<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-KSB
[X ] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-28388
CNB CORPORATION
(Name of Small Business Issuer in its charter)
Michigan 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 North Main Street, Cheboygan, MI 49721
(Address of principal executive offices, including Zip code)
Issuer's telephone number (616) 627-7111
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered under 12(g) of the Exchange Act:
Common Stock, par value $2.50 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
------ ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [X].
State issuer's revenues for its most recent fiscal year. $13,996,000
-----------
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practical date. Common 930,772 shares
DOCUMENTS INCORPORATED BY REFERENCE
Certain portion of the issuer's proxy statement for the annual meeting of
shareholders scheduled for May 20, 1997 are incorporated herein by reference
into Part III of this report and certain portions of the Annual Report to
Shareholders for the fiscal year ended December 31, 1996 are incorporated
herein by reference into Part II of this report.
<PAGE> 3
PART I
ITEM I - DESCRIPTION OF BUSINESS
CNB Corporation (Company) was incorporated in June, 1985 as a business
corporation under the Michigan Business Corporation Act, pursuant to the
authorization and direction of the Board of Directors of The Citizens National
Bank of Cheboygan (Bank).
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act with the Bank as its only wholly-owned subsidiary. The Bank was
acquired by the Company effective December 31, 1985. The Company has corporate
power to engage in such activities as permitted to business corporations under
the Michigan Business Corporation Act, subject to the limitations of the Bank
Holding Company Act and regulations of the Federal Reserve Board. In general,
the Bank Holding Company Act and regulations restrict the Company with respect
to its own activities and activities of any subsidiaries to the business of
banking or such other activities which are closely related to the business of
banking.
The Bank offers a full range of banking services to individuals, partnerships,
corporations, and other entities. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers.
The Bank's lending function provides a full range of loan products. These
include real estate mortgages, secured and unsecured commercial and consumer
loans, check credit loans, lines of credit, home equity loans and construction
financing. The Bank also participates in specialty loan programs through the
Michigan State Housing Development Authority, Small Business Administration,
Federal Home Loan Mortgage Corporation, Consolidated Farm Service Agency, and
Mortgage Guaranty Insurance Corporation. Through correspondent relationships,
the Bank also makes available credit cards and student loans. The Bank's loan
portfolio is over 58% residential real estate mortgages on both primary and
secondary homes. The borrower base is very diverse and loan to value ratios
are generally 80% or less. The commercial loan portfolio accounts for
approximately 10% of total loans. Agricultural lending is minimal and
predominately real estate secured. Construction lending is predominately
residential, with only an occasional "spec" home or commercial building.
Unsecured lending is very limited and personal guarantees are required on most
commercial loans.
Banking services are delivered through a system of five full-service banking
offices and three drive-in branches plus six automated teller machines in
Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the
Counties is primarily tourism with light manufacturing. The Bank maintains
correspondent bank relationships with several larger banks, which involve check
clearing operations, transfer of funds, loan participation, and the purchase
and sale of federal funds and other similar services.
Under various agency relationships, the Bank provides trust and discount
brokerage services, and mutual fund, annuity and life insurance products to its
customers.
SUPERVISION AND REGULATION
As a bank holding company within the meaning of the Bank Holding Company Act,
the Company is required by said Act to file annual reports of its operations
and such additional information as the Federal Reserve Board may require and is
subject, along with its subsidiary, to examination by the Federal Reserve
Board. The Federal Reserve Board is the primary regulator of the Company.
The Bank Holding Company Act requires every bank holding company to obtain
prior approval of the Federal Reserve Board before it may merge with or
consolidate into another bank holding company, acquire substantially all
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the assets of any bank, or acquire ownership or control of any voting shares of
any bank if after such acquisition it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank holding company or
bank. The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling
banks or furnishing services to banks and their subsidiaries. However, holding
companies may engage in, and may own shares of companies engaged in, certain
businesses found by the Federal Reserve Board to be so closely related to
banking or the management or control of banks as to be a proper incident
thereto.
Under current regulations of the Federal Reserve Board, a holding company and
its nonbank subsidiaries are permitted, among other activities, to engage,
subject to certain specified limitations, in such banking related business
ventures as consumer finance, equipment leasing, computer service bureau and
software operations, data processing, discount securities brokerage, mortgage
banking and brokerage, sale and leaseback, and other forms of real estate
banking. The Bank Holding Company Act does not place territorial restrictions
on the activities of nonbank subsidiaries of bank holding companies.
In addition, Federal legislation prohibits acquisition of "control" of a bank
or bank holding company without prior notice to certain federal bank
regulators. "Control" in certain cases may include the acquisition of as
little as 10% of the outstanding shares of capital stock.
The Company's cash revenues are derived primarily from dividends paid by the
Bank. National banking laws restrict the payment of cash dividends by a
national bank by providing, subject to certain exceptions, that dividends may
be paid only out of net profits then on hand after deducting therefrom its
losses and bad debts, and no dividends may be paid unless the bank will have a
surplus amounting to not less than one hundred percent (100%) of its common
capital stock.
The Bank is a national banking association and as such is subject to the
regulations of, and supervision and regular examination by, the Office of the
Comptroller of the Currency ("OCC"). Deposit accounts of the Bank are insured
by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and
restrictions under the laws of the State of Michigan and Title 12 of the United
States Code include the requirements that banks maintain reserves against
deposits, restrictions on the nature and amount of loans which may be made by a
bank, and the interest that may be charged thereon, restrictions on the payment
of interest on certain deposits, and restrictions relating to investments and
other activities of a bank. The Federal Reserve Board has established
guidelines for risk based capital by bank holding companies. These guidelines
establish a risk adjusted ratio relating capital to risk-weighted assets and
off-balance sheet exposures. These capital guidelines primarily define the
components of capital, categorize assets into different risk classes, and
include certain off-balance-sheet items in the calculation of capital
requirements. Tier 1 capital consists of shareholders' equity less intangible
assets and unrealized gain or loss on securities available for sale, and Tier 2
capital consists of Tier 1 capital plus qualifying loan loss reserves.
The capital ratios of the Bank exceed the minimum regulatory guidelines for
well-capitalized institutions. The following table shows the Company's
regulatory capital and capital ratios at December 31, 1996 and 1995, as well as
the regulatory requirements for adequately-capitalized and well-capitalized
institutions established by the FDIC.
