<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB / A
(Amendment No. 1)
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUER
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
COMMISSION FILE # 0-28388
CNB CORPORATION
(Name of Small Business Issuer as specified in its charter)
MICHIGAN 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 NORTH MAIN STREET, CHEBOYGAN, MI 49721
(Address of principal executive offices, including Zip code)
(616) 627-7111
Issuer's telephone number, including area code
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE NONE
Securities to be registered under 12(g) of the Act:
COMMON STOCK, PAR VALUE $5.00 PER SHARE
(Title of Class)
<PAGE> 2
PART 1
ITEM I - DESCRIPTION OF BUSINESS
CNB Corporation "("the Company") was incorporated in June, 1985 as a business
corporation under the Michigan Business Corporation Act, pursuant to the
authorization and direction of the Board of Directors of The Citizens National
Bank of Cheboygan ("the Bank").
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act with the Bank as its only wholly-owned subsidiary. The Bank was
acquired by the Company effective December 31, 1985. The Company has corporate
power to engage in such activities as permitted to business corporations under
the Michigan Business Corporation Act, subject to the limitations of the Bank
Holding Company Act and regulations of the Federal Reserve Board. In general,
the Bank Holding Company Act and regulations restrict the Company with respect
to its own activities and activities of any subsidiaries to the business of
banking or such other activities which are closely related to the business of
banking.
The Bank offers a full range of banking services to individuals, partnerships,
corporations, and other entities. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers.
The Bank's lending function provides a full range of loan products. These
include real estate mortgages, secured and unsecured commercial and consumer
loans, check credit loans, lines of credit, home equity loans and construction
financing. The Bank also participates in specialty loan programs through the
Michigan State Housing Development Authority, Small Business Administration,
Federal Home Loan Mortgage Corporation, Consolidated Farm Service Agency, and
Mortgage Guaranty Insurance Corporation. Through correspondent relationships,
the Bank also makes available credit cards and student loans. The Bank's loan
portfolio is over 50% residential real estate mortgages on both primary and
secondary homes. The borrower base is very diverse and loan to value ratios
are generally 80% or less. The commercial loan portfolio accounts for
approximately 10% of total loans. Agricultural lending is minimal and
predominately real estate secured. Construction lending is predominately
residential, with only an occasional "spec" home or commercial building.
Unsecured lending is very limited and personal guarantees are required on most
commercial loans.
Banking services are delivered through a system of five full-service banking
offices and three drive-in branches plus six automated teller machines in
Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the
Counties is primarily tourism with light manufacturing. The Bank maintains
correspondent bank relationships with several larger banks, which involve check
clearing operations, transfer of funds, loan participation, and the purchase
and sale of federal funds and other similar services.
Under various agency relationships, the Bank provides trust and discount
brokerage services, and mutual fund, annuity and life insurance products to its
customers.
SUPERVISION AND REGULATION
As a bank holding company within the meaning of the Bank Holding Company Act,
the Company is required by said Act to file annual reports of its operations
and such additional information as the Federal Reserve Board may require and is
subject, along with its subsidiary, to examination by the Federal Reserve
Board. The Federal Reserve Board is the primary regulator of the Company.
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The Bank Holding Company Act requires every bank holding company to obtain
prior approval of the Federal Reserve Board before it may merge with or
consolidate into another bank holding company, acquire substantially all the
assets of any bank, or acquire ownership or control of any voting shares of any
bank if after such acquisition it would own or control, directly or indirectly,
more than 5% of the voting shares of such bank holding company or bank. The
Bank Holding Company Act also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank and from engaging in
any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. However, holding
companies may engage in, and may own shares of companies engaged in, certain
businesses found by the Federal Reserve Board to be so closely related to
banking or the management or control of banks as to be a proper incident
thereto.
Under current regulations of the Federal Reserve Board, a holding company and
its nonbank sub-subsidiaries are permitted, among other activities, to engage,
subject to certain specified limitations, in such banking related business
ventures as consumer finance, equipment leasing, computer service bureau and
software operations, data processing, discount securities brokerage, mortgage
banking and brokerage, sale and leaseback, and other forms of real estate
banking. The Bank Holding Company Act does not place territorial restrictions
on the activities of nonbank subsidiaries of bank holding companies.
In addition, Federal legislation prohibits acquisition of "control" of a bank
or bank holding company without prior notice to certain federal bank
regulators. "Control" in certain cases may include the acquisition of as
little as 10% of the outstanding shares of capital stock.
The Company's cash revenues are derived primarily from dividends paid by the
Bank. National banking laws restrict the payment of cash dividends by a
national bank by providing, subject to certain exceptions, that dividends may
be paid only out of net profits then on hand after deducting therefrom its
losses and bad debts, and no dividends may be paid unless the bank will have a
surplus amounting to not less than one hundred percent (100%) of its common
capital stock.
The Bank is a national banking association and as such is subject to the
regulations of, and supervision and regular examination by, the Office of the
Comptroller of the Currency ("OCC"). Deposit accounts of the Bank are insured
by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and
restrictions under the laws of the State of Michigan and Title 12 of the United
States Code include the requirements that banks maintain reserves against
deposits, restrictions on the nature and amount of loans which may be made by a
bank, and the interest that may be charged thereon, restrictions on the payment
of interest on certain deposits, and restrictions relating to investments and
other activities of a bank. The Federal Reserve Board has established
guidelines for risk based capital by bank holding companies. These guidelines
establish a risk adjusted ratio relating capital to risk-weighted assets and
off-balance sheet exposures. These capital guidelines primarily define the
components of capital, categorize assets into different risk classes, and
include certain off-balance-sheet items in the calculation of capital
requirements. Tier 1 capital consists of shareholders' equity less intangible
assets and unrealized gain or loss on securities available for sale, and Tier 2
capital consists of Tier 1 capital plus qualifying loan loss reserves.
The capital ratios of the Bank exceed the minimum regulatory guidelines for
well-capitalized institutions. The following table shows the Company's
regulatory capital and capital ratios at December 31, 1995 and 1994, as well
as the regulatory requirements for adequately-capitalized and
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well-capitalized institutions established by the FDIC. Dollar amounts
shown are in thousands.
<TABLE>
<CAPTION>
Regulatory guidelines CNB Corporation
Adequate Well 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Tier 1 leverage ratio 4.00% 5.00% 9.76% 10.00%
Tier 1 risk adjusted capital ratio 4.00% 6.00% 18.88% 18.96%
Total risk adjusted capital ratio 8.00% 10.00% 20.13% 20.04%
Total shareholders' equity $16,251 $15,302
Unrealized gain (loss) on securities available
for sale, net of tax 52 (115)
------- -------
Tier 1 capital 16,199 15,417
Qualifying loan loss reserves 1,075 1,018
------- -------
Tier 2 capital $17,274 $16,435
======= =======
</TABLE>
The above ratios, in conjunction with regulatory ratios, have qualified the
Bank for the lowest FDIC insurance premium rate available to insured financial
institutions.
COMPETITION
In its primary market, which includes Cheboygan County and parts of Emmet,
Mackinac, Presque Isle and Montmorency Counties, the Bank maintains the largest
deposit base, or approximately 47.7% of deposit market share. The Bank is one
of two principal banking institutions located within this market. The
competing bank is a member of a multi-bank holding company with substantially
more assets than the Company. There are also two credit unions, one savings
and loan association and a brokerage firm. The Bank is the only independent
community bank in the Cheboygan County market.
On June 1, 1997, the Riegel - Neal Interstate Banking and Branching Efficiency
Act will be fully implemented allowing full interstate banking in Michigan and
other states which have opted into the program. As a result, the Company
expects that it will see new competition in its market area from out of state
financial institutions. Since the Bank's niche is as a community bank, it does
not feel the addition of out of state banks to its service area will have a
significant impact on its business.
In order to successfully compete, management has developed a sales and service
culture, stresses and rewards excellent customer service, and designs products
to meet the needs of the customer. The Bank also utilizes its ability to sell
loans in the secondary market.
EMPLOYEES
On December 31, 1995, the Bank employed 63 full-time and 14 part-time
employees. This compares to 65 full-time and 14 part-time employees as of
December 31, 1994. The Company has no full-time employees. Its operation and
business are carried out by officers and employees of the Bank who are not
compensated by the Company.
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ITEM 2. a. MANAGEMENT'S DISCUSSION AND ANALYSIS
STATISTICAL DISCLOSURE
SUMMARY
Net income for the Company for the year ended December 31, 1995, increased
29.4% to $2,364,534 or $5.08 per share compared to $1,826,659, or $3.93 per
share in 1994 and $1,737,209 or $3.71 per share in 1993.
Cash dividends declared totaled $3.40 per share in 1995, $2.50 in 1994 and
$2.05 in 1993. The Company's return on average assets was 1.48% for 1995,
1.20% for 1994 and 1.20% for 1993. The return on equity was 14.75% and 12.04%
for 1995 and 1994 respectively. The 1995 increase in earnings can be
attributed in part to an increase in the net interest income earned on
investments and loans as well as a one-time refund of FDIC assessments.
As of year-end 1995, assets were $166,559,959, an increase of $13,597,551 or
8.89% over 1994. This increase followed an increase of $3,307,332 or 2.21%
from 1993 to 1994. Total loans increased $4,441,725 at December 31, 1995 when
compared to December 31, 1994, while securities increased $3,282,885 and cash
and cash equivalents increased $5,991,463 over the same period. Deposits grew
during 1995 to $148,148,799 at year end, an increase of 8.93% over the prior
years. Shareholders' Equity increased $949,088 to $16,250,667 in 1995 from
$15,301,579 in 1994.
