income
associated with impaired loans of $43,000 during 1996 with $32,000 received in
cash.
8. DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
Certain of the Corporation's assets and liabilities which are financial
instruments have fair values that differ from their carrying values in the
accompanying consolidated balance sheet. These fair values, along with the
methods and assumptions used to estimate such fair values, are discussed below.
The fair values of all financial instruments not discussed below are estimated
to be equal to their carrying values as of December 31, 1996 and December 31,
1995.
41
<PAGE> 42
LOANS
The fair value of all loans is estimated by discounting the future cash
flows associated with the loans, using current interest rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The estimated fair value of loans at December 31, 1996
was $604,742,000 compared to the carrying value of $602,853,000 net of the
reserve for possible loan losses. At December 31, 1995 the estimated fair
value of loans was $432,324,000 compared to the carrying value of $434,949,000
net of the reserve for possible loan losses.
TIME DEPOSITS
The fair value of time deposits, consisting of fixed maturity certificates
of deposit and individual retirement accounts, is estimated by discounting the
related cash flows using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of time deposits at December 31,
1996 was $372,807,000 compared to the carrying value of $370,164,000. At
December 31, 1995 the estimated fair value of time deposits was $241,787,000
compared to the carrying value of $240,156,000.
NOTE PAYABLE
The fair value of the note payable is estimated by discounting the future
cash payments using a rate currently offered for a note with a comparable
remaining maturity. The estimated fair value of the note payable at December
31, 1996 and 1995 was $2,374,000 and $4,272,000 compared to the respective
carrying values of $2,375,000 and $4,275,000.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit, standby letters of credit
and written financial guarantees are estimated using the fees currently charged
to enter into similar agreements. The fair value of these instruments is not
material.
9. PREMISES, EQUIPMENT AND LEASES
Premises and equipment are stated at cost less accumulated depreciation
and amortization. A summary of these accounts follows:
<TABLE>
<CAPTION>
ACCUMULATED NET
ORIGINAL DEPRECIATION OR BOOK
(IN THOUSANDS) COST AMORTIZATION VALUE
- ------------------------------------------------------------
<S> <C> <C> <C>
At December 31, 1996:
Land $ 1,825 $ -- $ 1,825
Premises 10,458 3,740 6,718
Leasehold Improvements 1,482 1,199 283
Capital Leases 443 189 254
Furniture and Equipment 16,039 11,768 4,271
- ------------------------------------------------------------
Total $30,247 $16,896 $13,351
============================================================
At December 31, 1995:
Land $ 1,880 $ -- $ 1,880
Premises 11,322 4,298 7,024
Leasehold Improvements 2,038 877 1,161
Capital Leases 443 177 266
Furniture and Equipment 15,675 10,656 5,019
- ------------------------------------------------------------
Total $31,358 $16,008 $15,350
============================================================
</TABLE>
The charge for depreciation and amortization amounted to $2,157,000 in
1996, $1,925,000 in 1995, and $1,902,000 in 1994.
LEASES
The Corporation has various operating leases for premises and equipment
under agreements expiring at various dates through 2001. These leases, in
general, provide for renewal options and options to purchase certain premises
at fair values and require the payment of property taxes, insurance premiums
and maintenance costs. Total rental expense for all operating leases was
$907,700 in 1996, $842,000 in 1995 and $795,000 in 1994.
The future minimum payments for all non-cancelable operating leases as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) TOTAL
- --------------------------
<S> <C>
1997 $791
1998 690
1999 667
2000 610
2001 139
2002 and thereafter --
</TABLE>
At December 31, 1996, the Corporation had a capital lease which was
reported in Note Payable and Capital Leases in the consolidated balance sheet
and interest on other liabilities in the consolidated statement of income. The
capital lease expires in 2006.
42
<PAGE> 43
Minimum future capital lease payments, by year and in the aggregate after
the next five years, as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) TOTAL
- ------------------------------------------
<S> <C>
1997 $ 66
1998 66
1999 66
2000 66
2001 66
2002-2006 236
- ------------------------------------------
Total Minimum Lease Payments 566
Less: Amounts Representing Interest 247
- ------------------------------------------
Present Value of Net Minimum
Lease Payments $319
==========================================
</TABLE>
10. TIME DEPOSITS
The aggregate amount of time deposits of $100,000 or more totaled
$122,775,000 at December 31, 1996 and $36,744,000 at December 31, 1995. The
interest expense on time deposits over $100,000 was $3,621,000 in 1996,
$1,744,000 in 1995 and $921,000 in 1994.
11. NOTE PAYABLE
On January 15, 1993, CB Financial Corporation obtained a five year fixed
rate note for $9,500,000 with an interest rate of 6.25%. Terms of the note
require quarterly principal payments of $475,000 plus interest computed on the
outstanding balance. Proceeds of the note were used to fund the acquisition of
the First of Charlevoix Corporation.
Annual principal payments on the note payable as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) TOTAL
- ----------------------
<S> <C>
1997 $1,900
1998 475
- ----------------------
Total $2,375
======================
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Corporation has a defined contribution retirement plan and a 401-K
Plan. These plans cover substantially all full-time employees. The defined
contribution retirement plan and 401-K Plan require one year of continuous
service for eligibility. Under the defined contribution retirement plan, the
company contribution is 8% of the qualifying salary for each eligible employee.
The 401-K Plan features a company matching contribution of 1.5% up to a maximum
of 6% of qualifying salary contributed by each employee. The consolidated
contribution in 1996, 1995 and 1994 for the defined contribution retirement
plan and the 401-K Plan amounted to $686,000, $773,000 and $700,000,
respectively.
The Corporation provides post-retirement health care to employees hired
before April 1, 1993. Post retirement benefit costs are funded as claims are
incurred. The accumulated post-retirement benefit obligation at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Accumulated Post-Retirement Benefit Obligation:
Retirees $2,670 $2,609
Active Plan Participants 322 280
- ----------------------------------------------------------------------
Accumulated Post-Retirement Benefit Obligation 2,992 2,889
Plan Assets at Fair Value -- --
- ----------------------------------------------------------------------
Accumulated Post-Retirement Benefit Obligation
in Excess of Plan Assets 2,992 2,889
- ----------------------------------------------------------------------
Unrecognized Net Loss (390) (297)
Unrecognized Prior Service Cost (153) (169)
- ----------------------------------------------------------------------
Accrued Post-Retirement Benefit Obligation $2,449 $2,423
======================================================================
</TABLE>
For measurement purposes, a 9.9% annual rate of increase was assumed in
per capita cost of covered health care benefits for 1996. The rate was assumed
to grade down uniformly to 5% in the year 2004, and remain at that level
thereafter. The health care cost trend rate assumption has a significant impact
on the accumulated post-retirement benefit obligation and on future amounts
accrued. A one percentage point increase each year in the assumed health care
cost would increase the accumulated post-retirement benefit obligation at
December 31, 1996 by $104,000 and the aggregate of the service and interest
cost components of net periodic post-retirement benefit cost for the year ended
December 31, 1996 by $7,300.
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.5% compounded annually in 1996 and 1995 compared to
8.5% compounded annually in 1994.
Net periodic post-retirement benefit cost for 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 21 $ 637 $ 39
Interest Cost 215 212 154
Net Amortization and Deferral 25 17 24
- ----------------------------------------------------
Net Periodic Post-Retirement
Benefit Cost $ 261 $ 866 $ 217
====================================================
</TABLE>
13. RESTRUCTURING CHARGE
In the second quarter 1996, the Corporation recorded a pretax
restructuring charge of $1,102,000 or $727,000 after tax or $.26 per share. The
charge resulted primarily from costs associated with closing eight financial
centers in the process of rebuilding the retail delivery system. At December
31, 1996, a restructuring liability of $420,000 was recorded which represents
the
43
<PAGE> 44
costs to close two remaining financial centers.
During the third and fourth quarters of 1995, the Corporation implemented
a restructuring program designed to enhance productivity and effectiveness.