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At year end, consolidated and Bank actual capital levels (in millions) and
minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required (Adequately) Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------------- ----------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital to risk
weighted assets $18.2 19.6% $7.4 8.00% $9.2 10.00%
Tier I capital to risk
weighted assets 17.1 18.3% 3.7 4.00% 5.6 6.00%
Tier I capital to average
assets 17.1 9.9% 6.9 4.00% 8.6 5.00%
1995
Total Capital to risk
weighted assets 17.3 20.1% 6.9 8.00% 8.1 10.00%
Tier I capital to risk
weighted assets 16.2 18.9 3.4 4.00% 4.9 6.00%
Tier I capital to average
assets 16.2 10.1% 6.4 4.00% 7.9 5.00%
</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 51.1% of deposit market share. The Bank is one
of two principal banking institutions located within this market. The
competing bank is a member of a multi-bank holding company with substantially
more assets than the Company. There are also two credit unions, one savings
and loan association and a brokerage firm. The Bank is the only independent
community bank in the Cheboygan County market.
On June 1, 1997, the Riegel - Neal Interstate Banking and Branching Efficiency
Act will be fully implemented allowing full interstate banking in Michigan and
other states which have opted into the program. As a result, the Company
expects that it will see new competition in its market area from out of state
financial institutions. Since the Bank's niche is as a community bank, it does
not feel the addition of out of state banks to its service area will have a
significant impact on its business. In order to successfully compete,
management has developed a sales and service culture, stresses and rewards
excellent customer service, and designs products to meet the needs of the
customer. The Bank also utilizes its ability to sell loans in the secondary
market.
EMPLOYEES
On December 31, 1996, the Bank employed 62 full-time and 14 part-time
employees. This compares to 63 full-time and 14 part-time employees as of
December 31, 1995. The Company has no full-time employees. Its operation and
business are carried out by officers and employees of the Bank who are not
compensated by the Company.
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ITEM 2 - DESCRIPTION OF PROPERTY
(a) The Company and the Bank have their primary office at 303 N. Main Street,
Cheboygan, Michigan. In addition, the Bank owns and operates the following
facilities: South Main drive-in, 991 1/2 South Main Street, Cheboygan;
Downtown drive-in, 414 Division Street, Cheboygan; East Side drive-in, 816 East
State Street, Cheboygan; Onaway Office, 20581 W. State Street, Onaway; Pellston
Office, 200 Stimpson, Pellston; Mackinaw City Office, 580 S. Nicolet Street,
Mackinaw City; Indian River Office, 3990 Straits Hwy., Indian River. All
properties are owned by the Bank free of any mortgages or encumbrances. All
properties are in good condition.
(B)(1) Not applicable
(B)(2) The Bank makes first and second mortgage loans to its customers for the
purchase of residential and commercial properties. Historically, the Bank has
sold the majority of its residential mortgages loans qualifying for the
secondary market to the Federal Home Loan Mortgage Corporation ("FHLMC"). The
mortgage loan portfolio serviced by the Bank for the FHLMC totaled over $23
million at December 31, 1996.
(C) Not applicable
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor the Bank are a party to any pending legal proceedings
other than routine litigation that is incidental to the business of lending.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during this
reporting period.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a)(1)(I) The common stock of the Company has no public trading market.
All trades are handled on a direct basis between buyer and
seller. The Bank acts as the Company's transfer agent.
The principal market for the Company's stock consists of
existing shareholders, family members of existing shareholders
and individuals in its service area.
(ii) The information required by this item is included under the
caption "Financial Highlights" on page 4 of the Company's
Annual Report to Shareholders for the fiscal year ended December
31, 1996, which is hereby incorporated by reference.
(a)(2)(I) The information required by this item is included in Note 7 on
page 18 of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1996, which is hereby
incorporated by reference.
(ii) The number of common equity shares that could be sold pursuant
to Rule 144 under the Securities Act adjusted for the 2 for 1
stock split of May 31, 1996, is 9,306.
(iii) There are no public offerings pending.
(b) There are approximately 603 holders of record of the common
stock of the Company as of December 31, 1996.
(c)(1) During 1996 the Company declared regular dividends of $1.33 per
share plus a special dividend of $0.50.
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In 1995 the Company declared regular dividends of $1.20 per
share plus a special dividend of $.50. These per share
statistics are retroactively adjusted for the 2 for 1 stock
split of May 31, 1996. Subject to approval of the Board of
Directors of the Company and applicable law, the Company
anticipates that it will continue to pay a regular cash dividend
equal to or greater than the prior years. Special dividends are
considered each December based on the current year's earnings.
These have resulted in a dividend payout ratio averaging 65.9%
for the past three years.
(2) The Federal Reserve Board's Policy on the Payment of Cash
Dividends by Bank Holding Companies restricts the payment of
cash dividends based on the following criteria:
1. The Company's net income from operations over the past year
must be sufficient to fully fund the dividend.
2. The prospective rate of earnings retention must be
consistent with the Company's capital needs, asset quality,
and overall financial condition.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation (Company) and its subsidiary,
Citizens National Bank of Cheboygan (Bank). This discussion should be read in
conjunction with the financial statements beginning on page nine and the
related footnotes.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The balance maintained in cash and cash equivalents varies based on daily
fluctuations in loan and deposit balances. Sufficient cash is maintained on a
daily basis to meet the anticipated liquidity needs of the Company for customer
transactions and to clear checks drawn on other financial institutions. This
amount of clearings can vary by as much as $3 million in one day causing the
Company's cash position to vary.
SECURITIES
Investment balances increased $2.4 million during 1996. Securities available
for sale represent 13.3% of the portfolio. Currently the Company maintains a
primarily short-term securities portfolio. Therefore, not many securities are
needed in the available for sale classification to meet anticipated liquidity
needs. The average life of the investment portfolio is being extended as
securities of a longer maturity are added to the portfolio when appropriate.
As the amount of securities maturing on a regular monthly basis decreases,
liquidity will be maintained by adding to the available for sale portfolio.
The chart below shows the change in each of the categories of the portfolio
during 1996 and 1995, in thousands of dollars.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
U.S. Government and agency securities $4,168 $(3,748)
Tax exempt obligations of states and political subdivisions (219) 3,766
Other taxable securities (1,530) 3,265
------ ------
Total change in securities $2,419 $3,283
====== ======
</TABLE>
Holdings in U.S. Government and agency securities increased during the year
primarily as a result of increases in
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funds available through the growth of the deposit portfolio. The chart below
shows the percentage composition of the portfolio as of December 31.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
U.S. Government and agency securities 81.63% 77.91%
Tax exempt obligations of states and
political subdivisions 13.70 14.63
Other taxable securities 4.67 7.46
------- -------
100.00% 100.00%
======= =======
</TABLE>
Securities available for sale are recorded at fair value, and securities held
to maturity are recorded at amortized cost. The net unrealized loss on
securities available for sale at December 31, 1996 was two thousand dollars,
net of taxes. The unrealized gains and losses are temporary, since they are a
result of market changes rather than a reflection of credit quality.
Management has no specific intent to sell these securities at the present time.
Should the investments be held to maturity, no gain or loss will be
experienced.
The following table shows the maturity of the Bank's security portfolio at
December 31, 1996 in thousands. Securities are shown as being due in
accordance with the contractual scheduled principal repayments.