RESULTS OF OPERATIONS
ANALYSIS OF NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on
earning assets (loans and investments) and the interest paid on deposits. It
is the major component of earnings for a financial institution.
Net interest income is influenced primarily by changes in the balance and mix
of earning assets and interest-bearing liabilities, the portion of earning
assets that are funded by demand deposits and equity capital, and market
interest rates. Some of these factors are controlled to a certain extent by
management. Rates and fees on deposits and loans are monitored to be
competitive in the market area while maintaining the profitability levels
needed to meet established goals.
Conditions beyond management's control may have a significant impact on changes
in net interest income from one period to another. Examples of such external
factors are Federal Reserve Board monetary policy, introduction of new deposit
products by bank and non-bank financial competitors, and the fiscal and debt
management policies of the Federal government.
Interest rates were rising throughout most of 1994. The average yield on the
Bank's loan portfolio moved from 8.27% in 1993 to 8.39% in 1994. During that
same time, the average pre-tax yield on investment securities remained
unchanged at 4.77%. Although loan yields increased, the Bank sold $2.3 million
in student loans due to the increasing reporting burden and declining return.
These funds were put into securities. As a result, interest income on loans
decreased 0.5% while interest income on securities increased 21.8%.
Deposit rates move slower in response to changes in market rates. During 1994,
average deposits outstanding grew 5.95 % and the total interest cost increased
by 8.51%. Interest rates reversed course early in 1995, and decreased steadily
throughout the year although they did not return to the
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lows of 1994. During this time of falling interest rates, the Bank continued
to offer competitive products for both loans and deposits. As a result, the
average deposit balances grew 4.61%, the average rate on interest bearing
deposits increased from 2.87% to 3.59% and interest expense on deposits
increased 31.05%. Average loans increased 2.20% with an increase in loan rates
from 8.39% to 9.42% and an increase in interest income and fees on loans of
13.29%. Deposit increases not put into loans were invested in federal funds,
due to the high return they produced during 1995 and in anticipation of
increased loan demand. Average balances of securities and federal funds sold
increased 7.67%, average rates increased from 4.77% in 1994, to 5.64% in 1995,
and interest income increased 28.54%. As a result, net interest income was up
$154,514 or 2.50% in 1994, and $644,863 or 10.21% in 1995.
In the fall of 1995, the Bank decided to hold, rather than sell on the
secondary market, some fixed rate mortgages. The impact on 1995 was
immaterial, but as the Bank continues to hold more mortgages it will see
increases in our average balance of loans outstanding. It is expected that
these loans will be funded by the maturity of investment securities. This has
helped to balance our rate sensitive asset/liability position at six and twelve
months. As the yield on these mortgages is expected to exceed the yield on our
securities portfolio, management expects interest income to improve. Gains on
sales of loans, which will decrease somewhat, are not significant to the Bank
operations.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset and liability management involves the development and implementation of
strategies to maximize net interest income, minimize the vulnerability of
earnings to major changes in interest rates, and allow the Bank to profitably
compete in all phases of the business cycle. This process is carried out
through weekly meetings of senior officers representing lending,
deposit-gathering, funds management, investment, and marketing functions.
Interest rate risk arises when the maturity or repricing characteristics of
assets differ significantly from the maturity or repricing characteristics of
liabilities. One of the goals of asset and liability management is to balance
the various factors that create interest rate risk, thereby maintaining the
interest rate risk of the Bank within acceptable levels.
While controlling interest rate risk is an important objective, accommodating
customer maturity and repricing preferences is an equally important objective.
It is the function of asset and liability management to develop strategies to
reconcile these objectives. Management has developed policies and procedures
to sell the current production of long-term residential mortgages in the
secondary market to mitigate interest rate risk. Long term commercial loans
are generally written with floating rates tied to the prime rate to mitigate
interest rate risk on this category of loans.
One measure of interest rate risk is "gap", which represents the cumulative
difference between the amount of assets and liabilities maturing or repricing
at various time intervals. In measuring the interest rate risk gap, management
estimates loan repayments and early withdrawals of deposits and the interest
sensitivity of assets and liabilities which do not mature or reprice. Because
assets and liabilities do not reprice in exactly the same manner as interest
levels change, the gap should not be viewed as a sole indicator of how the net
interest income of the Bank will be affected by changes in interest rates.
Management's philosophy toward positioning the Bank for interest rate movement
is to minimize its exposure to changes in interest rates. This is done by
maintaining the Bank's gap position as close to a balanced position as
possible. This is achieved by purchasing short term investment securities,
booking variable rate loans and trying not to attract a large amount of
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CDs over $100,000 which are generally very rate sensitive. The Bank's
policy calls for a gap position at six and twelve months between 80% and 120%.
This policy is administered by the Asset/Liability committee which consists of
the President, and all members of senior management. This committee reviews the
gap position on a monthly basis. Members of the committee jointly have the
authority to make adjustments in loan or deposit pricing or in investment
strategy to bring about desired changes.
In the event of changes in interest rates, the Bank has the ability to manage
the interest margin due to the short nature of its deposit products, short
investment maturities and the high volume of variable rate loans. The steady
increase in net interest income in both rising and falling interest rate
environments demonstrates the effectiveness of these risk management
techniques.
Liquidity for a commercial bank is closely related to asset and liability
management. The goal of liquidity management is to maintain the availability
of resources to fund withdrawals and other operating requirements. Monitoring
maturities and future commitments and the use of short-term investments are
integral parts of liquidity management.
Management believes that deposit growth through core deposits provides the
primary funding for increases in loans and investment securities. Core
deposits include demand deposits, savings and money market accounts and
certificates of deposit under $100,000. The Bank is not dependent on high cost
volatile deposits.
The following chart shows the Bank's interest rate sensitivity as of December
31, 1995 in thousands of dollars.
<TABLE>
<CAPTION>
up to 4 to 12 1 to 5 over
3 months months years 5 years
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Federal funds sold $7,950
Interest bearing deposits in other banks $1,000
Taxable investment securities 12,167 16,566 $21,491 -
Non-taxable investment securities 1,112 2,692 3,455 $1,348
Loans 30,830 30,940 23,216 3,161
---------------------------------------------------------
Total Rate Sensitive Assets 52,059 51,198 48,162 4,509
Interest bearing demand deposits 13,737
Money market savings 30,051
Other time deposits 17,739 25,068 14,946 -
Total Rate Sensitive Liabilities $61,527 $25,068 $14,946 $-
Gap ($9,468) $26,130 $33,216 $4,509
Cumulative gap ($9,468) $16,662 $49,878 $54,387
Cumulative Ratio 84.61% 119.24% 149.12% 153.56%
</TABLE>
Loans with contractual maturities have been adjusted to consider prepays based
on historical experience. Savings deposits are classified as non-sensitive due
to the Bank's experience which indicates that it has a core of savings accounts
that do not respond to changes in interest rates.
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NON-INTEREST INCOME
Non-interest income increased 3.22% in 1995 following a decline of 5.07% in
1994. Fee income on deposit accounts has increased each year along with
deposit growth. Customers have been gradually switching to automated forms of
carrying funds such as the use of ATM cards and debit cards. As a result, we
experienced a decrease in exchange income of 7.9% during 1995. Exchange income
includes check cashing fees, travelers cheque fees, etc. Mortgage activity
typically decreases when loan rates are up and increases when loan rates are
down as customers refinance their mortgages to take advantage of lower rates.
Interest rates were at historic lows during 1993, which generated a great deal
of activity in mortgage refinancing. Interest rates climbed throughout 1994,
and the number of mortgages refinanced declined. In 1995, loan sales and
servicing income increased by 1.51% as the level of activity was stimulated by
decreases in rates. This fluctuation in mortgage activity caused some
volatility in the Bank's gain on loan sales although during this period the
Bank continued to build its portfolio of mortgage loans serviced for others
which has increased our service fee income. This income is likely to decline
in future years as loans pay off and the Bank retains these loans rather than
sells them.
NON-INTEREST EXPENSE
During 1995, non-interest expense decreased $174,632 or 3.75%. This decrease
is the result of reductions, large and small, in many expense categories as a
result of continued management review of operating expenses and the
implementation of changes where savings could be achieved without reducing
service. Some of these savings include a reduction in our employee health
insurance premium by $22,476 or 11.20% without any change in benefits following
a reduction in in 1994 of almost 2%. Changes were made to the telephone system
that resulted in savings of 25 percent in 1994 followed by another 28 percent
savings in 1995. However, it is expected that the 911 system now being
installed for Cheboygan County will increase telephone costs. Previously
unused space at the Mackinaw City branch is now being rented providing rental
income for this office. A favorable workers compensation experience rating
resulted in a net credit for this expense category in 1995 following a 5
percent increase in 1994. Since the introduction of risk-related FDIC
assessments in 1993, the Bank has paid the lowest FDIC premium rate allowed
which resulted in a reduction in FDIC expense from $281,610 in 1993 and
$298,648 in 1994 to $157,141 in 1995. This reduction in expense was due to a
lowering of assessment rates for the fourth quarter in 1995, as well as a
refund of $85,823 for premiums paid for the second and third quarters of 1995.
FDIC premiums are expected to be $2,000 for 1996. The Company expects to spend
approximately $500,000 during 1996 to remodel and refurnish the interior and
remodel the exterior of the main office. Once these improvements are placed in
service they will add to future periods depreciation expense although these
increases will not be material. This remodeling will be paid out of current
cash flow which will reduce current liquidity reducing future investments and
investment earnings.