The restructuring effort resulted in a pretax charge of $2,278,000 or
$1,634,000 after tax or $.58 per share. This charge consists of $1,604,000
which reflects the severance costs resulting from an early retirement package
offered to employees who met the minimum requirement based on age and years of
service, and $674,000 which reflects the excess of purchase price over assets
acquired relating to earlier acquisitions. The severance relates to 39
employees whose positions were eliminated or redefined due to the
re-engineering of the Corporation.
14. FEDERAL INCOME TAX
The items comprising the provision for Federal income tax are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current Tax Provision $ 3,360 $2,832 $3,023
Deferred Tax Benefit (1,223) (680) (36)
- ----------------------------------------------------------------------------
Provision for Federal Income Tax $ 2,137 $2,152 $2,987
============================================================================
</TABLE>
The provision for Federal income tax differs from the amount computed by
applying the U.S. Federal income tax rate (34%) due principally to the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for Federal Income
Tax at the Statutory Rate $ 2,428 $2,301 $3,258
Tax Exempt Interest (433) (485) (422)
Goodwill Amortization 149 301 126
Other, Net (7) 35 25
- ----------------------------------------------------------------------------
Provision for Federal
Income Tax $ 2,137 $2,152 $2,987
============================================================================
</TABLE>
The components of the net deferred income tax asset at December 31, 1996 and
1995 are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Deferred Income Tax Liabilities:
Depreciation and Basis Difference $386 $528
Net Accretion on Bond Discount 29 92
Deferred Loan Origination Costs and
Servicing Rights, Net 344 135
Premium on Core Deposits and Goodwill 238 691
Unrealized Gains on Securities
Available for Sale -- 849
Other 31 31
- --------------------------------------------------------------------------
Total Gross Deferred Tax Liabilities 1,028 2,326
- --------------------------------------------------------------------------
Deferred Income Tax Assets:
Reserve for Possible Loan Losses (2,097) (1,338)
Deferred Directors Fees (380) (386)
Post-Retirement Benefits Other than Pensions (893) (849)
Unrealized Losses on Securities
Available for Sale (347) --
Other (349) (127)
- --------------------------------------------------------------------------
Total Gross Deferred Tax Assets (4,066) (2,700)
- --------------------------------------------------------------------------
Net Deferred Tax Asset $ (3,038) $(374)
==========================================================================
</TABLE>
There was no valuation allowance necessary during 1996 or 1995.
15. OFF-BALANCE SHEET TRANSACTIONS
In the normal course of business, there are various commitments
outstanding to meet the financial needs of the Corporation's customers, which
are not reflected in the financial statements. Loan commitments are made to
accommodate the financial needs of customers of the subsidiary banks.
Historically, the majority of the commitments have not been drawn upon, and
therefore do not necessarily represent future cash requirements. Standby
letters of credit commit the Banks to make payments on behalf of customers when
certain specified future events occur. The Corporation does not expect, in the
normal course of business, to be required to fund these commitments. The
Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, and
to potential credit loss associated with letters of credit, is represented by
the contractual amount of those instruments. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to normal credit policies. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income
producing commercial properties. Outstanding commitments for unused
lines-of-credit amounted to $68,954,000 and $90,268,000 as of December 31, 1996
and 1995, respec-
44
<PAGE> 45
tively. At December 31, 1996 and 1995, the Corporation had standby letters of
credit outstanding of $2,234,000 and $1,506,000 respectively. The Corporation
had outstanding commitments for construction real estate mortgage loans of
$18,341,000 and $19,138,000 as of December 31, 1996 and 1995. Most of the loan
commitments and standby letters of credit at December 31, 1996 expire one year
from their contract date, none of which extend for more than five years.
Overall, concentrations of credit for loan commitments and standby letters of
credit are to customers located primarily in local areas served by the
subsidiary banks, all of which are in the central and northwest regions of
Michigan's lower peninsula.
16. RESTRICTIONS ON SUBSIDIARIES' DIVIDENDS AND LOANS OR ADVANCES
Michigan banking laws and regulations place restrictions on dividends paid
by the Corporation's subsidiary banks. In 1997, the subsidiary banks may
distribute dividends to the Corporation of approximately $15,900,000 plus their
1997 net income without prior approval of the regulatory agencies.
In addition, the ability of each subsidiary bank to pay dividends to the
Corporation can be further restricted as a result of regulatory policies and
guidelines relating to dividend payments and capital adequacy. The subsidiary
banks are also subject to restrictions as provided by State and Federal banking
laws that limit the transfer of funds to the Corporation in the form of loans
or extensions of credit.
17. EMPLOYEE STOCK OPTION PLAN AND NON-QUALIFIED STOCK OPTION PLAN FOR
INDEPENDENT DIRECTORS
In 1992, the shareholders of the Corporation approved an Employee Stock
Option Plan (the "Stock Plan") for key employees of the Corporation and its
subsidiary banks. The Corporation accounts for the Stock Plan under APB Opinion
No. 25, under which no compensation cost has been recognized. The Stock Plan
authorizes the granting of incentive and non-qualified stock options up to an
aggregate of 150,000 shares of common stock to such officers and employees of
the Corporation and its subsidiaries as determined by a committee of the Board
of Directors. The committee selects the officers and employees to whom options
are to be granted and the number of shares and type of options to be granted.
The options will have an exercise price of not less than 100% of the fair
market value of the Corporation's common stock on the grant date and cannot be
exercised more than 10 years from the date of the grant. All options under
this plan become fully vested after one year from the grant date provided the
employee is still employed by the Corporation or its subsidiaries. Once an
option is vested, it becomes exercisable at the rate of one-third per year. As
of December 31, 1996, 14,448 options are exercisable.
A summary of the transactions of the Stock Plan for the years ended
December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares under
stock options:
Outstanding at
beginning of year 31,482 24,110 15,000
Granted -- 15,698 12,310
Exercised -- -- --
Canceled (3,537) (8,326) (3,200)
- ----------------------------------------------------------------------------------
Outstanding at end of year 27,945 31,482 24,110
==================================================================================
Prices of shares under
stock options:
granted during year -- 2,500 at $30.50 12,310 at $34.00
13,198 at $31.125
- ----------------------------------------------------------------------------------
Exercised during year -- -- --
- ----------------------------------------------------------------------------------
Canceled during year 1,000 AT $33.25 3,100 at $33.25 3,200 at $33.25
- ----------------------------------------------------------------------------------
1,043 AT $34.00 3,234 at $34.00 --
1,494 AT $31.125 1,992 at $31.125 --
- ----------------------------------------------------------------------------------
Outstanding at 7,700 AT $33.25 8,700 at $33.25 11,800 at $33.25
end of year 8,033 AT $34.00 9,076 at $34.00 12,310 at $34.00
2,500 AT $30.50 2,500 at $30.50 --
9,712 AT $31.125 11,206 at $31.125 --
==================================================================================
</TABLE>
In addition, the shareholders of the Corporation approved a Non-Qualified
Stock Option and Deferred Compensation Plan for Independent Directors (the
"Director Plan"). An independent director is a person serving as a director of
the Corporation or one of its subsidiaries who is not otherwise employed by the
Corporation or one of its subsidiaries. Under the Director Plan, 50,000 shares
of common stock have been reserved for issuance by the Corporation for
non-qualified stock options granted to independent directors. Each independent
director of the Corporation or one of its subsidiaries who elects to defer all
or part of total compensation received as a director of the Corporation and its
subsidiaries under this plan will be granted stock options equal to the amount
of compensation deferred divided by the fair market value of a share of common
stock determined as of the grant date, rounded up to the nearest whole share.
All stock options granted under the Director Plan will have an exercise price
equal to 100% of the fair market value of the Corporation's common stock on the
grant date. All options
45
<PAGE> 46
are fully vested when granted, but cannot be exercised until the director is no
longer serving as a director of the Corporation or its subsidiaries. As of
December 31, 1996, 2,937 options are exercisable.