<TABLE>
<CAPTION>
Due in Due in 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
securities $17,947 $32,051 - -
State & Political subdivisions 4,420 3,072 $3,580 -
Other 180 - - -
------- ------- ------- ------
Total $22,547 $35,123 $3,580 $ 0
======= ======= ======= ======
</TABLE>
The Company maintains a conservative investment portfolio with a majority of
the investments in U.S. Government and agency securities and issues of
governmental units in our service area. The maturities of the U.S. Government
and agency securities have typically been very short, two years or less,
providing liquidity in addition to quality. During 1996, management felt that
there was sufficient liquidity to increase the maturity of the investment
portfolio, thereby increasing the potential yield. These plans are expected to
continue through 1997.
LOANS
Total loans increased $8.6 million, or 9.75%, during 1996. Substantially all
of this growth was in residential real estate mortgage loans due to an
increasing demand for housing in this area. As a full service lender, the
Company offers a variety of personal and commercial loans. Home mortgages
comprise the largest portion of the loan portfolio. The Company generally
retains ownership of adjustable rate loans and short to medium term fixed-rate
loans, and originates and sells long term single family residential fixed -rate
mortgage loans to the secondary market. The Company originated $3.7 million in
loans for sale in 1996 and $5.4 million in 1995. This practice allows the
Company to meet the housing credit needs of its service area while maintaining
an appropriate interest rate sensitivity and liquidity position. In addition
to mortgage loans, the Company makes loans for personal and business use,
secured and unsecured, to customers in our service area.
The table below shows total portfolio loans outstanding, in thousands of
dollars, at December 31, 1996 and 1995, and their percentage of the total loan
portfolio. All loans are domestic. There is no individual industry with more
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than a 10% concentration. However, all tourism related businesses, when
combined, total 12.4% of total loans.
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
------------------------ ----------------------
Portfolio loans: Balance % of total % of total Balance
------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Commercial $27,742 28.68% $30,023 34.06%
Residential mortgage 56,539 58.44 46,500 52.75
Construction mortgage 3,221 3.33 2,229 2.53
Consumer 9,239 9.55 9,395 10.66
------- ------- ------- ------
Total loans $96,741 100.00% $88,147 100.00%
======= ======= ======= ======
</TABLE>
The following table shows the maturity of the Bank's loan portfolio at December
31, 1996. Loans are shown as being due in accordance with the contractual
scheduled principal repayments.
<TABLE>
<CAPTION>
Due in Due
Due in one 1 to 5 After 5
Year or less Years Years
------------- ----- -----
<S> <C> <C> <C>
Fixed rate loans
Commercial $ 5,961 $ 9,857 $ 499
Consumer 4,489 4,683 24
Residential mortgage 7,545 2,471 5,838
------ ----- -----
Total fixed rate 17,995 17,011 6,361
Variable rate
Commercial 14,576 70
Consumer 43
Residential mortgage 32,908 7,777
------ -----
Total variable rate 47,527 7,847
------ ----- ------
TOTAL LOANS $65,522 $24,858 $6,361
======= ======= ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents that amount which management estimates
is adequate to provide for losses inherent in the loan portfolio. Management
determines the adequacy of the allowance for loan losses by reviewing selected
loans (including large loans, non-accrual loans and problem and delinquent
loans) and establishes specific loss allowances on these loans. Historical
loss information and local economic conditions are considered in establishing
allowances on the remaining loan portfolio. The allowance is increased by
provisions charged to expense and reduced by loan losses, net of recoveries.
The quality of the Company's loan portfolio compares well with its peer group
with non-performing loans at .14% of total loans at December 31, 1996 and 0.09%
at December 31, 1995. Loans charged off were 0.05% of total loans during 1996
and 0.05% in 1995. The Company added to the allowance for loan losses in 1996
and 1995 an amount considered adequate to cover possible losses that are
currently anticipated based on past experience and specific identification.
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The following table shows the allocation of the allowance at December 31 in
thousands of dollars.
<TABLE>
<CAPTION>
% of loans to % of loans to
1996 Total Loans 1995 Total Loans
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Commercial $ 51 28.68% $ 88 34.06%
Residential mortgage 49 58.44 43 52.75
Construction mortgage 0 3.33 0 2.53
Consumer 36 9.55 36 10.66
Unallocated 1,225 1,138
----- -----
Total allowance $1,361 100.00% $1,305 100.00%
====== ======= ====== =======
</TABLE>
Changes in Allowance for Loan Losses
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Balance at beginning or period $1,305 $1,246
Charge-offs;
Commercial 0 0
Residential mortgage 0 (43)
Construction mortgage 0 0
Consumer (63) (26)
-------- -------
Total charged-off (63) (69)
Recoveries:
Commercial 0 0
Residential mortgage 2 17
Construction mortgage 0 0
Consumer 17 11
------- -------
Total recoveries 19 28
-------- -------
Net charged-off (44) (41)
Provision for loan losses 100 100
------- ------
Balance at end of period $1,361 $1,305
======= ======
Net charge-offs to average loans 0.05% 0.05%
====== =====
</TABLE>
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively managing delinquencies, nonperforming assets and potential problem
loans. The Company performs an ongoing review of all large credits to watch
for any deterioration in quality. Nonperforming loans are comprised of (1)
loans accounted for on a nonaccrual basis; (2) loans contractually past due 90
days or more as to interest or principal payments (but not included in the
nonaccrual loans in (1) above); and (3) other loans whose terms have been
renegotiated to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower (exclusive
of loans in (1) or (2) above). The aggregate amount of nonperforming loans, in
thousands of dollars, is shown in the table below.
<TABLE>
<CAPTION>
12/31/96 12/31/95
<S> <C> <C> <C>
Nonaccrual loans $ 70 $ -
Loans past due 90 days or more 61 80
Troubled debt restructurings - -
--------- ---------
Total nonperforming loans $ 131 $ 80
===== ======
Percent of total loans 0.14% 0.09%
======= =====
</TABLE>
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When reasonable doubt exists concerning the collectibility of interest or
principal, a loan is placed on a non-accrual basis. Any interest accrued but
not collected is reversed and charged against current earnings. Interest
income which would have been recorded in 1996 under original terms on
non-accrual loans outstanding at December 31, 1996 was immaterial. There was
no interest income recorded in 1996 on non- accrual loans outstanding at
December 31, 1996.
At year-end 1996, the Company had approximately $586 thousand in loans for
which payments are current, but known financial difficulties of the borrowers
cause management concern about the ability to comply with existing loan
repayment terms. These loans, along with any other loans classified for
regulatory purposes that are not included in the table above, are subject to
constant management attention and their classification is reviewed on a monthly
basis.
Under the guidelines of SFAS No. 114 and 118, "Accounting by Creditors for
Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan-Income Recognition Disclosures, the Company had no impaired loans.