The provision for loan losses was $36,000 in 1994, and $100,000 in 1995. The
provision was increased to allow for increased risk of loss associated with the
larger loan portfolio and to provide an amount that management feels is an
appropriate amount for possible future losses based on past experience, general
economic conditions, information about specific borrower situations, and
collateral values. The provision in future years is expected to be enough to
cover loan losses plus an estimated amount relative to loan growth.
PROVISION FOR INCOME TAX
An increase in the provision for income tax in 1995 is due to the increase in
the Company's pre-tax income. The effective tax rate, derived by dividing
applicable income tax expense by income before taxes was 31%, substantially
unchanged from 1994.
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FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The balance maintained in cash and cash equivalents varies based on daily
fluctuations in loan and deposit balances. Enough cash is maintained on a
daily basis to meet the anticipated liquidity needs of the Bank for customer
transactions and to clear checks drawn on other financial institutions. This
amount of clearings can vary by as much as $3 million in one day causing the
Bank's cash position to vary.
SECURITIES
As described in Note 2 of the Notes to Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.
During 1995, the Company experienced a shift in its unrealized gains and losses
on securities available for sale. At December 31, 1994, the unrealized loss
was $174,444. During 1995, market rates declined, resulting in increases in
the market value of higher rate investments. At December 31, 1995, the
unrealized net gain on securities available for sale was $78,384.
These unrealized gains and losses are temporary, since they are a result of
market changes rather than a reflection of credit quality. Management has no
specific intent to sell these securities at the present time. Should the
investments be held to maturity, no gain or loss will be experienced.
The Company maintains a conservative investment portfolio with a majority of
the investments in U.S. Treasury and Agency securities and issues of units of
government in our service area. The maturity on the U.S. Treasury and Agency
securities has typically been very short, two years or less, providing
liquidity in addition to quality. During 1995, management felt that there was
sufficient liquidity to increase the maturity of the investment portfolio,
thereby increasing the yield. This program is expected to continue through
1996.
Interest rates on treasury securities declined throughout most of 1995.
Consequently, by year end, the rate paid on overnight Federal funds was
approximately the same as the rate for a two year treasury. Because of this
flatter yield curve, the Bank decided to invest more in Federal funds thereby
gaining greater liquidity without giving up yield.
Additional information relative to securities is presented in Note 4 of the
Notes to Consolidated Financial Statements on page 16 of the Company's 1995
Annual Report to Shareholders. Such information is incorporated herein by
reference.
LOANS
Loan portfolio quality, diversification of the portfolio and the monitoring of
potential problem loans are the primary functions of loan portfolio management.
The Bank adheres to established written loan policies and procedures.
Management has established a loan review process which provides for selected
ongoing review of the loan portfolio in order to monitor loan portfolio quality
and performance.
As a full service lender, the Bank offers a variety of personal and commercial
loans. Home mortgages comprise the largest portion of the loan portfolio. The
Bank generally retains ownership of adjustable rate loans and short to medium
term fixed-rate loans, and originates and sells long term single family
residential fixed-rate mortgage loans to the secondary market. The Bank
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originated $5,361,016 in loans for sale in 1995 and $7,506,006 in 1994. This
practice allows the Bank to meet the housing credit needs of its service area
while maintaining an appropriate interest rate sensitivity and liquidity
position for the Bank.
During 1995, the Bank decided to increase the total amount of loans
outstanding by retaining selected fixed rate mortgages rather than selling them
on the secondary market. As a result, the amount of mortgage loans outstanding
increased by $4.3 million. In addition to mortgage loans, the Bank continued
to make loans for personal and business use, secured and unsecured, to
customers in our service area.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents that amount which management estimates
is adequate to provide for losses inherent in the loan portfolio. Management
determines the adequacy of the allowance for loan losses by reviewing selected
loans (including large loans, non-accrual loans and problem and delinquent
loans) and establishes specific loss allowances on these loans. Historical
loss information and local economic conditions are considered in establishing
allowances on the remaining loan portfolio. The allowance is increased by
provisions charged to expense and reduced by loan losses, net of recoveries.
The quality of the Bank's loan portfolio compares well with its peer group with
non-performing loans at .09% of total loans outstanding at December 31, 1995
and 0.35% at December 31, 1994. Loans charged off were 0.05% of total loans
during 1995 and 0.06% in 1994. The Bank added to the reserve for loan losses
in 1994 and 1995 to sufficiently keep up with loan growth and maintain the
relationship of the reserve to total loans outstanding.
DEPOSITS
The Bank's service area has experienced steady economic growth. The Bank
offers competitive deposit products and has, therefore, shown steady deposit
growth as it maintains its market share. The majority of this growth is in
time deposit accounts. Customers typically shift into time deposits when they
feel that interest rates are relatively high. This shift will result in an
increase in the banks cost of funds.
CAPITAL
The Bank has maintained an average leverage ratio of 10.04% for the last three
years. This strong capital position provides the Bank with the flexibility to
leverage its capital so as to be able to take advantage of expansion
opportunities. The Bank's strong capital position also provides the
flexibility to continue with a high dividend payout ratio which reached 67
percent in 1995. Earnings are projected to continue at current levels or
better which will allow the Bank to continue to pay out dividends at this
level.
LIQUIDITY
Consistent with 1994 as detailed in the consolidated statement of cash flows,
the Company continued to build its balance sheet with cash flows obtained from
operations and increases in deposits. Net income combined with noncash
operating expenses provided approximately $3.5 million in liquidity. this
liquidity combined with increases in deposits of $12,1 million, offset by
dividends paid to shareholders and the maturity of loans and securities was
reinvested into securities and allowed for loan growth of $4.5 million. Excess
liquidity was invested in Federal Funds which allowed the Bank to obtain a
strong yield without impairing liquidity. The Bank serves a market that is
very strongly
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tied to the summer tourist industry. Consequently, the Bank experiences
seasonal swings in liquidity. The bulk of commercial loan activity is in the
spring and summer months as businesses gear up for the summer season. Deposit
growth comes during June, July and August, then may decline through the fall and
winter months. As a result, the Bank is usually very liquid from June to
September. Investment maturities are distributed evenly from October to May to
meet the Bank's liquidity needs during these months. Occasionally this trend
changes due to factors such as IRS rulings which may cause our commercial
customers to make significant changes in the timing of their financial
transactions. The general economy in the state or the price of gasoline can
affect the summer tourism industry resulting in changes in the Bank's
liquidity. Other than changes caused by these outside influences which the
Bank has learned to cope with, the Bank does not anticipate any significant
changes in its seasonal pattern. The remodeling project planned for 1996 at
the main office will absorb approximately $500,000 of current liquidity. No
other material items affecting liquidity are anticipated.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following shows the distribution of average assets and average
liabilities for 1994 and 1995.
CONSOLIDATED AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
1995 1994
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $14,138 $8,775
Securities
Taxable 49,930 50,965
Tax exempt 5,189 4,282
Loans 86,158 84,302
Less allowance for loan losses (1,287) (1,261)
-------- --------
Loans, net 84,871 83,041
Other Assets 5,611 4,867
-------- --------
TOTAL ASSETS $159,739 $151,930
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $142,128 $135,861
Other Liabilities 1,579 903
Shareholders' Equity 16,032 15,166
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $159,739 $151,930
======== ========
</TABLE>
ANALYSIS OF NET INTEREST EARNINGS
The following tables detail the key determinants of net interest income: the
average daily balances, the related interest income on a pre-tax basis, and
interest expense, as well as the average rates earned on these assets and
liabilities. The Bank pays a competitive rate of interest on its savings and
money market accounts. This provides the Bank with a solid base of core
deposits. This resulted in an improved interest margin during 1994 in a time
of rising interest rates as the bank was able to improve its earnings on
interest bearing assets more than it increased the cost of deposits. Interest
rates were declining throughout most of 1995, but were still above the levels
of 1993. Since the Bank invested heavily in two year securities during 1993,
it was able to renew these securities during 1995 at higher rates even though
interest rates were generally trending down.
Page 11
<PAGE> 13
The Bank funds loan growth to the extent of local loan demand. Average loans
outstanding declined during 1994 due in part to the sale of $2.3 million of
student loans. Funds were, therefore, added to the securities portfolio.
During 1995, a combination of increased loan demand and the decision to retain
some of the fixed rate residential mortgages resulted in increased loans
outstanding.
Average balances and rates for 1995 and 1994 in thousands of dollars, were as
follows:
<TABLE>
<CAPTION>
------------- 1 9 9 5 -------------- ------------- 1 9 9 4 -----------
AVERAGE AVG INTEREST AVERAGE AVG INTEREST
BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Securities
Taxable securities $ 49,930 5.61% $ 2,800 $ 50,965 4.75% $2,421
Tax exempt securities (pre-
tax basis) 5,189 5.10% 265 4,282 5.03% 215
Federal funds sold 8,348 6.14% 513 3,699 4.72% 174
Loans, net of unearned
income and deferred loan
fees 86,158 9.42% 8,119 84,302 8.39% 7,075
$149,625 7.82% $11,697 $143,248 6.90% $9,885
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest
bearing demand deposits 40,012 2.71% 1,086 43,459 2.73% 1,187
Time deposits 82,243 4.89% 4,022 73,177 3.70% 2,711
AVERAGE RATE ON
INTEREST BEARING
DEPOSITS $122,255 3.59% 5,108 $116,636 2.87% 3,898
Net interest income 3.64% $ 6,589 3.56% $5,987
Net interest income as a percent
of average interest earning-assets 4.40% 4.18%
</TABLE>
Page 12
<PAGE> 14
CHANGE IN NET INTEREST INCOME
VOLUME AND RATE CHANGE
The table below shows the effect of volume and rate changes on net interest
income (a).