A summary of the transactions of the Director Plan for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares under
stock options:
Outstanding at
beginning of year 16,195 11,039 6,023
Granted 6,590 5,256 5,402
Exercised -- -- --
Canceled -- (100) (386)
- ----------------------------------------------------------------------
Outstanding at
end of year 22,785 16,195 11,039
======================================================================
Prices of shares under
stock options:
granted during the year 6,590 AT 5,256 at 5,402 at
$31.125 $34.00 $33.25
- ----------------------------------------------------------------------
Exercised during year -- -- --
- ----------------------------------------------------------------------
Canceled during year -- 100 at 231 at
$21.00 $21.00
155 at
$33.25
- ----------------------------------------------------------------------
Outstanding at 5,692 AT 5,692 at 5,792 at
end of year $21.00 $21.00 $21.00
5,247 AT 5,247 at 5,247 at
$33.25 $33.25 $33.25
5,256 AT 5,256 at --
$34.00 $34.00
6,590 AT
$31.125
======================================================================
</TABLE>
The Corporation has elected to provide the pro forma disclosures, as
permitted under the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the Stock and Director Plans
("Plans") within the accompanying consolidated statements of income. Had
compensation expense for the Plans been determined based on the fair value at
the grant date for awards in 1995 and 1996 consistent with the provisions of
SFAS No. 123, the Corporation's pro forma net income and pro forma net income
per common share would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995
- ------------------------------------------------------
<S> <C> <C>
Pro forma net income:
As reported $5,004 $4,616
SFAS No. 123 pro forma 4,933 4,519
Pro forma net income per common share:
As reported 1.79 1.65
SFAS No. 123 pro forma 1.76 1.61
</TABLE>
The weighted average fair value of options granted in 1995 and 1996 is
$6.25 and $5.60, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for the 1995 and 1996 grants: risk-free rate of
interest of 7.09% and 6.68%, respectively; dividend yield of 3.82%; and
expected lives of 10 years.
18. LITIGATION AND
CONTINGENT LIABILITIES
The Corporation is party to routine litigation arising in the normal
course of business. In the opinion of management, the liabilities arising from
these proceedings, if any, will not be material to the Corporation's financial
position or results of operations.
19. PARENT COMPANY
FINANCIAL STATEMENTS
The financial statements of the parent company, CB Financial Corporation,
are contained on pages 51-52 and are incorporated herein by reference. These
financial statements include the balance sheet, statement of income and
statement of cash flows.
20. REGULATORY CAPITAL
The Corporation and its bank subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements triggers certain mandatory, and
possibly additional discretionary, actions by regulations that could have a
direct material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. These minimum
amounts and ratios of Total and Tier 1 Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 Capital to average assets
(as defined) are set forth in the Table on page 48. The Corporation's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weighting and other factors.
46
<PAGE> 47
21. SUBSEQUENT EVENT
On January 27, 1997, CB Financial Corporation, a Michigan corporation (the
"Company"), and Citizens Banking Corporation, a Michigan corporation
("Citizens"), entered into an Agreement and Plan of Merger, dated as of January
27, 1997 (the "Merger Agreement"). The Merger Agreement provides for the merger
("Merger") of a wholly-owned subsidiary of Citizens with and into the Company,
as a result of which the Company will become a wholly-owned subsidiary of
Citizens, subject to, among other customary conditions, the affirmative vote of
a majority of the outstanding voting shares of the Company and Citizens and
various regulatory approvals. Pursuant to the Merger Agreement, each
outstanding share of the Company's commons stock, par value $7.50 per share,
will be exchanged for 1.489 shares of Citizens common stock. The transaction
will be accounted for as a pooling of interests and is anticipated to be
tax-free for Federal income tax purposes. It is currently expected to be
completed by the end of the second quarter of 1997.
47
<PAGE> 48
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- --------------------------- --------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):(1)
Consolidated $74,742 12.91% > $46,328 > 8.00% > $57,910 > 10.00%
- - - -
City Bank and Trust 49,130 17.66 > 22,256 > 8.00 > 27,820 > 10.00
- - - -
City Bank 14,235 8.95 > 12,724 > 8.00 > 15,905 > 10.00
- - - -
CB North 13,716 9.37 > 11,705 > 8.00 > 14,632 > 10.00
- - - -
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):(1)
Consolidated 68,673 11.86 > 23,164 > 4.00 > 34,746 > 6.00
- - - -
City Bank and Trust 46,776 16.81 > 11,128 > 4.00 > 16,692 > 6.00
- - - -
City Bank 12,247 7.70 > 6,362 > 4.00 > 9,543 > 6.00
- - - -
CB North 11,989 8.19 > 5,853 > 4.00 > 8,779 > 6.00
- - - -
TIER 1 CAPITAL (TO AVERAGE ASSETS):(2)
Consolidated 68,673 8.32 > 33,032 > 4.00 > 41,290 > 5.00
- - - -
City Bank and Trust 46,776 10.22 > 18,299 > 4.00 > 22,874 > 5.00
- - - -
City Bank 12,247 5.64 > 8,691 > 4.00 > 10,864 > 5.00
- - - -
CB North 11,989 6.76 > 7,099 > 4.00 > 8,874 > 5.00
- - - -
(1) RISK-WEIGHTED ASSETS:
Consolidated 579,097
City Bank and Trust 278,203
City Bank 159,049
CB North 146,315
(2) AVERAGE RISK-WEIGHTED ASSETS:
Consolidated 825,808
City Bank and Trust 457,471
City Bank 217,284
CB North 177,482
AS OF DECEMBER 31, 1995:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):(1)
Consolidated 69,806 16.59 > 33,661 > 8.00 > 42,076 > 10.00
- - - -
City Bank and Trust 48,671 23.36 > 16,670 > 8.00 > 20,838 > 10.00
- - - -
City Bank 13,746 11.59 > 9,492 > 8.00 > 11,864 > 10.00
- - - -
CB North 10,944 11.12 > 7,872 > 8.00 > 9,840 > 10.00
- - - -
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):(1)
Consolidated 65,873 15.66 > 16,831 > 4.00 > 25,246 > 6.00
- - - -
City Bank and Trust 46,757 22.44 > 8,335 > 4.00 > 12,503 > 6.00
- - - -
City Bank 12,710 10.71 > 4,746 > 4.00 > 7,119 > 6.00
- - - -
CB North 9,961 10.12 > 3,936 > 4.00 > 5,904 > 6.00
- - - -
TIER 1 CAPITAL (TO AVERAGE ASSETS):(2)
Consolidated 65,873 9.44 > 27,912 > 4.00 > 34,890 > 5.00
- - - -
City Bank and Trust 46,757 11.98 > 15,612 > 4.00 > 19,515 > 5.00
- - - -
City Bank 12,710 7.43 > 6,843 > 4.00 > 8,553 > 5.00
- - - -
CB North 9,961 6.71 > 5,938 > 4.00 > 7,423 > 5.00
- - - -
(1) RISK-WEIGHTED ASSETS:
Consolidated 420,764
City Bank and Trust 208,377
City Bank 118,644
CB North 98,404
(2) AVERAGE RISK-WEIGHTED ASSETS:
Consolidated 697,807
City Bank and Trust 390,292
City Bank 171,063
CB North 148,450
</TABLE>
48
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CB Financial Corporation:
We have audited the accompanying consolidated balance sheet of CB
FINANCIAL CORPORATION (a Michigan corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statement of income, changes in
shareholders' equity and cash flows for the three years in the period ended
December 31, 1996. These financial statements are the responsibility of CB
Financial 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 of
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 financial statements referred to above present fairly,
in all material respects, the financial position of CB Financial Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1994, CB Financial Corporation changed its method of accounting for
certain investments in debt and equity securities.
/s/ Arthur Andersen LLP
Detroit, Michigan,
February 4, 1997.