DEPOSITS
The Company's service area has experienced steady economic growth. The Company
offers competitive deposit products and has, therefore, shown steady deposit
growth as it maintains its market share. Deposits increased $5.7 million or
3.86% during 1996. Money market savings accounted for $4.5 million of this
increase. The Company considers a $5.7 million growth in deposits to be
noteworthy considering the number of individuals who have moved their funds
from banks into the equities markets.
The majority of the Company's deposits are derived from core customers,
relating to long term relationships with local personal, business and public
customers. The Company has increased its market share to 51.1%. Deposit rates
are monitored continually to assure that the Company pays a competitive rate.
The Company does not support its growth through purchased or brokered deposits.
The following table shows the average balances outstanding and average interest
rates for each major deposit category for the year in thousands of dollars.
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
-------------------------- -------------------------
Avg Bal Rate Avg Bal Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Non interest-bearing demand $ 21,156 $ 19,859
Interest-bearing demand 14,051 2.40% 13,377 2.40%
Savings deposits 25,288 2.89 26,630 2.88
Time deposits
92,602 5.00 82,263 4.88
--------- ---------
$153,097 $142,129
========= ========
</TABLE>
Time deposits in amounts of $100,000 or greater, in thousands, by time to
maturity at December 31, 1996 were:
<TABLE>
<S> <C>
Up to 3 months $3,942
3 to 6 months 1,293
6 to 12 months 1,719
Over 12 months $2,777
-----
$9,731
======
</TABLE>
LIQUIDITY AND FUNDS MANAGEMENT
LIQUIDITY
Consistent with 1995 as detailed in the Consolidated Statements of Cash Flows,
the Company continued to build its balance sheet with cash flows obtained from
operations and increases in deposits. Net income combined with
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noncash operating expenses provided approximately $3.3 million in liquidity.
This liquidity combined with increases in deposits of $5.7 million, offset by
dividends paid to shareholders, allowed for loan growth of $8.6 million.
Excess liquidity was invested in Federal Funds which allowed the Company to
obtain a strong yield without impairing liquidity. The Company serves a market
that is very strongly tied to the summer tourist industry. Consequently, the
Company experiences seasonal swings in liquidity. The bulk of commercial loan
activity is in the spring and summer months as businesses prepare for the
summer season. Deposit growth occurs during July, August and September, then
may decline through the fall and winter months. As a result, the Company is
usually very liquid from June to September. Investment security maturities are
distributed evenly from October to May to meet the Company's liquidity needs
during these months. The general economy in the state or the price of gasoline
can affect the summer tourism industry resulting in changes in the Company's
liquidity. The Company does not anticipate any significant changes in its
seasonal pattern.
The loan to deposit ratio increased to 62.86% at December 31, 1996 from 59.50%
at December 31, 1995. Management continues to emphasize loan growth and would
like to see this ratio at a minimum of 65%. This change in the asset mix from
securities to higher yielding loans will increase the net interest margin over
time. The Company did not borrow funds during 1996.
FUNDS MANAGEMENT
The following chart shows the Company's interest rate sensitivity as of
December 31, 1996 in thousands of dollars
<TABLE>
<CAPTION>
Repricing or maturing within
--------------------------------------------
up to 4 to 12 1 to 5 over
3 months months years 5 years Total
--------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 4,050 $ 4,050
Taxable investment securities 6,139 $15,025 $31,185 52,349
Tax exempt investment securities 514 3,424 3,319 $1,644 8,901
Loans 29,580 35,942 24,858 6,361 96,741
------ ------- ------ ----- ------
Total rate sensitive assets 40,283 54,391 59,362 8,005 162,041
------ ------- ------ ----- -------
Interest bearing demand deposits 1,517 4,096 9,557 15,170
Savings 6,058 5,452 12,721 24,231
Money market savings 14,754 5,934 13,847 34,535
Time deposits 19,483 21,059 16,971 57,513
-------- ------- -------- ------
Total rate sensitive liabilities 41,812 36,541 53,096 $131,449
-------- ------- -------- --------
Gap $( 1,529) $17,850 $ 6,266 $ 8,005
--------- ------- ------- -------
Cumulative Gap $( 1,529) $16,321 $22,587 $30,592
======== ======= ======= =======
Cumulative Ratio 96.34% 120.83%
====== =======
</TABLE>
Management reviews the rate and term of any callable securities in the
portfolio. The probability of call is used as the basis for determining a
repricing date. Management believes that the difference between rate sensitive
assets and rate sensitive liabilities ("Gap") overstates true interest
sensitivity. Interest exposure is not as significant as expressed in the above
schedule. Even though the Company has the contractual right to make a change
in certain deposit rates, given our competitive position, management believes
that liabilities do not need to be repriced as soon as rates begin to move.
During 1996, the Company originated and retained $6.8 million in 15 year fixed
rate mortgages. This has provided better utilization of our available funds
and will contribute to increased interest income in the future.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. The Company
12
<PAGE> 13
has maintained an average leverage ratio of 9.87% for the last three years.
This strong capital position provides the Company with the flexibility to
leverage its capital so as to be able to take advantage of expansion
opportunities. The Company's strong capital position also provides the
flexibility to continue with a high dividend payout ratio which has averaged
65.9% over the past three years. Earnings are projected to continue at current
levels or better which will allow the Company to continue to pay out dividends
at this level.
Dividends paid represent a yield of approximately 6.2% in 1996 and 6.5% in
1995. A two for one stock split was distributed to shareholders in 1996. The
stock of the Company is generally traded locally. Additional information
concerning capital ratios and shareholder return is included in the Financial
Highlights schedule. The Company maintains a five year plan, and utilizes a
formal strategic planning process. Management and the Board continue to
monitor long term goals, which include increasing market share and maintaining
long term earnings sufficient to pay consistent dividend.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest spreads were down from 1995 to 1996, but volumes were up. As a
result, the Company experienced an increase in net interest income. An
increase of $429 thousand is attributed to increased volumes. Declining rate
spreads created a decrease of $131 thousand for a net change of $298 thousand.
The Company continues to experience pressure for lower interest rates on loan
products and higher interest rates on deposit products as competition
increases. The net spread for the year ended December 31, 1996 was 3.69%
compared to 3.85% during 1995. This pressure on interest margins will continue
as increasing non-bank institutions, who do not have to follow the same
regulatory guidelines as banks, compete for deposit and loan customers. The
Company is attempting to change both the spread and mix as available funds are
moved from securities to loans and remaining security maturities are
lengthened.