<TABLE>
<CAPTION>
1995 compared to 1994 1994 compared to 1993
(In Thousands of Dollars) (In Thousands of Dollars)
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Interest earned on:
Federal funds sold $273 $66 $339 ($39) $61 $22
Taxable securities (50) 429 379 490 (15) 475
Tax exempt securities (b) 46 3 49 0 6 7
Loans 159 885 1,044 (116) 103 (13)
--- --- ----- ---- --- ---
Total Interest Income 428 1,383 1,811 335 155 491
--- ----- ----- --- --- ---
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest bearing
demand deposits (94) (7) (101) 65 (11) 54
Time deposits 366 945 1,311 122 74 196
--- --- ----- --- -- ---
Total Interest Expense 272 938 1,210 187 63 250
--- --- ----- --- -- ---
Net Change in Net Interest
Income $156 $445 $601 $148 $92 $241
==== ==== ==== ==== ==== ====
</TABLE>
(a) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(b) Tax exempt securities are shown on a pre-tax basis.
INVESTMENT PORTFOLIO
As deposits continued to grow during a time of moderate loan growth, funds have
become available for investment. The securities portfolio of the Bank increased
during 1995. The chart below shows the change in each of the categories of the
portfolio during 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
(In Thousands of Dollars)
<S> <C> <C>
U.S. Treasury and agency securities ($3,748) $8,731
Tax exempt obligations of states and political subdivisions 3,766 933
Taxable obligations of state and political subdivisions
and other securities 3,265 (5,472)
------ ------
NET CHANGE IN SECURITIES $3,283 $4,192
====== ======
</TABLE>
Page 13
<PAGE> 15
Holdings in tax exempt obligations of state and political subdivisions
increased as well as other securities. Holdings in U.S. Treasury and agency
securities declined in 1995 due to maturing securities. No securities were
sold during 1995 or 1994. The chart below shows the percentage makeup of the
portfolio as of December 31.
<TABLE>
<S> <C> <C>
U.S. Treasury and agency securities 77.91% 89.25%
Tax exempt obligations of states and
political subdivisions 14.63% 8.72%
Taxable obligations of states and political
subdivisions and other securities 7.46% 2.03%
------- -------
Total Securities 100.00% 100.00%
======= =======
</TABLE>
MATURITIES AND SENSITIVITIES OF SECURITIES TO CHANGES IN INTEREST RATES
The following table shows the maturity of the Bank's security portfolio at
December 31, 1995 in thousands. Securities are shown as being due in
accordance with the contractual scheduled principal repayments.
<TABLE>
<CAPTION>
Due in Due after Due after
one year one through five through Due after
or less five years ten years ten years
-------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
U.S. Government and agency $24,604 $21,150
Weighted average yield 5.46% 6.43%
State & political subdivisions 7,676 3,795 1,039 309
Weighted average yield 5.09% 5.24% 4.76% 5.17%
Other 180
Weighted average yield 6.00%
</TABLE>
LOAN PORTFOLIO
TYPES OF LOANS
The following table shows the amount and yield of loans in each major category
at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In Thousands of Dollars)
Percent Percent
Balance Yield of portfolio Balance Yield of portfolio
------- ------ ------------ ------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $30,017 10.10% 34.05% $30,976 9.69% 37.01%
Real estate
Residential mortgage 46,506 8.59% 52.76% 42,151 8.11% 50.36%
Construction 2,229 9.18% 2.53% 1,696 9.25% 2.03%
Installment loans to individuals 9,395 10.47% 10.66% 8,882 10.12% 10.61%
------- ----- ------ ------- ----- ------
Total loans $88,147 9.32% 100.00% $83,705 8.93% 100.00%
======= ====== ======= ======= ====== =======
</TABLE>
Page 14
<PAGE> 16
CONCENTRATION OF CREDITS
The Bank monitors its loans to borrowers engaged in similar activities since
these loans could be similarly impacted by changes in general economic
conditions. A review by Standard Industry Code does not reveal any
concentration in excess of 10% of the loan portfolio. However, due to the
nature of our service area, the Bank combine those SIC codes which it feels are
related to the tourism industry. Industries included are hotel and motel,
restaurant, novelty and gift shops, campgrounds, bars, marine transportation,
etc. The total of these classifications at December 31, 1995, was $12 million
or 13.6% of total loans and 73.7% of capital. At this time the Bank does not
have any concerns about the continued viability of the tourism industry in its
service area.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the maturity of the Bank's loan portfolio at December
31, 1995.
Loans are shown as being due in accordance with the contractual scheduled
principal repayments.
<TABLE>
<CAPTION>
Due within 2 - 5 After 5
one year Year Year Total
--------- ------ ------ -------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
Fixed rate loans:
Commercial and Agriculture $ 4,749 $11,024 $ 939 $16,712
Installment loans to individuals 3,643 4,490 520 8,653
Real estate - mortgage 2,836 3,369 3,102 9,307
------- ------- ------- -------
Total Fixed Rate 11,228 18,883 4,561 34,672
Variable Rate:
Commercial and Agriculture 19,524 785 0 20,309
Installment loans to individuals 48 0 0 48
Real estate - mortgage 27,570 5,548 0 33,118
------- ------- ------ -------
Total Variable Rate 47,142 6,333 0 53,475
------- ------- ------ -------
TOTAL LOANS $58,370 $25,216 $4,561 $88,147
======= ======= ====== =======
</TABLE>
Risk Elements
Non-accrual, Past Due and Restructured Loans
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Nonperforming Loans: 1995 1994
----- -----
<S> <C> <C>
Non-accrual loans $ 26 $ 161
Accruing loans past due 90
days or more 56 132
----- -----
Total nonperforming loans $ 82 $ 293
===== =====
Percent of total loans 0.09% 0.35%
</TABLE> ===== =====
It is the Bank's policy to follow OCC guidelines for national banks in the
determination of loans classified as non-accrual. These guidelines provide for
classifying as non-accrual any loan that is 90 days delinquent unless the loan
is both well secured and in the process of collection.
Page 15
<PAGE> 17
SUMMARY OF LOAN LOSS EXPERIENCE
Analysis of the Allowance for Loan Losses
The allowance for loan losses represents that amount which management estimates
is adequate to provide for losses inherent in the loan portfolio. Management
determines the adequacy of the allowance for loan losses by reviewing selected
loans (including large loans, non-accrual loans and problem and delinquent
loans) and establishes specific loss allowances on these loans. Historical
loss information and local economic conditions are considered in establishing
allowances on the remaining loan portfolio. The allowance is increased by
provisions charged to expense and reduced by loan losses, net of recoveries.
Changes In Allowance For Loan Losses
<TABLE>
<CAPTION>
(In thousands of dollars)
1995 1994
---- ----
<S> <C> <C>
Balance at beginning of period $1,246 $1,258
Charge-offs:
Commercial and Agriculture 0 (27)
Real estate - mortgage (44) (15)
Real estate - construction 0 0
Installment loans to individuals (26) (22)
------ ------
Total charged-off (70) (64)
Recoveries:
Commercial and Agriculture 0 0
Real estate - mortgage 17 3
Real estate - construction 0 0
Installment loans to individuals 11 13
------ ------
Total recoveries 28 16
------ ------
Net charged -off (42) (48)
Provision for loan losses 100 36
------ ------
Balance at end of period $1,304 $1,246
Ratio of net charged-off to ====== ======
average loans 0.05% 0.06%
====== ======
</TABLE>
The Bank maintains a conservative philosophy as to the balance to be maintained
in the reserve for loan losses. Even though the current delinquencies and
charged off loans are low, there have been times in the past ten years when
loans charged off approached 1% of total loans. It is management's belief that
a charge off of this magnitude, although not currently anticipated, is always a
possibility. A reserve balance of approximately 1.5% of total loans is,
therefore, considered prudent based on past experience and management's belief
of the risk within the portfolio.
Page 16
<PAGE> 18
The Bank has experienced low loan losses and low charges to the reserve in
recent years. The allowance for loan losses was increased in 1995 to
account for the increase in loans outstanding. The Bank does not anticipate
any unusual activity in loans charged-offs or recoveries in the coming year,
Net loans charged off are expected to be in the range of $50,000 to
$100,000. Additional information relative to the allowance for possible
loan losses is presented in Note 2 of the Notes to Consolidated Financial
Statements, page 14 of the Annual Report to Shareholders which is
incorporated herein by reference.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table shows the allocation of the allowance at December 31:
<TABLE>
<CAPTION>
(In Thousands of Dollars)
--------------- 1995 --------------- ---------1994 ---------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Commercial and Agriculture $88 34.05% $57 37.01%
Real estate - mortgage 43 52.76% 18 50.35%
Real estate - construction 0 2.53% 0 2.03%
Installment loans to individuals 36 10.66% 43 10.61%
Unallocated 1,137 0.00% 1,128 0.00%
------ ------ ------ ------
Total Allowance $1,304 100.00% $1,246 100.00%
====== ====== ====== ======
</TABLE>
DEPOSITS
AVERAGE BALANCES
The following table shows the average balances outstanding and average
interest rates for each major deposit category for the year:
<TABLE>
<CAPTION>
(In thousands of dollars)
---------- 1 9 9 5 --------- -------- 1 9 9 4 --------
AVG BAL RATE AVG BAL RATE
<S> <C> <C> <C> <C>
Non interest-bearing
demand $19,873 $19,222
Interest bearing demand 13,377 2.40% 13,739 2.41%
Savings deposits 26,635 2.87% 29,720 2.88%
Time deposits 82,243 4.89% 73,177 3.71%
-------- --------
Total Average Deposits $142,128 $135,858
======== ========
</TABLE>
DEPOSIT MATURITY DISTRIBUTION
The following shows the amount of deposits at December 31, 1995 and 1994
according to their maturity date and the interest rate on said deposits.