49
<PAGE> 50
REPORT OF MANAGEMENT
Management is responsible for the accompanying financial statements and
all other financial information appearing in this Form 10-K Report. In the
opinion of management, the financial statements have been prepared in
conformity with generally accepted accounting principles and include amounts
which of necessity are based on management's best estimates and judgements with
due consideration for materiality. The other financial information herein is
consistent with that in the financial statements.
The Corporation maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded, that
transactions are processed in accordance with the Corporation's authorization
and policies, and that transactions are properly recorded to permit preparation
of financial statements that fairly present the financial position and results
of operations in accordance with generally accepted accounting principles. The
concept of reasonable assurance is based on the recognition that the cost of
internal accounting control systems should not exceed the related benefits.
Management believes the Corporation's internal control system provides the
appropriate balance between costs of such controls and the related benefits. In
addition, the internal accounting controls are augmented by a written code of
conduct under which employees are to maintain high levels of ethical business
standards and an organizational structure providing for segregation of duties
and responsibilities.
In order to monitor compliance with this system of controls, the
Corporation maintains an extensive internal audit program. Internal audit
reports are issued to appropriate officers and significant audit exceptions, if
any, are reviewed with management and the Audit Committee of the Board of
Directors.
The Board of Directors, through the Audit Committee comprised solely of
outside directors, oversees management's discharge of its financial reporting
responsibility. The Audit Committee meets periodically with management as well
as internal and external independent auditors to assure that the Committee is
carrying out its responsibility to assess the scope of the annual audit plan,
to review the status and results of audits, to review the Form 10-K Report
including major changes in accounting policies and reporting practices.
The financial statements in the Form 10-K Report have been audited by the
Corporation's independent public accountants, Arthur Andersen LLP, for the
purpose of determining that the financial statements are presented fairly. As
part of their audit of the Corporation's financial statements, Arthur Andersen
LLP considered the Corporation's system of internal control to the extent they
deemed necessary to determine the nature, timing and extent of their audit
tests.
50
<PAGE> 51
BALANCE SHEET AND STATEMENT OF INCOME (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
BALANCE SHEET
AS OF DECEMBER 31,
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Money Market Assets $ 2,244 $ 1,790
Securities Available for Sale -- 144
Investment in Subsidiaries 79,225 80,952
Receivables from Subsidiaries -- 1,000
Other Assets 628 342
- ---------------------------------------------------------------------------------------------------------
Total Assets $ 82,097 $ 84,228
=========================================================================================================
LIABILITIES:
Note Payable $ 2,375 $ 4,275
Dividend Payable 840 840
Accrued Expenses and Other Liabilities 2,103 1,655
- ---------------------------------------------------------------------------------------------------------
Total Liabilities 5,318 6,770
- ---------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred Stock--no par value, 100,000 shares authorized, none outstanding -- --
Common Stock--$7.50 par value, 5,000,000 shares authorized, 2,801,053
shares outstanding 21,008 21,008
Capital Surplus 8,073 8,073
Undivided Profits 48,372 46,730
Unrealized Gains (Losses) on Securities Available for Sale, Net of Tax Effect (674) 1,647
- ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 76,779 77,458
- ---------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 82,097 $ 84,228
=========================================================================================================
<CAPTION>
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income on Money Market Assets $ 37 $ 61 $ 10
Income on Securities Available for Sale 3 4 65
Interest Expense 233 327 453
- --------------------------------------------------------------------------------------------
Net Interest Income (Expense) (193) (262) (378)
- --------------------------------------------------------------------------------------------
Non-Interest Income 163 18 814
- --------------------------------------------------------------------------------------------
Non-Interest Expenses:
Salaries and Employee Benefits 4,138 2,788 2,542
Restructuring Charge 241 457 --
Other Operating Expenses 2,209 1,721 1,400
- -------------------------------------------------------------------------------------------
Total Non-Interest Expenses 6,588 4,966 3,942
- -------------------------------------------------------------------------------------------
Operating Loss before Provision for Federal Income Tax (6,618) (5,210) (3,506)
Benefit from Federal Income Tax (2,254) (1,776) (1,219)
- -------------------------------------------------------------------------------------------
Operating Loss before Earnings of Subsidiaries (4,364) (3,434) (2,287)
Equity in Earnings of Subsidiaries 9,368 8,050 8,881
- -------------------------------------------------------------------------------------------
Net Income $ 5,004 $ 4,616 $ 6,594
===========================================================================================
Per Share Data:
Net Income $ 1.79 $ 1.65 $ 2.35
Average Number of Shares Outstanding 2,803,364 2,803,437 2,803,158
</TABLE>
51
<PAGE> 52
STATEMENT OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Cash on Deposit with Subsidiary Bank:
Cash Flows from Operating Activities:
Dividends Received from Subsidiaries $ 9,837 $ 6,763 $ 8,759
Cash Received from Subsidiaries for Income Taxes 5,343 4,538 4,316
Income Taxes Paid (3,310) (2,728) (3,086)
Cash Paid to Suppliers and Employees (6,147) (4,238) (3,644)
Income Received 106 64 157
Interest Paid (259) (353) (470)
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,570 4,046 6,032
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from Sales of Securities Available for Sale 146 23 6,173
Purchase of Securities Available for Sale -- -- (4,027)
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 146 23 2,146
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Cash Dividends Paid (3,362) (3,361) (3,361)
Repayment of Note Payable (1,900) (1,900) (1,900)
- ------------------------------------------------------------------------------------------------------
Net Cash (used) by Financing Activities (5,262) (5,261) (5,261)
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 454 (1,192) 2,917
Cash and Cash Equivalents at Beginning of Year 1,790 2,982 65
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,244 $ 1,790 $ 2,982
======================================================================================================
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income $ 5,004 $ 4,616 $ 6,594
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Security Gains (97) (18) (731)
Increase in Investment in Subsidiaries (1,531) (287) (1,772)
(Increase) Decrease in Receivables from Subsidiaries 1,000 (1,000) 1,657
Increase in Accrued Expenses and Other Liabilities 253 714 487
(Increase) Decrease in Other Assets 941 21 (203)
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 5,570 $ 4,046 $ 6,032
======================================================================================================
</TABLE>
52
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to Part I of this Annual Report on Form 10-K for
information as to the executive officers of the Corporation.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
of the Corporation. The information is based in part on information supplied
by such persons.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION
LAST 5 YEARS DIRECTOR SINCE
DIRECTORS WHOSE TERMS EXPIRE IN 1997
<S> <C> <C>
Douglas L. Burdick, 60 Private Investor (Jackson, Michigan) 1981
James N. Franklin, 47 Vice President-General Manager, 1995
The Worthington Steel Company, flat rolled
steel sales and processing (Jackson, Michigan)
Sherwood M. Furman, 60 President, Furman's, Inc., retail clothing store 1991
(Jackson, Michigan)
Steven W. Seely, 46 President and Chief Operating 1995
Officer of the Corporation(1)
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Harold P. Andrews, 64 Chairman, President and Chief Executive Officer, 1995
CM Ventures Ltd., investments
(Jackson, Michigan)(2)
Brian D. Bell, 59 Chairman and Chief Executive Officer of the 1983
Corporation; President and Chief Executive Officer
of City Bank and Trust
Alvin L. Glick, 70 Chairman of the Board and Chief Executive Officer, 1990
Alro Steel Corporation, a steel service center
(Jackson, Michigan)
Monte R. Story, 65 Chairman of the Board, Farhat, Story and 1984
Kraus, P.C., attorneys (East Lansing, Michigan)
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Stephen J.
Lazaroff, 43 President, Diversified Precision Products, Inc., 1993
manufacturer of specialty cutting tools
(Spring Arbor, Michigan)
Philip G. Miller, 50 President, Miller Tool & Die Co., special 1993
machining and manufacturing (Jackson, Michigan)
</TABLE>
53
<PAGE> 54
(1) Prior to 1995, Mr. Seely was Vice President of NBD Bancorp, Inc., Detroit,
Michigan (now First Chicago NBD Corporation, Chicago, Illinois).