The table below shows the year to date daily average Consolidated Balance
Sheet, revenue on earning assets,(on a pre-tax basis) or expense of interest
bearing liabilities, and the annualized effective rate or yield for the period
ending December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Yield Analysis of Consolidated Average Assets and Liabilities
in thousands of dollars
Year ended Year ended Year ended
December 31, 1996 December 31,1995 December 31, 1994
-------------------------- -------------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield
Balance Int Rate Balance Int Rate Balance Int Rate
------- ----- ------ ---------- --- ------ ---------- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 5,113 $ 273 5.34% $ 8,348 $ 486 5.82% $ 3,698 $ 152 4.11%
Taxable securities 55,068 3,349 6.08 50,522 2,863 5.67 51,215 2,451 4.79
Tax exempt securities 8,324 402 4.83 5,190 264 5.09 4,032 208 5.16
Loans 93,188 8,934 9.59 86,158 8,456 9.81 84,302 7,463 8.85
------- ----- ---- -------- ------- ---- ------- ----- -----
Total int. earning assets 161,693 12,958 8.01% 150,218 12,069 8.03% 143,247 10,274 7.17
------ ------- ------
Cash and due from banks 5,447 5,198 5,077
Premises and equipment, net 1,929 1,984 2,126
Other assets 2,662 2,339 1,480
------ -------- ------
Total $171,731 $159,739 $151,930
======== ========= =========
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1996 December 31,1995 December 31, 1994
--------------------- --------------------- --------------------
Average Yield/ Average Yield/ Average Yield/
Balance Int Rate Balance Int Rate Balance Int Rate
------- --- ------ ------- --- ------ ------- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing liabilities:
Interest bearing demand
deposits $ 14,051 337 2.40% $13,377 321 2.40% $13,739 332 2.42%
Savings deposits 25,288 732 2.89 26,630 766 2.88 29,720 855 2.88
CDS $100,000 and over 11,809 608 5.15 9,213 453 4.92 6,204 223 3.59
Other time deposits 80,793 4,022 4.98 73,050 3,568 4.88 66,973 2,548 3.80
------- ------ ---- ------- ------ ----- ------ ------ ----
Total interest bearing deposits 131,941 5,699 4.32% 122,270 5,108 4.18% 116,636 3,958 3.39%
----- ----- -----
Noninterest bearing deposits 21,156 19,859 19,222
Other liabilities 1,667 1,578 906
Shareholders' equity 16,967 16,032 15,166
-------- -------- --------
Total $171,731 $159,739 $151,930
======== ======== =========
Net interest income $7,259 $6,961 $6,316
====== ====== ======
Net interest spread 3.69% 3.85% 3.78%
===== ===== =====
Net yield on interest earning assets 4.49% 4.63% 4.41%
===== ===== =====
Ratio of interest earning assets to
interest bearing liabilities 1.22% 1.23% 1.23%
===== ===== =====
</TABLE>
The table below shows the effect of volume and rate changes on net interest
income for the year-ended December 31, on a pre-tax basis, in thousands of
dollars.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
-------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------- ---- --- ------- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $(175) $(38) $(213) $251 $ 83 $334
Taxable securities 268 218 486 (34) 446 412
Tax exempt securities 152 (14) 138 59 (3) 56
Taxable loans 678 (200) 478 167 826 993
--- ----- --- --- ---- -----
Total interest income $ 923 $ (34) $889 $443 $1,352 $1,795
Interest bearing demand
deposits $ 16 $ 0 $ 16 $ (9) $ (2) $ (11)
Savings deposits (39) 5 (34) (89) 0 (89)
CDS $100,000 and over 133 22 155 131 99 230
Other interest bearing
deposits 384 70 454 247 773 1,020
---- ----- ---- ---- ----- -----
Total interest expense 494 97 591 280 870 1,150
--- ----- ---- ----- ---- -----
Net change in net interest
income (a) $ 429 $(131) $298 $163 $482 $645
===== ====== ==== ==== ==== ====
</TABLE>
(a) The net change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
OTHER INCOME
Noninterest income continues to improve, although at a slower rate than in
previous years, increasing 0.19% in 1996. The Company continues to search for
new opportunities for noninterest income. Fee income from traditional checking
and savings products is declining and being replaced with fees from ATM, ACH
and other automated services. Consequently, service charges on deposit
accounts increased only 2.1% while average deposits increased 7.7%. Earnings
from the sale of mutual funds and other new services added in the past few
years are
14
<PAGE> 15
increasing slowly. These new fees will play an important part in replacing
traditional fees. Because the Company has decided, for the time being, to
retain 15 year residential mortgages, our fee income for servicing sold loans
has declined while interest income will be increased over the life of these
loans.
OTHER EXPENSE
Noninterest expense, exclusive of the FDIC assessment paid, increased 3.61%. A
change in the FDIC assessment rates reduced this expense from $157 thousand in
1995 to $2 thousand in 1996. Salaries and wages were up 4.15%. Pension and
other employee benefits are down 4.32% due to favorable workman's compensation
ratings, reduced health care costs and reduced pension expense due to earnings
on plan assets. Furniture and equipment expense increased 9.5% due in part to
the remodeling of the main office during 1996.
FEDERAL INCOME TAXES
Income tax expense increased 5.9% from December 31, 1995 to 1996 primarily as a
result of the increase in pre-tax income. The Company's effective tax rate
decreased to 30.1% in 1996 from 30.9% in 1995. There was no significant change
in the Company's income tax position from 1995 to 1996.
The effective tax rates for 1996, 1995 and 1994 are shown in the table below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before tax ($000) $3,723 $3,424 $2,635
Income tax expense 1,122 1,059 808
Effective tax rate 30.1% 30.9% 30.7%
</TABLE>
NET INCOME
Consolidated net income was $2,601,000 for 1996, compared to $2,365,000 for
1995. Return on consolidated average assets for 1996 was 1.51%, compared to
1.48% in 1995. Return on average shareholders' equity was 15.33% in 1996
compared to 14.75% in 1995. Earnings per share for 1996, 1995, and 1994 were
$2.79, $2.54, and $1.96. Increases were due mostly to increases in net
interest income as other income and other expenses experienced very little
change. This is explained in more detail elsewhere in this report.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements, notes to financial statements, and independent
auditor's reports for the years ended December 31, 1996 and 1995, listed below
are incorporated by reference in this report from the corresponding portions
set forth in pages 9 to 23 of the Company's annual report to shareholders
for the year ended December 31, 1996. With the exception of the portions of
the Company's annual report to shareholders for the year ended December 31,
1996 specifically incorporated herein by reference, such report shall not be
deemed filed as part of this annual report on Form 10-KSB.
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - for each of the three years
ended December 31, 1996
Consolidated Statements of Shareholders' Equity - for each of
the three years in the period ended December 31, 1996
Consolidated Statements of Cash Flows - for each of the three years
in the period ended December 31, 1996
Notes to the Consolidated Financial Statements
Report of Independent Auditors
Financial Highlights
The consolidated financial statements for the year ended December 31, 1996
incorporated by reference herein, have been prepared in accordance with GAAP.