<TABLE>
<CAPTION>
Deposits over
All Deposits Rate $100,000 Rate
<S> <C> <C> <C> <C>
Three months or less $108,135 2.66% $5,682 5.40%
Over three months through six months 10,347 5.16% 1,662 5.42%
Over six months through twelve months 14,721 5.72% 1,790 5.99%
Over twelve months 14,946 5.75% 1,811 6.19%
-------- -------
Total Deposits $148,149 $10,945
======== =======
</TABLE>
Page 17
<PAGE> 19
Deposits Issued by Foreign Offices
NONE
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Return on average assets 1.48% 1.20%
Return on average shareholders' equity 14.75% 12.04%
Dividend payout ratio 66.92% 63.69%
Average equity to average total assets 10.03% 9.98%
Book value per share $17.46 $16.44
Cash dividends per share $1.70 $1.25
</TABLE>
All per share statistics have been retroactively adjusted for the 2 for 1 stock
split of May 31, 1996.
SHORT TERM BORROWINGS
NONE
ITEM 2. b. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1996.
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation and its subsidiary, Citizens
National Bank of Cheboygan ("Bank") for the three month period ending March 31,
1996. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to form 10-SB and
Rule 310 of Regulation SB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-SB for the year ended December 31, 1995.
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement 122, Accounting for Mortgage Servicing Rights. The Statement
requires that the Company recognize mortgage servicing rights on loans it
purchases or originates with the intent to sell as an asset. Capitalized
mortgage servicing rights are included in other assets and are not material at
March 31, 1996.
FINANCIAL CONDITION
SUMMARY
Total deposits remained nearly flat at $148.1 million from December 31. 1995 to
March 31, 1996. This is normal for this time of year as many seasonal
businesses are closed and are working off of last summer's cash reserves.
Loans during this period increased by $2.9 million. Two million of this was
due to the addition of fixed rate mortgages to the bank's loan portfolio that
in earlier years would have been sold on the secondary market. The remainder
of the loan increase was in the
Page 18
<PAGE> 20
area of commercial loans. Cash and cash equivalents declined by $7.2 million as
these funds were invested in longer term interest earning assets, increasing
securities by $3.9 million and using the remainder to fund loan growth.
SECURITIES
There were no sales or transfers of securities during the first quarter of
1996. Most of the addition to securities was invested in U.S. Treasury and
agency securities with maturities of two to three years in keeping with the
bank's conservative investment policy.
RISK ELEMENTS
Non-accrual, Past Due and Restructured Loans
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Nonperforming Loans: 3/31/96 12/31/95
------- --------
<S> <C> <C>
Non-accrual loans $26 $26
Accruing loans past due 90
days or more 266 56
------ -------
Total nonperforming loans $292 $82
====== =======
Percent of total loans 0.32% 0.09%
====== =======
</TABLE>
It is the Company's policy to follow OCC guidelines for national banks in the
determination of loans classified as non-accrual. This guideline provides for
classifying any loan as non-accrual that is 90 days delinquent unless the loan
is both well secured and in the process of collection. Interest lost on
non-accrual loans during the first quarter of 1996 is $-0- and during 1995 was
$2,563.
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents that amount which management estimates
is adequate to provide for losses inherent in the loan portfolio. Management
determines the adequacy of the allowance for loan losses by reviewing selected
loans (including large loans, non-accrual loans and problem and delinquent
loans) and establishes specific loss allowances on these loans. Historical loss
information and local economic conditions are considered in establishing
allowances on the remaining loan portfolio. The allowance is increased by
provisions charged to expense and reduced by loan losses, net of recoveries.
Page 19
<PAGE> 21
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(In thousands of dollars)
1996 1995
----------- ----
<S> <C> <C>
Balance at beginning of period $1,304 $1,258
Charge-offs:
Commercial and Agriculture 0 (27)
Real estate - mortgage 0 (15)
Real estate - construction 0 0
Installment loans to individuals (3) (22)
------ ------
Total charged-off (3) (64)
Recoveries:
Commercial and Agriculture 0 0
Real estate - mortgage 1 3
Real estate - construction 0 0
Installment loans to individuals 4 13
------ ------
Total recoveries 5 16
------ ------
Net recovery 2 (48)
Provision for loan losses 25 36
------ --
Balance at end of period $1,331 $1,246
====== ======
Ratio of net charged-off to
average loans (NA) 0.06%
==== ======
</TABLE>
The Bank maintains a conservative philosophy as to the balance to be maintained
in the reserve for loan losses. Even though the current delinquencies and
charged off loans are low, there have been times in the past ten years when
loans charged off approached 1% of total loans. It is managements belief that
a charge off of this magnitude, although not currently anticipated, is always a
possibility. A reserve balance of approximately 1.5% of total loans is,
therefore, considered prudent.
RECENT DEVELOPMENTS
The following material events and transactions have occurred subsequent to
March 31, 1996, and have not been reported previously reported herein.
1. John D. Perrino, Vice President and Branch Manager retired from Citizens
National Bank as of June 14, 1996. Management is in the process of
interviewing candidates for this position.
2. Shareholders of the Company approved a 2 for 1 stock split at the
Shareholders' Annual Meeting on May 21, 1996 to shareholders of record May 31,
1996. Per share statistics as originally reported in the Annual Report to
Shareholders of December 31, 1995 are restated as follows:
<TABLE>
<CAPTION>
Original Amount Restated amount
----------------- ------------------
1995 1994 1995 1994
----------------- ------------------
<S> <C> <C> <C> <C>
Net Income Per Share $ 5.08 $ 3.93 $ 2.54 $ 1.97
Cash Dividend Declared 3.40 2.50 1.70 1.25
Book Value (at December 31) 34.92 32.88 17.46 16.44
</TABLE>
3. Shareholders approved an employee incentive stock option plan at the
Shareholders' Annual Meeting on May 21, 1996. Options for 12,500 shares were
issued on July 11, 1996 to key officers at $32.00 per share.
4. The December 31, 1995 form 10-SB discussed plans to remodel the main office
at a cost of
Page 20
<PAGE> 22
approximately $500,000. Bids have since been received and the
cost of the project is now anticipated to be around $800,000.
ITEM 3 - DESCRIPTION OF PROPERTY
(a) The Company and the Bank have their primary office at 303 N. Main Street,
Cheboygan, Michigan. In addition, the Bank owns and operates the following
facilities: South Main drive-in, 991 1/2 South Main Street, Cheboygan;
Downtown drive-in, 414 Division Street, Cheboygan; East Side drive-in, 816
East State Street, Cheboygan; Onaway Office, 20581 W. State Street, Onaway;
Pellston Office, 200 Stimpson, Pellston; Mackinaw City Office, 580 S. Nicolet
Street, Mackinaw City; Indian River Office, 3990 Straits Hwy., Indian River.
All properties are owned by the Bank free of any mortgages or encumbrances.
All properties are in good condition. During 1996, the Bank plans to spend
approximately $500,000 to remodel and refurnish the interior and remodel the
exterior of the main office.
(b) (1) Not applicable
(b) (2) The Bank makes first and second mortgage loans to its customers for
the purchase of residential and commercial properties. Historically, the Bank
has sold the majority of its residential mortgages loans qualifying for the
secondary market to the Federal Home Loan Mortgage Corporation ("FHLMC"). The
mortgage loan portfolio serviced by the Bank for the FHLMC totaled over $23
million at December 31, 1995. Beginning in the fall of 1995, the Bank decided
to hold some of these residential mortgage loans to increase the Bank's total
mortgage loan portfolio.
(c) Not applicable
Page 21
<PAGE> 23
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following reflects the data on those persons known by the Company to
be the beneficial owner of more than five percent of the common stock of the
Company as of March 11, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) (2) (3) (4)
Title of Name and Amount and Percent
Class Address of Nature of of Class
Beneficial Beneficial
Owner Ownership
COMMON Thomas A. Ellenberger
P O Box 190
Onaway, MI 49765 28,800 (1) 6.19%
COMMON Dessie M. Ormsbee
P O Box 5157
Cheboygan, MI 49721 27,820 (2) 5.97%
</TABLE>
(1) 693 of such shares are owned of record by Thomas A. Ellenberger. 28,197
of such shares are owned of record by the Thomas A. and Henrietta M.
Ellenberger Trust of which Mr. Ellenberger is the trustee.
(2) 13,910 of such shares are owned of record by the Dessie M. Ormsbee Trust,
and 13,910 by the Leroy J. Ormsbee Trust, of which Mrs. Ormsbee is
trustee.