(2) Prior to 1994, Mr. Andrews was Chairman and Chief Executive Officer of
Camshaft Machine Co., a manufacturer of automotive parts in Jackson, Michigan.
Reference is made to Part I of this Form 10-K for information regarding
the executive officers of the Corporation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and certain officers and persons who own more than 10%
of a registered class of the Corporation's equity securities, to file with the
Securities and Exchange Commission ("SEC") initial reports of ownership and
reports of changes in ownership of the Corporation's common stock and other
equity securities. These officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Corporation with copies of these
reports.
To the Corporation's knowledge, based solely on review of copies of such
reports furnished to the Corporation and written representations that no other
reports were required, during the fiscal year ended December 31, 1996 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% shareholders were complied with, except that one report with
respect to one transaction was filed late on behalf of Mr. Flanders.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents, for the fiscal years shown, the annual, long
term and other compensation paid to or accrued for the Corporation's Chief
Executive Officer and its other executive officers whose 1996 salary and bonus
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
- -----------------------------------------------------------------------------------------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND SALARY UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) BONUS ($) (1) OPTIONS (#) ($) (2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Brian D. Bell 1996 207,000 50,000 -0- 19,121
Chairman and CEO of 1995 200,000 -0- 5,180 19,207
CB Financial Corporation 1994 195,385 42,000 5,425 19,240
Steven W. Seely(3) 1996 170,800 33,000 -0- 10,514
President and COO of 1995 143,795 -0- 2,500 -0-
CB Financial Corporation
James E. Burtch(3) 1996 87,915 12,795 -0- 11,071
President and CEO of
City Bank
Francis B. Flanders(3) 1996 98,846 14,250 -0- 11,451
Chairman, President and
CEO of CB North
</TABLE>
54
<PAGE> 55
(1) Cash bonuses under the Short Term Executive Incentive Compensation Plan
for services rendered in fiscal years 1996, 1995 and 1994 have been shown in
the year earned, but were actually paid in the following fiscal year.
(2) The amounts shown for 1996 include (i) contributions by the Corporation
made for the account of the Named Executive Officer to the Corporation's Money
Purchase Pension Plan equal to 8% of qualifying salary and bonus, and (ii)
matching contributions made by the Corporation for the account of the Named
Executive Officer to the Corporation's 401(k) Plan equal to 1.5%, with a
maximum of 6%, of salary deferred by the Named Executive Officer, as set forth
below.
<TABLE>
<CAPTION>
MONEY PURCHASE
NAME PENSION PLAN AND OTHER 401(k) PLAN
- ---- ---------------------- -----------
<S> <C> <C>
Brian D. Bell $16,976 $2,145
Steven W. Seely 8,523 1,991
James E. Burtch 11,071 -0-
Francis B. Flanders 9,968 1,483
</TABLE>
Also included for Mr. Burtch is $2600 in life insurance premiums paid by the
Corporation for a policy the beneficiaries of which are designated by Mr.
Burtch.
(3) Mr. Seely became an executive officer of the Corporation in 1995. Messrs.
Burtch and Flanders became executive officers of the Corporation in 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
The following table presents information about stock options held by the
Named Executive Officers at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT FY-
FY-END (#) END ($) (1)
-------------------------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------
<S> <C> <C>
Brian D. Bell 10,544/5,261 33,222/22,080
Steven W. Seely 833/1,667 4,840/9,685
James E. Burtch 332/664 1,721/3,443
Francis B. Flanders 3,141/1,717 10,100/7,402
</TABLE>
(1) The value shown is based on the market bid price of the Corporation's
common stock on December 31, 1996 of $36.00 net of the option exercise price.
EMPLOYMENT AND SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENTS
The Company has entered into an Employment Agreement with Brian D. Bell
(the "Employment Agreement") with a term beginning on October 22, 1996 and
ending on September 1, 1999 and which provides for the payment of a salary of
not less than $136,377 per year. Mr. Bell is also eligible to participate in
any other compensation and benefit plans generally available to executive
employees of the Corporation of like grade and salary, including, but not
limited to, retirement plans, group life, disability, accidental death and
dismemberment, travel and accident, health and dental insurance plans and stock
option plans. The Employment Agreement also provides for Mr. Bell's use of an
automobile, which shall be transferred to Mr. Bell upon the expiration of the
term of the Employment
55
<PAGE> 56
Agreement or termination of Mr. Bell's employment following a change in control
or for any reason other than cause. The Employment Agreement provides that if
there is a change in control and either (a) Mr. Bell's employment is terminated
by the Corporation other than with cause; or (b) Mr. Bell resigns from his
employment following a material change in his title, authorities or duties in
effect immediately prior to the change in control, a reduction in his
compensation or benefits, or a change in his principal place of employment
without his consent to a city, different from the city which is the principal
place of his employment immediately prior to the change in control, then Mr.
Bell is entitled to receive his salary then in effect, but in no event no less
than $136,377 per year for the remainder of the term of his Employment
Agreement. Mr. Bell is also entitled to actively participate in the
Corporation's other compensation and benefit plans.
The Employment Agreement defines change in control as follows: (1) five
days before expiration of a tender offer or exchange offer that would have the
effect of giving a person, entity or group beneficial ownership of 25% of more
of the Corporation's voting stock; (2) consummation of a merger, consolidation
or sale of substantially all of the assets of the Corporation approved by its
shareholders; (3) the acquisition of beneficial ownership of 25% or more of the
Corporation's voting stock by a person, entity or group; or (4) a change in
composition of a majority of the Board of Directors in any period of two
consecutive years without certain approval of or participation by the Board in
such change.
The Corporation has also entered into a Supplemental Retirement Benefit
Agreement (the "Retirement Agreement") with Mr. Bell. The Retirement Agreement
provides an annual retirement benefit on or after age 62 equal to 10 percent of
Mr. Bell's final average compensation. Under the Retirement Agreement,
compensation is the average annual compensation for any three calendar years
falling within the final five years of employment that results in the highest
average amount, and compensation is determined by reference to base salary and
incentive bonus awards during a calendar year. The estimated annual benefit
payable to Mr. Bell should he retire at age 62 will be an annual amount equal
to $28,500. No other executive officer is covered by the Retirement Agreement.
CHANGE OF CONTROL AGREEMENT
The Corporation has entered into a Change of Control Agreement (the
"Control Agreement") with Steven W. Seely. Under the Control Agreement, if Mr.
Seely is involuntarily terminated other than for cause, if his duties are or
his principal place of employment is changed or if his compensation is reduced
during a period of up to two years following a change of control of the
Corporation, the Corporation will pay Mr. Seely a specified severance amount.
Under the Control Agreement, the severance amount will equal two times the
greater of Mr. Seely's annual base salary upon the change of control or upon
termination, plus continuation of coverage by the Corporation's medical and
dental insurance plans for 24 months. The Control Agreement defines change of
control as the occurrence of any one of the following: (i) a person or group
acquires beneficial ownership of 30% or more of the voting power of the
Corporation's outstanding securities; (ii) as a result of any one of certain
business combination or acquisition transactions, a majority of the Board of
Directors changes; (iii) as the result of a business combination transaction,
less than 70% of the Corporation's voting securities are owned by former
non-affiliate shareholders of the Corporation; and (v) the Corporation
transfers substantially all of its assets to another corporation which is not a
wholly owned subsidiary of the Corporation.
EXECUTIVE'S DEFERRED COMPENSATION PLAN
The Corporation has entered into an Executive's Deferred Compensation Plan
(the "Deferred Plan") with James E. Burtch which provides for the payment by
the Corporation of a benefit upon retirement of $2,000 per month for life or
180 months, whichever is longer. Mr. Burtch's retirement date for purposes of
the Deferred Plan is December 22, 1999. If Mr. Burtch's employment is
terminated for reasons other than death or total and permanent disability prior
to his normal retirement date, with or without cause, voluntarily or
involuntarily, and if such termination was not due to fraudulent or dishonest
conduct by Mr. Burtch, the Corporation is required to pay Mr. Burtch a pro rata
portion of the post-retirement benefits provided for in the Deferred Plan
beginning at his normal retirement date.