All necessary accruals and adjustments have been made which in the opinion of
management are necessary in order to make the financial statements not
misleading.
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
IN THOUSANDS OF DOLLARS, WHERE APPLICABLE 1996 1995 1994
<S> <C> <C> <C>
OPERATING STATISTICS
Interest income $ 12,958 $ 12,069 $ 10,274
Interest expense 5,699 5,108 3,958
Net interest income 7,259 6,961 6,316
Income before income taxes 3,723 3,424 2,635
Net income 2,601 2,365 1,827
Earnings per share 2.79 2.54 1.96
Return on average assets (ROA) 1.51% 1.48% 1.20%
Return on average shareholders' equity (ROE) 15.33% 14.75% 12.04%
BALANCE SHEET STATISTICS
Securities 61,250 58,831 55,549
Loans 96,741 88,147 83,705
Deposits 153,868 148,149 136,000
Total assets 173,085 166,560 152,962
CAPITAL STATISTICS
Shareholders' equity 17,053 16,251 15,302
Book value per share 18.32 17.46 16.44
Cash dividend per share 1.88 1.70 1.25
Dividend payout ratio 67.09% 66.92% 63.65%
Average equity to average total assets 9.88% 10.04% 9.98%
CREDIT QUALITY
Net charge-offs to gross loans 0.05% 0.05% 0.06%
Nonperforming assets to gross loans 0.14 0.09 0.35
Allowance for loan losses to gross loans 1.41 1.48 1.49
Allowance for loan losses to nonperforming assets 10.39X 16.33X 4.29X
</TABLE>
Per share data has been restated to reflect the 1996 stock split.
PRICE RANGE FOR COMMON STOCK
The following table shows the high and low selling prices of known transactions
in common stock of the Company for each quarter of 1996 and 1995. The Company
had 603 shareholders as of December 31, 1996. The prices and dividends per
share have been restated to reflect the 1996 stock split.
<TABLE>
<CAPTION>
1996 1995
CASH CASH
MARKET PRICE DIVIDENDS MARKET PRICE DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
<S> <C> <C> <C> <C> <C> <C>
1st $28.50 $26.50 $0.325 $27.50 $26.50 $0.275
2nd 30.00 28.50 0.350 27.50 26.25 0.275
3rd 32.00 32.00 0.350 26.00 25.75 0.325
4th 32.00 32.00 0.850 26.00 25.00 0.825
</TABLE>
16
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS In thousands of dollars except per share data 1996 1995
<S> <C> <C>
Cash and due from banks $ 6,054 $ 7,340
Federal funds sold 4,050 7,950
-------- ---------
TOTAL CASH AND CASH EQUIVALENTS 10,104 15,290
Securities available for sale 8,165 12,001
Securities held to maturity
(market value $53,416 in 1996 and $47,144 in 1995) 53,085 46,830
-------- ---------
TOTAL SECURITIES 61,250 58,831
LOANS 96,741 88,147
Less allowance for loan losses 1,361 1,305
-------- ---------
LOANS, NET 95,380 86,842
-------- ---------
Premises and equipment, net 2,679 1,945
Accrued interest receivable and other assets 3,672 3,652
-------- ---------
TOTAL ASSETS $173,085 $166,560
======== ========
LIABILITIES
DEPOSITS
Non-interest bearing $ 22,419 $ 20,778
Interest bearing 131,449 127,371
-------- ---------
TOTAL DEPOSITS 153,868 148,149
Accrued interest payable and other liabilities 2,164 2,160
-------- ---------
TOTAL LIABILITIES 156,032 150,309
-------- --------
SHAREHOLDERS' EQUITY
Common stock -- $2.50 par value; 1,000,000 shares authorized;
930,772 shares issued and outstanding in 1996 and 1995 2,327 2,327
Additional paid-in capital 4,979 4,979
Retained earnings 9,749 8,893
Unrealized gain (loss) on securities available for sale,
net of tax of ($1) in 1996 and $27 in 1995 (2) 52
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 17,053 16,251
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $173,085 $166,560
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 18
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
INTEREST INCOME: In thousands of dollars except per share data 1996 1995 1994
<S> <C> <C> <C>
Loans, including fees $ 8,934 $ 8,456 $ 7,463
Securities:
Taxable 3,349 2,864 2,451
Tax-exempt 402 264 208
Federal funds sold 273 485 152
------- ------- -------
TOTAL INTEREST INCOME 12,958 12,069 10,274
INTEREST ON DEPOSITS 5,699 5,108 3,958
------- ------- -------
Net Interest Income 7,259 6,961 6,316
Provision for loan losses 100 100 36
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,159 6,861 6,280
------- ------- -------
OTHER INCOME
Service charges on deposit accounts 628 615 593
Loan sales and servicing fees 140 182 180
Other service charges, collections and exchanges 83 88 95
Other operating income 187 151 135
------- ------- -------
TOTAL OTHER INCOME 1,038 1,036 1,003
------- ------- -------
OTHER EXPENSES
Salaries and wages 2,032 1,951 1,882
Pension and other employee benefits 686 717 745
Net occupancy expense of bank premises 219 216 208
FDIC insurance premiums 2 157 299
Furniture and equipment 323 295 317
Printing and Supplies 147 140 136
Other operating expenses 1,065 997 1,061
------- ------- -------
TOTAL OTHER EXPENSES 4,474 4,473 4,648
------- ------- -------
INCOME BEFORE INCOME TAXES 3,723 3,424 2,635
Income tax expense 1,122 1,059 808
------- ------- -------
NET INCOME 2,601 $ 2,365 $ 1,827
======= ======= =======
EARNINGS PER SHARE $ 2.79 $ 2.54 $ 1.96
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
ADDITIONAL SECURITIES TOTAL
COMMON PAID IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE, NET EQUITY
<S> <C> <C> <C> <C> <C>
In thousands of dollars except per share data
BALANCE -- JANUARY 1, 1994 $2,327 $4,979 $ 7,447 $ 0 $14,753
Adoption of SFAS No. 115, net (2) (2)
Net income 1,827 1,827
Cash dividends - $1.25 per share (Note 1) (1,163) (1,163)
Net change in unrealized gain (loss)
on securities available for sale, net (113) (113)
------- ------ ------- ----- -------
BALANCE -- DECEMBER 31, 1994 2,327 4,979 8,111 (115) 15,302
Net income 2,365 2,365
Cash dividends - $1.70 per share (Note 1) (1,583) (1,583)
Net change in unrealized gain (loss)
on securities available for sale, net 167 167
------- ------ ------- ----- -------
BALANCE -- DECEMBER 31, 1995 2,327 4,979 8,893 52 16,251
Net income 2,601 2,601
Cash dividends - $1.875 per share (Note 1) (1,745) (1,745)
Net change in unrealized gain (loss)
on securities available for sale, net (54) (54)
------- ------ ------- ----- -------
BALANCE -- DECEMBER 31, 1996 $2,327 $4,979 $ 9,749 $ (2) $17,053
======= ====== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
In thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,601 $ 2,365 $ 1,827
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES:
Depreciation 267 230 248
Accretion and amortization of investment securities (net) 312 722 1,317
Provision for loan losses 100 100 36
Loans originated for sale (3,710) (5,361) (7,506)
Proceeds from sales of loans originated for sale 3,727 5,396 7,565
Gain on sales of loans (17) (35) (59)
(Increase) decrease in other assets 15 (121) (250)
Increase (decrease) in other liabilities (26) 200 (124)
-------- -------- --------
TOTAL ADJUSTMENTS 668 1,131 1,227
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 3,269 3,496 3,054
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 5,780
Purchase of securities available for sale (2,029) (1,978)
Proceeds from maturities of securities held to maturity 31,853 27,054 28,655
Purchase of securities held to maturity (38,417) (28,829) (34,339)
Net (increase) decrease in portfolio loans (8,638) (4,483) 1,956
Premises and equipment expenditures (1,001) (135) (70)
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES (12,452) (8,371) (3,798)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 5,719 12,149 2,633
Dividends paid (1,722) (1,282) (1,000)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES 3,997 10,867 1,633
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,186) 5,992 889
-------- -------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,290 9,298 8,409
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,104 $ 15,290 $ 9,298
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 5,693 $ 5,028 $ 4,033
Income taxes $ 1,056 $ 1,050 $ 5,944
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Upon adoption of SFAS No. 115 at January 1, 1994, the Company transferred
$5,119 from investment securities to securities
available for sale and transferred $46,237 from investment securities to
investment securities held to maturity.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
its Special Report, "A Guide to Implementation of SFAS No. 115 on
Accounting for Certain Investments in Debt and Equity Securities" ("Guide").