(b) The following reflects data on shares beneficially owned by all directors
and nominees, and named executive officers.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Ownership of Common Stock
<S> <C> <C> <C> <C>
Title of
Class Name and Sole Voting Shared Voting Percent
Address of and/or and/or of
Beneficial Investment Investment Common
Owner Power Power(1) Stock
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<S> <C> <C> <C>
Common Robert E. Churchill
President and Chief
Executive Officer
CNB Corporation and
Citizens National Bank
303 N. Main Street
Cheboygan, MI 49721 5,200 1.12%
</TABLE>
Page 22
<PAGE> 24
DIRECTORS
<TABLE>
<CAPTION>
Title of Name and Address Sole Voting Shared Voting Percent of
Class of Beneficial Owner and/or Investment and/or Investment Common
Power Power (1) Stock
<S> <C> <C> <C> <C> <C>
Common James H. Taylor
7354 Mullett Lake Rd
Cheboygan, MI 49721 1,343 0.29%
Common Thomas A. Ellenberger
P O Box 190
Onaway, MI 49765 28,800 6.19%
Common James C. Conboy, Jr.
229 Court Street
Cheboygan, MI 49721 298 2,409 0.58%
Common Kathleen M. Darrow
(Director of Bank Only)
PO Box 3
Mackinaw City, MI 49701 381 0.08%
Common Thomas J. Ellenberger
(Director of Bank Only)
P O Box 190
Onaway, MI 49765 1,092 440 0.09%
Common Thomas J. Fisher
P O Box 628
Indian River, MI 49749 1,993 0.43%
Common John L. Ormsbee
9506 N. Straits Hwy.
Cheboygan, MI 49721 5,214 1.12%
Common Vincent J. Hillesheim
724 S. Main Street
Cheboygan, MI 49721 465 0.10%
Common Francis J. VanAntwerp, Jr.
P. O. Box 8
Cheboygan, MI 49721 14 2,610 0.56%
Common John P. Ward
303 N. Main Street
Cheboygan, MI 49721 1,566 0.34%
Common All directors and named executive officers 10.90%
as a group of 11 persons 50,733 shares
</TABLE>
(1) The number of shares presented includes shares as to which the indicated
person is legally entitled to share voting and/or investment power by reason of
joint ownership, trust, or other contract or property right.
Page 23
<PAGE> 25
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
EXECUTIVE OFFICERS
Robert E. Churchill, age 55, is President and Chief Executive Officer of the
Bank and the Company. He started with the Bank as Vice President in 1975, was
named Senior Vice President in 1977, Executive Vice President in 1978,
Executive Vice President and Chief Administrative Officer in 1984, Executive
Vice President and Chief Operations Officer in 1987, and President and Chief
Executive Officer in 1988. Mr. Churchill has been a director of the Bank since
1983 and the Company since 1985.
John P. Ward, age 59, has been Senior Vice President and Secretary of the
Company since July, 1985. He joined the Bank as Trust Officer in 1973, became
Assistant Vice President & Cashier in 1979, Vice President & Cashier in 1980,
Senior Vice President & Cashier in 1983. Mr. Ward became a director or the
Company and the Bank in 1994.
John F. Ekdahl, age 45, is Senior Vice President of the Bank and the Company.
He started with the Bank as Vice President in 1987, was named First Vice
President in 1989 and Senior Vice President in 1992. He became Senior Vice
President of the Company in 1993.
Jean K. Hunt, age 47, is Treasurer of the Company and Vice President and
Controller of the Bank. She started with the Bank in 1972 as Auditor. She was
named Assistant Cashier & Auditor in 1975, Assistant Vice President &
Controller in 1977, and Vice President & Controller in 1980.
Kenneth N. Sheldon, age 49, is First Vice President-Examination of the Bank.
He started with with the Bank in 1977 as Assistant Vice President, and was
promoted to Vice President in 1978, Senior Vice President in 1980, and First
Vice President-Examination in 1987.
Susan A. Eno, age 41, has been with the Bank since 1975. She was named
Assistant Vice President in 1989 and Vice President-Personnel in 1990.
Douglas Damm, age 42, started as Vice President-Loans of the Bank from 1987 to
1992. He was named Vice President & Senior Loan Officer in 1992.
Richard L. Wine, age 51, Vice President-Mortgage Lending, has been with the
Bank in that capacity since 1988.
Anthony Nowosad, age 52, is Vice President-Data Processing of the Bank, a
position he has held since 1987. Prior to that he was Assistant Vice
President-Operations from 1983 to 1987.
John D. Perrino, age 58, started with the Bank as Assistant Vice President and
Manager of the Onaway Branch in 1975. He was promoted to Vice President and
Branch Manager in 1983.
No executive officer is involved in any legal proceedings as described in Item
401 of Regulation S-B.
There are no family relationships between any of the above listed executive
officers and any director.
Page 24
<PAGE> 26
DIRECTORS
<TABLE>
<CAPTION>
Director
Since (1)
<S> <C>
Robert E. Churchill, age 55, President and CEO of the Company
and the Bank 1983
John P. Ward, age 59, Senior Vice President and Secretary of the
Company, and Senior Vice President and Cashier of the Bank 1994
James H. Taylor, age 70, Retired in 1986 after serving 15 years as
President of Northwood Oil Company, a jobber for the Shell Oil
Company. 1972
James C. Conboy, Jr., age 48, Attorney/Partner, Bodman, Longley, &
Dahling, LLP since 1990. Attorney/Partner, Conboy, Fell, Stack &
Hanson from 1988-1990. 1983
Kathleen Darrow, age 53, Co-owner of Darrow Bros. Excavating, Inc.
since 1968 and president of that company since November, 1995.
Group Sales & Special Events coordinator for the Mackinac State Historic
Parks since 1983. Director of Bank only. 1995
Thomas A. Ellenberger, age 70, Owner and President of Albert Ellenberger
Lumber Co. (Retail Lumber Sales) since 1957. (2) 1973
Thomas J. Ellenberger, age 45, Part owner of Albert Ellenberger Lumber Co.
(Retail Lumber Sales) since 1986 and Vice President and Secretary of that
company since 1992. Director of Bank only. (2) 1995
Thomas J. Fisher, age 66, Owner and President of North Country Homes
Corporation (Modular Home Sales) since 1976. 1993
Vincent J. Hillesheim, age 45, President of Crusoe's Rivertown Motors,
Inc. d/b/a Anchor In Marina since 1987. Business manager 1980-1987.
President of Lincoln Bridge Plaza, Inc. (Commercial Property Leases)
(Commercial Property Leases) since 1980.
Vice President of Great Lakes Accounting & Tax Service, Inc. 1994
John L. Ormsbee, age 57, Sole proprietor of Jack's Sales (Auctioneering
Services, Logging, and Christmas Tree Sales) since 1981. 1980
Francis J. VanAntwerp, Jr., age 51, President, Durocher Dock & Dredge,
Inc. (Marine Construction) since 1984, President and owner of Salvor, Ltd.
Real Estate and Equipment Leasing) since 1986. 1990
(1) All directors are directors of the Company and the Bank, except as otherwise indicated. Any
directorship listed prior to 1985, the year the Company was formed, would have been as a director
of the Bank.
(2) Thomas J. Ellenberger is the son of Thomas A. Ellenberger
</TABLE>
Page 25
<PAGE> 27
All directors have been elected or appointed to serve until the next annual
meeting of shareholders and until their successors are elected and qualified.
No director is involved in any legal proceedings as described in Item 401 of
Regulation S-B.
ITEM 6 - EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Annual Compensation All other
Name and Position Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Robert E. Churchill 1995 $ 114,000 (1) $ 47,537 $ 5,860 (2)
President and CEO
</TABLE>
(1) Includes director fees of $4,000
(2) Includes employer's matching contribution of $4,249 under 401(k) plan.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995 the Bank had, and expects to have in the future, banking
transactions in the ordinary course of its business with the Company's
directors and officers and their related interests on substantially the same
terms, including interest rates and collateral on loans, as those prevailing
at the time for comparable transactions with others. These transactions did
not involve more than the normal risk of collectability or present other
unfavorable features. Activity in excess of $60,000 with these individuals
for 1995 was as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
<S> <C>
Balance outstanding, December 31, 1994 $ 999
New loans and rewrites 6,664
Payments and payoffs 6,682
-----------
Balance outstanding, December 31, 1995 $ 981
===========
</TABLE>
Page 26
<PAGE> 28
ITEM 8 - DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 500,000 shares of common
stock, par value $5.00 per share, of which 465,386 shares are issued and
outstanding (retroactively adjusted for the 2 for 1 stock split of May 31,
1996). All common stock outstanding is fully paid and non-assessable. Common
shareholders are entitled to dividends to the extent funds are legally
available and the Board of Directors declares payment. The Company's ability to
pay dividends is largely contingent upon the Bank's ability to pay dividends.
Common shareholders have voting power on all matters requiring shareholder
approval and are entitled to one vote per share. The Company's shareholders do
not have cumulative voting rights or preemptive rights. Upon liquidation or
dissolution of the Company, the net assets of the Company would be
distributable to the common shareholders pro rata.
Article VII of the Company's articles of incorporation provides in general
that in addition to any affirmative vote required by law, the Company's
articles of incorporation or bylaws, the approval or authorization of a
Business Combination shall require the affirmative vote of a majority of the
voting power of all of the shares of Voting Stock held by shareholders other
than an Interested Shareholder, with which or by or on whose behalf, directly
or indirectly, a Business Combination is proposed, voting together as a single
class. This affirmative vote is required notwithstanding the fact that no vote
may be required or that a lesser percentage or separate class vote may be
otherwise required.