DIRECTOR COMPENSATION
Non-employee directors of the Corporation receive $500 per Board meeting
attended, $400 for each committee meeting attended (committee chairmen receive
$500 for each meeting attended) and a $2,500 annual retainer.
56
<PAGE> 57
Under the Non-Qualified Stock Option and Deferred Compensation Plan for
Independent Directors (the "Director Plan"), non-employee directors may
annually elect to defer all or part of their directors' fees. If a director
elects to defer fees under the Director Plan, amounts deferred are converted
each May 1 into an option to purchase the number of shares of common stock of
the Corporation equal to the total amount of fees deferred during the preceding
twelve month period divided by the fair market value of a share of common stock
on May 1. A director who participates in the Director Plan is credited
annually with an amount representing dividends on the total amount of options
granted together with interest on such dividend earnings. Amounts deferred are
payable after a director reaches mandatory retirement age. Options are not
exercisable until the director no longer serves as a director of the
Corporation.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors ("Committee"),
composed of four non-employee directors, is responsible for establishing the
base salaries of the Corporation's Chairman and Chief Executive Officer
("CEO"), Mr. Bell, as well as the Corporation's other executive officers. The
Committee is also responsible for establishing and administering the terms and
policies of the Corporation's incentive compensation plan and Stock Option
Plan.
1. Compensation Principles
The Corporation's executive compensation program is designed to be closely
linked to corporate performance. To this end, the Corporation has developed an
overall compensation strategy and specific compensation plans that tie a
significant portion of executive compensation to the Corporation's success in
meeting specified performance goals. The overall objectives of this strategy
are to attract and retain the best possible executive talent, to motivate these
executives to achieve the goals inherent to the Corporation's business
strategies, to provide a compensation package that recognizes individual
contributions as well as overall business results, and to link executive and
shareholder interests through equity based plans.
Each year the Committee reviews the Corporation's executive compensation
program. This review includes comparing the Corporation's executive
compensation, return on average assets, return on average equity, growth of
assets and overall corporate performance to peer groups of financial
institutions and financial institution holding companies, including those that
represent the Corporation's most direct competitors for executive talent. The
peer groups used for compensation analysis are generally not the same as the
peer group index in the Performance Graph set forth below. The Committee
believes that the Corporation's most direct competitors for executive talent
are not necessarily all of the companies included in peer groups reviewed to
compare shareholder returns. The annual compensation reviews permit an ongoing
evaluation of the link between the Corporation's performance and its executive
compensation in the context of the compensation programs of other comparable
companies.
The Committee determines the compensation of the CEO, Mr. Bell, and other
executive officers and sets policies for and reviews the compensation awarded
to other corporate and affiliate officers. This is designed to insure
consistency throughout the executive compensation program.
The key elements of the Corporation's 1996 executive compensation
consisted of base salary and the opportunities for annual incentive bonuses and
stock option grants. The Committee's policies with respect to each of these
elements, including the basis for the compensation awarded to Mr. Bell, are
discussed below. In addition, while the elements of the compensation described
below are considered separately, the Committee takes into account the full
compensation package afforded by the Corporation to the individuals, including
pension, insurance and other benefits.
2. Base Salaries
The base salaries for executive officers are determined by evaluating the
responsibilities of the position held and the experience of the individual, and
by reference to the competitive market place for executive talent, including a
comparison to base salaries for comparable positions at peer companies. The
Committee generally seeks to set executive officer salary levels approximately
at the median of the range of executive salaries paid by peer companies.
57
<PAGE> 58
Annual salary adjustments are determined by evaluating the performance of
the Corporation and of each executive officer and also take into account new
responsibilities. In the case of officers with responsibility for a particular
bank subsidiary, such subsidiary's financial results are also considered.
Performance measures considered by the Committee include, as appropriate and
without specific weighting, growth of assets, quality of loan portfolio,
capital position and relations with customers and employees.
With respect to the base salary paid to Mr. Bell in 1996, the Committee
considered a comparison of the base salaries of chief executive officers of
peer companies and its assessment of Mr. Bell's individual performance. As a
result of this review, Mr. Bell's annual base salary for 1996 was increased
from $200,000 to $214,000, with the increase taking effect July 1, 1996 such
that Mr. Bell received a salary of $207,000 for 1996. In particular, the
Committee's review of Mr. Bell's salary took into account the fact that the
adjustment resulted in a salary approximately at the peer group average.
Further, in addition to the general performance measures noted above, the
Committee also based the adjustment on its particular consideration of the
added burdens and responsibilities placed on Mr. Bell in implementing the
Corporation's restructuring process during 1995 and 1996 and recognition that
the Corporation's performance had begun to improve as a result.
3. Incentive Bonuses
Executive officers are eligible to receive an annual cash bonus under the
Corporation's short term incentive compensation plan. The plan seeks to give
participants an incentive to improve the overall profitability and growth of
each of the Corporation's subsidiary banks and to compensate executives who
contribute by their ability, industry and ingenuity to the management and
successful operation of the Corporation's subsidiaries.
Each year the Committee determines the executives who are eligible to
participate in the incentive compensation plan for that year, the percentage of
salary that each executive might receive as an incentive if, in the judgment of
the Committee, performance measures are achieved, the threshold and target
levels of the performance measures and the relative importance of the
performance measures. Generally, if the executive officers qualify for
bonuses, the bonuses can range between 10% and 50% of annual salary depending
on the executive's level of responsibility and a discretionary evaluation of
his or her individual performance.
In 1996, the performance measures utilized were return on assets, return
on equity, earnings per share, efficiency ratio, and assets (in millions of
dollars) per employee, each weighted equally. The target levels of the
foregoing performance measures under the plan have historically been set by the
Committee above peer group averages. For 1996 only, however, the Committee
deemed the special circumstances of the Corporation's restructuring and the
beginning of its improved performance resulting therefrom to warrant adjustment
of target levels. This included the exclusion of restructuring charges and
securities gains from the Corporation's results to which the target levels were
applied. The Corporation's 1996 composite performance achieved 50% of the
composite target level, which resulted in corresponding payouts to executives,
including Mr. Bell, of 50% of their potential incentive award opportunity. Mr.
Bell's incentive award was $50,000 or 50% of the potential award opportunity of
48.3% of his 1996 salary.
4. Stock Options
Under the Stock Option Plan, which was approved by shareholders in 1992,
stock options may be granted to the executive officers. The purpose of the
Stock Option Plan is to advance the interest of the Corporation and its
shareholders by providing key employees of the Corporation and its subsidiary
banks, upon whose judgment, initiative and efforts the successful conduct of
the business largely depends, with an additional incentive to perform in a
superior manner, as well as to attract and retain people with experience and
ability. The Committee is authorized to determine the size of stock option
awards, the officers or employees who receive them, and the conditions under
which they will be granted.
Stock options are designed to align the interests of executives with those
of the shareholders. Stock options are granted with an exercise price equal to
or greater than the market price of the common stock on the date of grant and
vest over a number of years. This approach is designed to incentivize the
creation of shareholder value over the long term. Consequently, recipients of
options realize compensation from options only to the extent the Corporation's
stock price increases.
58
<PAGE> 59
Consistent with past and continuing practice of the Committee,
consideration of stock option grants in 1996 was based in part on 1995
corporate performance. As corporate performance target levels were not reached
during 1995, no stock options were granted during 1996.
5. Conclusion
Through the programs described above, a significant portion of the
Corporation's executive compensation is linked directly to individual and
corporate performance. In 1996, as in previous years, between 10% and 40% of
the Corporation's executive compensation consisted of performance-based
variable elements. The Committee intends to continue the policy of linking
executive compensation to corporate performance, recognizing that the ups and
downs of the business cycle from time to time may result in imbalance during
particular periods.
Submitted by the Compensation Committee.