As permitted by the Guide, the Company made a one-time reassessment and
transferred securities from the held to maturity portfolio to the available
for sale portfolio. At the date of transfer, these securities had an
amortized cost of $4,941 and fair value of $4,978.
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CNB Corporation (the Company) and its
wholly owned subsidiary, Citizens National Bank (the Bank), conform to
generally accepted accounting principles and to general practice within the
banking industry. The following describes the significant accounting and
reporting policies which are employed in the preparation of the consolidated
financial statements.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS AND CONCENTRATIONS OF CREDIT RISK: The Corporation is a
one-bank holding company which conducts no direct business activities. All
business activities are performed by the Bank.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to
individuals for home mortgages, automobiles and personal expenditures, and
loans to business enterprises for current operations and expansion. The Bank
offers a variety of deposit vehicles, including checking, savings, money
market, individual retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the Michigan
communities in which the Bank is located and the area immediately surrounding
these communities. The Bank serves these markets through nine offices located
in Cheboygan, Presque Isle, and Emmet Counties in Northern Lower Michigan.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided.
Actual results could differ from these estimates.
Areas involving the use of management's estimates and assumptions include
the allowance for loan losses, fair values of certain securities and other
financial instruments, the determination and carrying value of impaired loans,
the carrying value of loans held for sale, the carrying value of other real
estate, the determination of other-than-temporary reductions in the fair value
of securities, recognition and measurement of loss contingencies, and
depreciation of premises and equipment. Estimates that are more susceptible to
change in the near term include the fair value of financial instruments and the
allowance for loan losses.
CASH FLOW REPORTING: Cash and cash equivalents are defined as cash and due
from banks and federal funds sold. Net cash flows are reported for customer
loan and deposit transactions and short term borrowings with a maturity of 90
days or less.
SECURITIES: Securities classified as held to maturity are carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on sales are determined using the specific identification
method. Interest and dividend income, adjusted by amortization of purchase
premiums and discounts, is included in earnings.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or
market value in the aggregate. Net unrealized losses are recorded in a
valuation allowance by charges to income.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs. Interest income is reported on the interest
method and includes amortization of net deferred loan fees and costs over the
loan term.
21
<PAGE> 22
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days, unless the loan is both well secured
and in the process of collection. Payments received on such loans are
reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full,
an allowance for loan losses is recorded. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-off that
occurs. A problem loan is charged-off by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures."
Under SFAS No. 114 and No. 118, a loan is considered to be impaired when
it is probable that the Corporation will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement.
Impaired loans are carried at the present value of expected cash flows
discounted at the loan's effective interest rate or at the fair value of the
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses may be allocated to impaired loans. The effect of adopting these
standards was included in the provision for loan losses for 1995, and was not
considered material.
Smaller balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of
borrower operating results and financial conditions indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Loans are generally moved
to nonaccrual status when 90 days or more past due. These loans are often
considered impaired. Impaired loans, or portions thereof, are charged-off when
deemed uncollectible. The nature of disclosures for impaired loans is
considered generally comparable to prior nonaccrual and renegotiated loans and
non-performing and past-due asset disclosures.
SERVICING RIGHTS: Effective January 1, 1996, the Company adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Prior to adopting SFAS No. 122,
servicing right assets were recorded only for purchased rights to service
mortgage loans. Subsequent to adopting this standard, servicing rights
represent both purchased rights and the allocated value of servicing rights
retained on loans sold. Servicing rights are expensed in proportion to, and
over the period of, estimated net servicing revenues. Impairment is evaluated
based on the fair value of the rights, using groupings of the underlying loans
as to interest rates and then, secondarily as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance. The effect of adopting this standard was not material to the
consolidated financial statements.
Excess servicing receivables are reported when a loan sale results in servicing
in excess of normal amounts, and is expensed over the life of the servicing on
the interest method.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated
depreciation. Depreciation expense is calculated on the straight-line method
over asset useful lives. These assets are reviewed for impairment under SFAS
No. 121 when events indicate the carrying amount may not be recoverable.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at
22
<PAGE> 23
acquisition. When the real estate is acquired, any excess of the related loan
balance over the estimated fair value is charged to the allowance for loan
losses. After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell. Expenses,
gains and losses on disposition, and changes in the valuation allowance are
reported in other expense.
EMPLOYEE BENEFITS: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Contributions to the plan are based on the maximum amount
deductible for income tax purposes. A benefit plan with 401(k) features covers
substantially all employees. The plan allows participants compensation
deferrals, with up to 2% of such deferrals matched at 100% and the next 2%
of such deferrals matched at 50%.