The foregoing requirements are not applicable to any Business Combination, if
all of the conditions specified in either of the following paragraph First or
Second are met:
First: The Business Combination shall have been approved by a majority of the
Continuing Directors; or
Second: All of the following conditions have been met:
(1) The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other
than cash to be received per share by holders of Common Stock in such Business
Combination shall be at least equal to the highest amount determined under
subparagraphs (i) and (ii) below:
(i) The highest price per share paid by or on behalf of the Interested
Shareholder for any shares of Common Stock in connection with the acquisition
by the Interested Shareholder of beneficial ownership of shares of Common Stock
(a) within the two-year period immediately prior to the first public
announcement of the proposed Business Combination (the "Announcement Date") or
(b) in the
Page 27
<PAGE> 29
transaction in which it became an Interested Shareholder, whichever is higher;
and
(ii) The Fair Market Value per share of Common Stock on the Announcement Date
or on the date on which the Interested Shareholder became an Interested
Shareholders (the "Determination Date"), whichever is higher.
(2) The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other
than cash to be receive per share by holders of shares of any class or series
of outstanding Voting Stock, other than Common Stock, shall be at least equal
to the highest amount determined under clauses (i), (ii) and (iii) below:
(i) The highest price per share paid by or on behalf of the Interested
Shareholder for any shares of such class of series of Voting Stock in
connection with the acquisition by the Interested Shareholder of beneficial
ownership of shares of Voting Stock (a) within the two-year period immediately
prior to the Announcement Date or (b) in the transaction in which it became an
Interested Shareholder, whichever is higher; and
(ii) The Fair Market Value per share of Voting Stock on the Announcement Date
or on the Determination Date, whichever is higher; and
(iii) The highest preferential amount per share to which the holders of
shares of such class or series of Voting Stock would be entitled, if any, in
the event of any voluntary of involuntary liquidation, dissolution or winding
up of the Company.
(3) After such Interested Shareholder has become an Interested Shareholder
and prior to the consummation of such Business Combination: (i) except as
approved by a majority of the Continuing Directors, there shall have been no
failure to declare and pay at the regular date therefor any full periodic
dividends in accordance with the terms of any outstanding Preferred Stock, and
(ii) there shall have been (a) no reduction in the annual rate of dividend paid
on the Common Stock, except as approved by a majority of the Continuing
Directors, and (b) an increase in such annual rate of dividends as necessary to
reflect any reclassification, recapitalization, reorganization, or any similar
transaction which has the effect of reducing the number of outstanding shares
of the Common Stock, unless the failure so to increase such annual rate is
approved by a majority of the Continuing Directors.
(4) After such Interested Shareholder has become an Interested Shareholder,
such Interested Shareholder shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder), of any loans, advances,
guarantees, pledges, or other financial assistance or any tax credits or other
tax advantages provided by the Company.
Page 28
<PAGE> 30
(5) Such Interested Shareholder shall not have made any major change in the
Company's business or equity capital structure without the approval of a
majority of the Continuing Directors.
For purposes of Article VII, the term "Business Combination" shall mean:
(a) any merger or consolidation of the Company or any Subsidiary with any
Interested Shareholder or any other company which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested Shareholder;
or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, investment, loan, advance, guarantee, agreement to purchase,
agreement to pay, extension of credit, joint venture or other arrangement with
or for the benefit of any Interested Shareholder of any Affiliate or Associate
of any Interested Shareholder involving any Substantial Part of the assets,
securities or commitments of the Company, any Subsidiary or any Interested
Shareholder or any Affiliate or Associate of any Interested Shareholder; or
(c) the adoption of any plan or proposal for the liquidation or dissolution
of the Company proposed by or on behalf of any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder; or
(d) any reclassification of securities or recapitalization of the Company or
any merger or consolidation of the Company with any of its Subsidiaries or any
other transaction that has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class or series of
Voting Stock, or any securities convertible into Voting Stock, or into equity
securities of any Subsidiary, that is beneficially owned by an Interested
Shareholder or any Affiliate or Associate thereof; or
(e) any agreement, contract or arrangement providing for any one or more of
the actions specified in the foregoing clauses (a) through (d).
The term "Interested Shareholder" means any person who or that:
(a) is a person who is the beneficial owner, directly or indirectly, of more
than 20% of the voting power of the then outstanding Voting Stock; or
(b) is an Affiliate or Associate of the Company and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner of 20% or more of the voting power of the then outstanding Voting Stock."
The term "Continuing Director" means any member of the Board of Directors of
the Company while such person is a member of the
Page 29
<PAGE> 31
Board, who is not an Affiliate or Associate or representative of the Interested
Shareholder and was a member of the Board prior to the time that the Interested
Shareholder became such, and any successor of a Continuing Director, while such
successor is a member of the Board, who is not an Affiliate or Associate or
representative of the Interested Shareholder.
The foregoing summary of Article VII of the Company's articles of
incorporation does not purport to be complete, and is qualified in its entirety
by the provisions of Article VII, which is hereby incorporated by this
reference.
Page 30
<PAGE> 32
PART II
ITEM 1 - 'MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK
(a) (1) (i) The common stock of the Company has no public trading market.
All trades are handled on a direct basis between buyer and seller.
The Bank acts as the Company's transfer agent.
The principal market for the Company's stock consists of
existing shareholders, family members of existing stockholders and
individuals in its service area.
(ii) The high and low bid for each quarter for the last two fiscal
years, based on those sales known to the Company as reflected in
actual trades as adjusted for the 2 for 1 stock split of May 31,
1996, is as follows:
<TABLE>
<CAPTION>
High Low
---- ---
1994 per share statistics
<S> <C> <C>
1st quarter $ 28.00 $ 27.50
2nd quarter 28.00 25.00
3rd quarter 25.00 25.00
4th quarter 26.25 25.00
1995 per share statistics
1st quarter $ 27.50 $ 26.50
2nd quarter 27.50 26.25
3rd quarter 26.00 25.75
4th quarter 26.00 25.00
</TABLE>
(2) (i) There are no shares subject to outstanding options, warrants to
purchase, or securities convertible into common equity.
(ii) The number of common equity shares that could be sold pursuant
to Rule 144 under the Securities Act adjusted for the 2 for 1
stock split of May 31, 1996, is 9,306.
(iii) There are no public offerings pending.
(b) There are approximately 515 holders of record of the common
stock of the Company as of December 31, 1995.
(c) (1) During 1994 the Company declared regular dividends of $1.00 per
share plus a special dividend of $0.25. In 1995 the Company
declared regular dividends of $1.20 per share plus a special
dividend of $.50. These per share statistics are retroactively
adjusted for the 2 for 1 stock split of May 31, 1996. Subject to
approval of the Board of Directors of the Company and applicable
law, the Company anticipates that it will continue to pay a regular
cash dividend equal to or greater than the prior years. Special
dividends are considered each December based on the current year's
earnings. These have resulted in a dividend payout ratio gradually
increasing to the current level of 67% in 1995.
Page 31
<PAGE> 33
(2) The Federal Reserve Board's Policy on the Payment of Cash
Dividends by Bank Holding Companies restricts the payment of cash
dividends based on the following criteria:
1. The Company's net income from operations over the past year
must be sufficient to fully fund the dividend.
2. The prospective rate of earnings retention must be consistent
with the Company's capital needs, asset quality, and overall
financial condition.
ITEM 2 - LEGAL PROCEEDINGS
(a) Neither the Company nor the Bank are a party to any pending legal
proceedings other than routine litigation that is incidental to the business of
lending.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company has not changed its independent public accounting firm since its
inception in 1985.
ITEM 4 - RECENT SALES OF UNREGISTERED SECURITIES
The Company has not sold any securities in the past three years.
ITEM 5 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Michigan Business Corporation Act authorizes a corporation to grant
indemnity to officers and directors for certain liabilities. Article VI of the
Company's articles of incorporation provides for indemnification of its
officers, directors, employees and other agents to the extent permitted by
Michigan law. The Company has purchased directors' and officers' liability
insurance covering certain liabilities incurred by its directors and officers
in connection with the performance of their duties.
In general, the Michigan Business Corporation Act (the "Act") provides for
indemnification of any "covered employee" (as later defined) of a corporation
who is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is was a
covered employee. A "covered employee" is any person who is serving or who
served as a director, officer, employee or agent of the corporation or any
other corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan), if the service was at the request of the
corporation. The Act discriminates between actions brought about by third
parties and those brought for the benefit of the corporation. In a third party
action, the covered employee may be indemnified if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation or its shareholders. In a criminal
action or proceeding, indemnification is further limited to cases where the
covered employee had no reason or cause to believe that his or her conduct was
unlawful. In actions for the benefit of the corporation (such as derivative
suits), the covered employee may be indemnified if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best
Page 32
<PAGE> 34
interests of the corporation or its shareholders.
All directors have been elected or appointed to serve until the next annual
meeting of shareholders and until their successors are elected and qualified.
No director is involved in any legal proceedings as described in Item 401 of
Regulation S-B.
PART F/S
ITEM 1 - FINANCIAL STATEMENTS, DECEMBER 31, 1995
The following consolidated financial statements and report of independent
auditors appear on pages 10 to 20 in the Annual Report to Shareholders for the
year ended December 31, 1995 and are incorporated herein by reference.
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity - years ended
December 31, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1995 and 1994
Notes to the Consolidated Financial Statements - December 31, 1995
Report of Independent Auditors
Consolidated financial statements for the three months ended March 31, 1996
which follow, have been prepared in accordance with GAAP. All necessary
accruals and adjustments have been made which in the opinion of management are
necessary in order to make the financial statements not misleading.