Douglas L. Burdick, Chairman
Alvin L. Glick
Sherwood M. Furman
Stephen J. Lazaroff
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Bell serves as a director of Alro Steel Corporation. Mr. Glick, the
Chairman and Chief Executive Officer of Alro Steel Corporation, serves as a
member of the Executive and Compensation Committees of the Corporation. As
described under "Item 13. Certain Relationships and Related Transactions," of
this Form 10-K, the Banks have had and expect to have in the future banking
transactions in the ordinary course of business with the Corporation's
directors, officers and their associates, including Mr. Glick and his
associates, on substantially the same terms, including interest rates,
collateral and repayment terms on extensions of credit, as those prevailing at
the time for comparable transactions with others.
59
<PAGE> 60
PERFORMANCE GRAPH
The graph below compares the cumulative total of shareholder return on the
Corporation's common stock for the last five fiscal years with the cumulative
total return on the Nasdaq Stock Market (US) Index, which is comprised of all
United States common shares traded on the Nasdaq Stock Market, and the Nasdaq
Bank Index, which is comprised of banks and bank holding company common shares
traded on the Nasdaq Stock Market, over the same period. The graph assumes the
investment of $100 in the Corporation's common stock, the Nasdaq Stock Market
(US) Index, and the Nasdaq Bank Index on December 31, 1991 and the reinvestment
of all dividends. The shareholder return shown on the graph is not necessarily
indicative of future performance.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
12/91 12/92 12/93 12/94 12/95 12/96
<S> <C> <C> <C> <C> <C> <C>
CB FINANCIAL CORPORATION 100 142 177 170 197 232
NASDAQ STOCK MARKET-US 100 116 134 131 185 227
NASDAQ BANK 100 146 166 165 246 326
</TABLE>
60
<PAGE> 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 28,
1997, as to the beneficial ownership of the Corporation's common stock by (i)
each person known by the Corporation to be the beneficial owner of more than 5%
of its common stock, (ii) each director of the Corporation, (iii) each Named
Executive Officer, and (iv) all directors and executive officers of the
Corporation as a group. The information is based in part on information
supplied by such persons. Except as noted, the beneficial owners exercise sole
voting and investment powers over all shares shown.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NUMBER OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- --------------------- ----------------
<S> <C> <C>
Citizens Banking Corporation 557,619 (1) 19.9 (1)
328 S. Saginaw Street
Flint, Michigan 48502
City Bank and Trust Company 353,090 (2) 12.6
One Jackson Square
Jackson, Michigan 49201
Harold P. Andrews(3) 6,067 (4) *
Brian D. Bell(3)(5) 30,218 (6)(7)(8) *
Douglas L. Burdick(3) 21,739 (4)(8) *
James E. Burtch(5) 2,303 (6)(7) *
Francis B. Flanders(5) 4,295 (6)(7) *
James N. Franklin(3) 8,294 (4)(8) *
Sherwood M. Furman(3) 3,935 (4)(8) *
Alvin L. Glick(3) 31,875 (4) *
Stephen J. Lazaroff(3) 13,506 (4)(8) *
Philip G. Miller(3) 42,664 (4)(8)(9) 1.5
Steven W. Seely(3)(5) 4,440 (6)(7) *
Monte R. Story(3) 11,266 (4)(8)(10) *
All directors and executive officers
as a group (13 persons) 185,771 6.2
</TABLE>
(1) Includes 557,409 shares beneficially owned by Citizens Banking Corporation
("Citizens") which are authorized but unissued. The right to acquire the
shares was granted to Citizens pursuant to a Stock Option Agreement, dated as
of January 27, 1997, entered into in connection with the Agreement and Plan of
Merger between the Company and Citizens also dated as of January 27, 1997. See
"Change of Control" below. Citizens has disclaimed beneficial ownership of the
557,409 shares. The percentage shown is that of the number of shares that
would be outstanding if the number of shares shown were issued upon exercise of
the option granted to Citizens under the Stock Option Agreement.
(2) All shares are held in a fiduciary capacity, including 85,827 shares
(3.1%) over which City Bank and Trust Company exercises sole voting and
investment powers, 5,396 shares (.19%) as to which it shares voting and
investment powers with others; and 261,867 shares (9.3%) as to which it has no
voting powers.
(3) The person named as a director of the Corporation.
(4) Includes shares covered by options granted under the Corporation's
Non-Qualified Stock Option and Deferred Compensation Plan for Independent
Directors as follows: Mr. Andrews, 1,199 shares; Mr. Burdick, 2,508 shares;
Mr. Franklin, 1,209 shares; Mr. Furman, 1,886 shares; Mr. Glick, 1,946 shares;
Mr. Lazaroff, 1,757 shares; Mr. Miller, 954 shares; and Mr. Story, 2,224
shares. These options become exercisable upon the director's retirement from
the Board.
61
<PAGE> 62
(5) The person named is a Named Executive Officer (as defined above; see Item
11. "Executive Compensation-Summary Compensation Table," of this Form 10-K).
(6) Includes the equivalent of shares held for the account of the person named
by City Bank and Trust Company as trustee of the Retirement and Savings Plan as
follows: Mr. Bell, 14,800 shares; Mr. Seely, 1,417 shares; Mr. Burtch, 1,647
shares; and Mr. Flanders, 477 shares.
(7) Includes for the person named shares covered by currently exercisable
options as follows: Mr. Bell, 10,544 shares; Mr. Seely, 833 shares; Mr.
Burtch, 332 shares; and Mr. Flanders, 3,141 shares.
(8) Includes shares as to which investment and voting powers are shared with
spouses or other family members as follows: Mr. Bell 1,096 shares; Mr.
Burdick, 3,788 shares; Mr. Franklin, 2,000 shares; Mr. Furman, 308 shares; Mr.
Lazaroff, 1,362 shares; Mr. Miller, 2,126 shares; and Mr. Story, 774 shares.
(9) Includes 36,815 shares held by partnerships in which Mr. Miller is a
partner.
(10) Includes 5,032 shares held in the profit sharing account of the law firm
of which Mr. Story is Chairman.
* Less than 1%.
CHANGE IN CONTROL
References made to Note 21 to the Consolidated Financial Statements
included under Item 8. "Financial Statements and Supplementary Data," of this
Form 10-K Report regarding the Agreement and Plan of Merger entered into by the
Corporation and Citizens Banking Corporation, which, if consummated, will
result in a change in control of the Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Banks have had, and expect to have in the future, banking transactions
in the ordinary course of business with the Corporation's directors, officers
and their associates, on substantially the same terms, including interest
rates, collateral and repayment terms on extensions of credit, as those
prevailing at the time for comparable transactions with others. The
Corporation believes that all such transactions during 1996 were made in the
ordinary course of business, were made on substantially the same terms,
including interest rates, collateral and repayment terms, as those prevailing
at the time for comparable transactions with others, and did not involve more
than a normal risk of collectability or present other unfavorable features.
62
<PAGE> 63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements:
The following consolidated financial statements of the Corporation and its
subsidiaries are included under Item 8 of this Form 10-K:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Report of Management
The information required for related party loans is presented in Note 6 of
the Notes to Consolidated Financial Statements in this Form 10-K. The
information required for Parent Company Only financial statements is presented
in Note 19 of the Notes to Consolidated Financial Statements in this Form 10-K.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
2. Schedules:
All schedules are omitted because they are inapplicable, not required or
the information is included in the financial statements or notes thereto.
3. Exhibits:
The following exhibits to this report are required by Item 601 of
Regulation S-K:
(2) Agreement and Plan of Merger by and among Citizens Banking
Corporation, Polaris Acquisition, Inc. and CB Financial Corporation,
dated as of January 27, 1997, is incorporated by reference to Exhibit
2.1 to the Form 8-K Report of the Corporation dated January 27, 1997.
(3) (a) Articles of Incorporation and Bylaws of the Corporation are
incorporated herein by reference to Exhibit 3(a) to the Form 10-K
Report of the Corporation for the year ended December 31, 1991
(file number 0-11011).