Page 33
<PAGE> 35
ITEM 2 - FINANCIAL STATEMENTS, MARCH 31, 1996
(A) CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
In thousands of dollars
============================================================================================
<S> <C> <C>
ASSETS
Cash and demand balances in other banks $5,340 $7,340
Federal funds sold 2,750 7,950
- --------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,090 15,290
Securities available for sale 10,275 11,821
Securities held to maturity (fair value of
$52,641and $47,325 respectively) 52,505 47,011
- --------------------------------------------------------------------------------------------
Total securities 62,780 58,832
Total loans 91,055 88,147
Less: allowance for loan losses (1,332) (1,306)
- --------------------------------------------------------------------------------------------
89,723 86,841
Premises and equipment, net 1,942 1,945
Accrued interest receivable and other assets 3,753 3,652
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $166,288 $166,560
============================================================================================
LIABILITIES
Deposits
Noninterest bearing $16,801 $20,778
Interest bearing 131,299 127,371
- --------------------------------------------------------------------------------------------
Total deposits 148,100 148,149
Accrued interest payable and other liabilities 1,689 2,160
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 149,789 150,309
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; 1,000,000 shares
authorized; 465,386 shares issued and outstanding 2,327 2,327
Capital surplus 4,979 4,979
Retained earnings 9,194 8,893
Unrealized gain (loss) on securities available for sale,
net of tax of $0 and $27 respectively (1) 52
- --------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 16,499 16,251
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $166,288 $166,560
============================================================================================
</TABLE>
All per share statistics have been retroactively adjusted to reflect the 2 for
1 stock split of May 31, 1996. See Notes to consolidated financial statements.
Page 34
<PAGE> 36
(B) CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
In thousands of dollars 1996 1995
==============================================================================
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,164 $1,993
Interest on securities
Taxable 774 649
Tax exempt 101 57
Interest on federal funds sold 116 106
- ------------------------------------------------------------------------------
Total interest income 3,155 2,805
INTEREST ON DEPOSITS 1,405 1,153
- ------------------------------------------------------------------------------
NET INTEREST INCOME 1,750 1,652
Provision for loan losses 25 25
- ------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,725 1,627
OTHER INCOME
Service charges on deposit accounts 151 138
Other service charges 17 16
Other income 68 63
- ------------------------------------------------------------------------------
Total other income 236 217
OTHER EXPENSE
Salaries and employee benefits 687 663
Occupancy and equipment expense 58 60
Federal deposit insurance premiums 1 76
Furniture & equipment expense 79 78
Other expense 276 291
- ------------------------------------------------------------------------------
Total other expense 1,101 1,168
- ------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX 860 676
Federal income tax 256 201
- ------------------------------------------------------------------------------
NET INCOME $604 $475
==============================================================================
Net income per share of common stock $0.65 $0.51
Cash dividends declared per share of common stock $0.33 $0.28
Return on average assets (annualized) 1.45% 1.24%
Return on average equity (annualized) 14.62% 12.29%
</TABLE>
All per share statistics have been retroactively adjusted to reflect the 2 for
1 stock split of May 31. See Notes to consolidated financial statements.
Page 35
<PAGE> 37
(C) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Capital Retained
In thousands of dollars Stock Surplus Earnings (a) Total
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,327 $4,979 $8,110 ($115) $15,301
Net income, 1995 2,365 2,365
Cash dividends declared, $1.70 per share (1,582) (1,582)
Net change in unrealized gain (loss)
on securities available for sale 167 167
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 2,327 4,979 8,893 52 16,251
Net Income YTD 1996 604 604
Cash dividends declared, $0.33 per share -303 (303)
Net change in unrealized gain (loss)
on securities available for sale (53) (53)
- -------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 $2,327 $4,979 $9,194 ($1) $16,499
=============================================================================================================
</TABLE>
(a) Unrealized Gain (Loss) on Securities Available for Sale
All per share statistics have been retroactively adjusted to reflect the 2 for
1 stock split of May 31, 1996. See Notes to consolidated financial statements.
Page 36
<PAGE> 38
(D) YEAR TO DATE CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended March 31,
In thousands of dollars 1996 1995
=====================================================================================================
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 604 $ 475
- -----------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation 69 64
Amortization and accretion of investment securities (net) 316 226
Provision for loan losses 25 25
Loans originated for sale (1,459) (477)
Proceeds from sales of loans 1,463 478
Gain on sales of loans (4) (1)
Change in assets and liabilities:
Income taxes receivable 256 201
Interest receivable (183) (10)
Interest payable 8 13
Other assets (146) (148)
Other liabilities (15) 60
- -----------------------------------------------------------------------------------------------------
Total adjustments 330 431
- -----------------------------------------------------------------------------------------------------
Net cash from operating activities 934 906
- -----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from maturities of securities available for sale 3,485 -
Proceeds from maturities of securities held to maturity 9,769 7,277
Purchase of securities available for sale (2,029) (1,978)
Purchase of securities held to maturity (15,569) (3,549)
Net increase in loans (2,907) (1,205)
Property and equipment expenditures (66) (19)
- -----------------------------------------------------------------------------------------------------
Net cash from investing activities (7,317) 526
- -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in deposits (49) 2,112
Dividends paid (768) (468)
- -----------------------------------------------------------------------------------------------------
Net cash from financing activities (817) 1,645
- -----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (7,200) 3,077
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 15,290 9,298
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,090 $ 12,375
=====================================================================================================
Cash Paid During the Period for
Interest $ 1,397 $ 1,140
Income taxes $ 512 $ 403
=====================================================================================================
</TABLE>
See Notes to consolidated financial statements.
Page 37
<PAGE> 39
(E) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of CNB Corporation
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10 Q-SB and Rule 310 of Regulation S-B . Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ending March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Registration of Securities on Form 10-SB as of December 31, 1995.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities at March 31, 1996 are shown
below in thousands of dollars.
<TABLE>
<CAPTION>
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury and agency securities $ 9,981 $ 39 $ 41 9,979
Tax-exempt obligations of states and
political subdivisions 293 3 296
-------------------------------------------------------------
Total $ 10,274 $ 42 $ 41 $ 10,275
=============================================================
Securities Held to Maturity
U.S. Treasury and agency securities $ 39,178 $ 155 $ 147 $ 39,186
Tax-exempt obligations of states and
political subdivisions 7,532 64 20 7,576
Other securities 5,795 83 5,878
-------------------------------------------------------------
Total $ 52,505 $ 302 $ 167 $ 52,640
=============================================================
</TABLE>
The amortized cost and fair value of securities by contractual maturity at
March 31, 1996 are shown below, in thousands of dollars
<TABLE>
<CAPTION>
-------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,294 $ 2,297 $ 16,657 $ 16,695
Due after one year through five years 7,982 7,978 32,610 32,622
Due after five years through ten years 2,698 2,780
Due after ten years 540 543
-------------------------------------------------------------
Total $ 10,276 $ 10,275 $ 52,505 $ 52,640
=============================================================
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with our without call or
prepayment penalties.
There were no sales of securities for the periods ending March 31, 1996 and
1995.
Page 38
<PAGE> 40
Securities carried at $981,427 as of March 31, 1996 were pledged to secure
deposits of public funds and for other purposes as required by law.
The Company had no security holdings the value of which individually exceeds
ten percent of stockholders' equity at March 31, 1996, other than those held by
the U.S. Government, its agencies and other political subdivisions.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended March 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Balance at beginning of period $ 1,306 $ 1,247
Loans charged off (3) (3)
Recoveries credited to allowance 4 2
Provision charged to operations 25 25
-------------------------
Balance at end of period $ 1,332 $ 1,271
=========================
</TABLE>
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," ("SFAS No. 114") at January
1, 1995. Under this standard, the carrying value of loans considered to be
impaired is reduced to the present value of expected future cash flows or to
the fair value of the collateral by allocating a portion of the allowance for
loan losses to such loans. If these allocations cause the allowance for loan
losses to require increase, such increase is reported as bad debt expense.
There was no increase in the allowance for loan losses due to the adoption of
SFAS No. 114 at January 1, 1995.
The Company had no impaired loans during 1995, nor during the first quarter of
1996.
NOTE 4 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
The following table shows the commitments to make loans and the unused lines of
credit, in thousands of dollars, available to Bank customers at March 31, 1996.
<TABLE>
<S> <C>
Outstanding commitments to make fixed rate loans $ 2,613
Outstanding commitments to make variable rate loans 6,251
Unused lines of credit - variable rate 2,824
Standby letters of credit - variable rate 29
---------
$ 11,717
=========
</TABLE>
Page 39
<PAGE> 41
PART III
ITEM 1 - INDEX TO EXHIBITS
The following exhibits are filed as part of this report:
* Exhibit 1 Articles of Incorporation of the Company and all amendments
thereto.
* Exhibit 2 Bylaws of the Company as currently in effect.
* Exhibit 3 Annual Report to the Shareholders for the year ended
December 31, 1995
The consolidated financial statement and notes related
thereto appear on pages 10 to 20 in the Annual Report to
Shareholders are incorporated by reference in this Form 10-SB
Report. With the exception of these statements and
information, the Annual Report to Shareholders for the year
ended December 31, 1995, is not deemed filed as part of this
Form 10-SB Report.
* Exhibit 4 List of Subsidiaries.
* Previously filed as exhibits to the Company's Form 10 S-B filed April 29,
1996, File No. 0-28388, and incorporated herein by reference.
Page 40
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has caused this registration statement to be signed on
its behalf by the undersigned thereunto duly authorized.
CNB CORPORATION
(Registration)
Date - August 13, 1996 Date - August 13, 1996
/s/ Robert E. Churchill /s/ Jean K. Hunt
----------------------- -------------------------
Robert E. Churchill Jean K. Hunt
President and Chief Executive Officer Vice President/Controller
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