(3) (b) Bylaws of the Corporation are incorporated herein by
reference to Exhibit 3 to the Form 8-K Report of the
Corporation dated January 27, 1997.
(4) None (other than Exhibit (3), Articles of Incorporation and
Bylaws).
(9) None
(10)(a) The 1992 Employee Stock Option Plan, as restated July 19, 1994
is incorporated herein by reference to Exhibit (10)(a) to the Form
10-K Report of the Corporation for the year ended December 31, 1994.
(10)(b) The Non-Qualified Stock Option and Deferred Compensation Plan
for Independent Directors is incorporated herein by reference to the
exhibit to the Corporation's Registration Statement on Form S-8,
dated November 10, 1992 (Registration number 33-54618).
63
<PAGE> 64
(10) (c) Supplemental Retirement Benefit Agreement (the "Benefit
Agreement"), dated December 15, 1994, between the Corporation and
Brian D. Bell is incorporated herein by reference to Exhibit (10)(c)
to the Form 10-K Report of the Corporation for the year ended December
31, 1994 and Amendment #1 to the Benefit Agreement, dated October 22,
1996, is incorporated herein by reference to Exhibit 10 to the Form
10-Q Report of the Corporation for the quarter ended September 30,
1996.
(10) (d) Trust Agreement Under CB Financial Corporation Non-Qualified
Deferred Compensation Arrangement, between the Corporation and NBD
Bank, N.A. as trustee, dated December 15, 1994 is incorporated by
reference to Exhibit 10(c) to the Form 10-K Report of the Corporation
for the year ended December 31, 1994.
(10) (e) Employment Agreement, effective as of October 22, 1996,
between Brian D. Bell and the Corporation is incorporated by reference
to Exhibit 10 to the Form 10-Q Report of the Corporation for the
quarter ended September 30, 1996.
(10) (f) Change of Control Agreement, effective as of March 1, 1995,
between Steven W. Seely and the Corporation is incorporated by
reference to Exhibit 10 to the Form 10-Q Report of the Corporation for
the quarter ended September 30, 1995.
(10) (g) Description of the Short Term Executive Incentive (or
variable compensation)Plan of the Corporation, in which the executive
officers participate, is filed herewith.
(11) The computation of per share earnings is presented in the
Consolidated Statement of Income on page 42 of this Form 10-K Report.
(12) Reference is made to the computation of financial ratios for
financial institutions presented in Part I of this Form 10-K Report.
(13) Not Applicable.
(16) Not applicable.
(18) Not applicable.
(21) A list of current subsidiaries of the Corporation is incorporated
herein by reference to Exhibit (21) to the Corporation's Form 10-K
Report for the year ended December 31, 1995.
(22) Not applicable.
(23) The consent of independent public accountants, Arthur Andersen LLP,
is filed herewith.
(24) Not applicable.
(27) Financial data schedule is filed herewith.
(b) Reports on Form 8-K filed during the last quarter of 1996 covered by this
report:
No reports on Form 8-K were filed during the fourth quarter of 1996.
64
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Jackson and State of Michigan on March 11, 1997.
CB FINANCIAL CORPORATION
By: /s/ Brian D. Bell
------------------------------
Brian D. Bell, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons in the capacities
indicated on March 11, 1997.
/s/ Brian D. Bell Chairman and Chief Executive Officer
- --------------------------- (principal executive and financial officer)
Brian D. Bell and Director
/s/ Steven W. Seely Director
- ---------------------------
Steven W. Seely
/s/ A. Wayne Klump Treasurer (principal accounting officer)
- ---------------------------
A. Wayne Klump
/s/ Harold P. Andrews Director
- ---------------------------
Harold P. Andrews
/s/ Douglas L. Burdick Director
- ---------------------------
Douglas L. Burdick
/s/ James N. Franklin Director
- ---------------------------
James N. Franklin
/s/ Sherwood M. Furman Director
- ---------------------------
Sherwood M. Furman
/s/ Alvin L. Glick Director
- ---------------------------
Alvin L. Glick
/s/ Stephen J. Lazaroff Director
- ---------------------------
Stephen J. Lazaroff
/s/ Philip G. Miller Director
- ---------------------------
Philip G. Miller
/s/ Monte R. Story Director
- ---------------------------
Monte R. Story
65
<PAGE> 66
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10(g) Description of the Short Term Executive Incentive Plan
23 Consent of Independent Public Accountants
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10(g)
DESCRIPTION OF CB FINANCIAL SHORT TERM EXECUTIVE INCENTIVE PLAN
The purpose of the Short Term Executive Incentive Plan is to attract, motivate
and retain key employees. The plan is administered by the Compensation
Committee of the Board of Directors.
Objective:
- Promote strong linkage between performance of key employees and
Corporation performance.
- Reward performance that directly supports the Corporation's annual
business objectives.
- Reward and recognize innovation and creativity in accomplishing
business objectives.
- Provide opportunities for significant compensation based on
performance that does not increase fixed compensation costs.
- Attract, retain and motivate key employees necessary for the
Corporation's future success.
Eligible Participants:
All incumbents in the Executive Salary Structure Levels I through IV are
regularly eligible for the plan.
Corporation Performance Targets:
Corporation performance targets are set annually by the CEO and/or COO and
concurred by the Compensation Committee. These goals and objectives are broad
corporate-wide earnings and ratio objectives which are intended to reflect
generally accepted determinants of performance. They may include, but not
necessarily be limited to: return on assets (ROA), return on equity (ROE),
earnings per share (EPS), overhead (efficiency), assets per employee/$1
million, etc.
Award Opportunity:
Individual award levels vary based on the position each individual
occupies in the organizational hierarchy, as well as performance compared
to earnings and ratio objectives achieved by the Corporation. The higher
the position the greater the target individual payout. The Compensation
Committee has discretion and can award up to the highest payout percentage
for that individual.
Establishing Funding:
Funding for the plan is determined on the basis of a pool. The pool is
determined by the overall performance achieved by the corporation. Each of the
ratio and earnings objectives contribute 20% to the pool. Distribution of
funds to participants of the plan is, nevertheless, subject to the discretion
of the Compensation Committee. Consequently, strong overall corporate
performance to objectives does not guarantee an individual entitlement to
incentive payout. Payouts are payable in cash in one lump sum.
Plan Modification:
The Corporation may modify the plan or eliminate the plan at its sole
discretion.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 4, 1997 included in this Form 10-K, into CB
Financial Corporation's previously filed Registration Statement File No.
33-54616 and Registration Statement File No. 33-54618.
Detroit, Michigan, ARTHUR ANDERSEN LLP
March 20, 1997.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 44,719
<INT-BEARING-DEPOSITS> 2,244
<FED-FUNDS-SOLD> 4,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,887
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 609,021
<ALLOWANCE> 6,168
<TOTAL-ASSETS> 825,037
<DEPOSITS> 735,804
<SHORT-TERM> 386
<LIABILITIES-OTHER> 9,374
<LONG-TERM> 2,694
<COMMON> 21,008
0
0
<OTHER-SE> 55,771
<TOTAL-LIABILITIES-AND-EQUITY> 825,037
<INTEREST-LOAN> 45,898
<INTEREST-INVEST> 10,297
<INTEREST-OTHER> 251
<INTEREST-TOTAL> 56,446
<INTEREST-DEPOSIT> 23,150
<INTEREST-EXPENSE> 788
<INTEREST-INCOME-NET> 32,508
<LOAN-LOSSES> 3,792
<SECURITIES-GAINS> 510
<EXPENSE-OTHER> 29,152
<INCOME-PRETAX> 7,141
<INCOME-PRE-EXTRAORDINARY> 7,141
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,004
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 4.75
<LOANS-NON> 1,993
<LOANS-PAST> 512
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 341
<ALLOWANCE-OPEN> 3,934
<CHARGE-OFFS> 2,201
<RECOVERIES> 643
<ALLOWANCE-CLOSE> 6,168
<ALLOWANCE-DOMESTIC> 5,350
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 818
</TABLE>