Expense of the defined benefit plan is reported by spreading the expected
contributions to the plan less long-term earnings on plan assets over the
employee's service period. Expense of the defined contribution plan is based on
the annual contributions. Expense for employee compensation under stock option
plans is based on APB Opinion 25, with expense preported only if options are
granted below market prices at grant date. Proforma disclosures of net income
and earnings per share are provided as if the fair value method of SFAS No. 123
were used for stock-based compensation.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
STOCK SPLITS AND DIVIDENDS: In May 1996 shareholders of the Company approved
an Amendment to the Articles of Incorporation to decrease the par value from
$5.00 to $2.50 per share and to increase the authorized shares from 500,000 to
1,000,000. In addition, a two-for-one stock split was declared in 1996. Stock
splits are recorded by adjusting par value. Dividends issued in stock are
reported by transferring the market value of the stock issued from retained
earnings to common stock and additional paid-in capital. Fractional shares are
paid in cash for all stock dividends. Cash dividends per share are based on the
number of shares outstanding at the date of declaration, retroactively adjusted
for stock dividends and splits.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgement regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing
on-and-off balance sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
EARNINGS AND DIVIDENDS PER SHARE - Earnings per share of common stock is based
on weighted-average outstanding shares during the year plus dilutive common
stock equivalents using the average stock price. Common equivalent shares are
shares which may be issuable to employees upon exercise of outstanding stock
options. Diluted earnings per share is calculated assuming any conversions
occurred at the start of the year and uses ending market price, if more
dilutive. The number of shares used to calculate net income per share has been
adjusted for all stock dividends and was 930,772 for 1996, 1995 and 1994.
RECLASSIFICATION - Some items in prior financial statements have been
reclassified to conform with the current presentation.
23
<PAGE> 24
NOTE 2 - SECURITIES
The amortized cost and fair values of securities (in thousands) at year end,
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Government and agency $ 7,988 $ 7 $ 10 $ 7,985
Other 180 180
------- ------ ------ -------
TOTALS $ 8,168 $ 7 $ 10 $ 8,165
======= ====== ====== =======
DECEMBER 31, 1995
U.S. Government and agency $11,448 $ 86 $ 11 $11,523
State and municipal 295 3 298
Other 180 180
------- ------ ------ -------
TOTALS $11,923 $ 89 $ 11 $12,001
======= ====== ====== =======
HELD TO MATURITY
DECEMBER 31, 1996
U.S. Government and agency $42,013 $ 271 $ 75 $42,209
State and municipal 11,072 142 7 11,207
------- ------ ------ -------
TOTALS $53,085 $ 413 $ 82 $53,416
======= ====== ====== =======
DECEMBER 31, 1995
U.S. Government and agency $34,307 $ 270 $ 18 $34,559
State and municipal 12,523 74 12 12,585
------- ------ ------ -------
TOTALS $46,830 $ 344 $ 30 $47,144
======= ====== ====== =======
</TABLE>
There were no sales of securities during 1996 or 1995.
Contractual maturities of debt securities (in thousands) at year-end 1996 were
as follows. Expected maturities may differ from contractual maturity because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<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 $ 4,178 $4,178 $18,369 $18,499
Due from one to five years 3,990 3,987 31,136 31,242
Due from five to ten years 1,474 1,481
Due after ten years 2,106 2,194
------- ------ ------- -------
TOTALS $ 8,168 $8,165 $53,085 $53,416
======= ====== ======= =======
</TABLE>
Securities with a carrying value of $1,000,000 were pledged at December 31,
1996, to secure public deposits and for other purposes.
Except as indicated below, total securities of any state (including its
political subdivisions) were less than 10% of shareholders' equity. At year
end 1996 and 1995, the amortized cost of securities (in thousands) issued by
the state of Michigan and all of its political subdivisions totaled $5,279 and
$9,236 with an estimated fair value of $5,329 and $9,362. At year end 1996, the
amortized cost of securities (in thousands) issued by the state of Illinois and
all of its political subdivisions totaled $3,153 with an estimated fair value
of $3,209.
24
<PAGE> 25
NOTE 3 - LOANS
Year-end loans (in thousands) were as follows:
1996 1995
Residential real estate loans $56,699 $46,689
Commercial real estate loans 21,331 21,487
Consumer loans 9,239 9,395
Commercial loans 9,632 10,765
Net deferred fees and costs (160) (189)
------- -------
96,741 88,147
Allowance for loan losses (1,361) (1,305)
------- -------
$95,380 $86,842
======= =======
Activity in the allowance for loan losses (in thousands) is summarized as
follows:
1996 1995
Beginning balance $ 1,305 $ 1,246
Provision for loan losses 100 100
Charge-offs (63) (69)
Recoveries 19 28
------- -------
Ending Balance $ 1,361 $ 1,305
======= =======
The Company had no impaired loans for 1996 and 1995. There were no loans held
for sale at year-end 1996 and 1995.
NOTE 4 - LOAN SERVICING
Mortgages loans serviced for others are not reported as assets. These loans
totaled $22,770,530 and $23,579,532 at year-end 1996 and 1995. Related escrow
deposit balances were $34,770 and $5,312.
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment (in thousands) were as follows.
1996 1995
Real estate and buildings $ 3,215 $ 2,626
Furniture and fixtures 2,724 2,340
------- -------
Total cost 5,939 4,966
Less accumulated depreciation (3,260) (3,021)
------- -------
$ 2,679 $ 1,945
======= =======
Depreciation expense amounted to $266,794, $229,273 and $248,171 in 1996, 1995
and 1994, respectively.
NOTE 6 - DEPOSITS
Time deposit accounts individually exceeding $100,000 total $9,731,726 and
$10,680,565 at year-end 1996 and 1995.
At year-end 1996, stated maturities of time deposits with a remaining term
greater than one year (in thousands) were:
1997 $40,199
1998 10,557
1999 2,618
2000 2,737
2001 1,402
-------
Total $57,513
=======
NOTE 7 - EMPLOYEE BENEFITS
DEFINED BENEFIT RETIREMENT PLAN
The Company has a defined benefit, noncontributory pension plan which provides
retirement benefits for essentially all employees. The following sets forth
the plan's funded status and amounts recognized (in thousands) in the
financial statements:
1996 1995
Present values using actuarial assumptions
Accumulated benefit
obligation, substantially vested $ 1,626 $ 1,573
======= =======
Projected benefit obligation
using compensation service
rendered to date (2,453) (2,354)
Plan assets at fair value 2,489 2,352
------- -------
Funded status 36 (2)
Unrecognized transition
obligation (136) (147)
Unrecognized prior
service cost (46) (49)
Unrecognized net loss 288 302
------- -------
Net pension asset $ 142 $ 104
======= =======
25
<PAGE> 26
Net pension expense and related year-end assumptions consist of the following:
1996 1995 1994
Service cost-benefits
earned $ 106 $ 100 $ 109
Interest cost on benefit
obligation 184 173 167
Actual return on
plan assets (191) (158) (169)
Net amortization
and deferral (4) (3)
----- ----- -----
Pension expense $ 95 $ 115 $ 104
===== ===== =====
Weighted average
discount rate 8.00% 8.00% 7.50%
Rate of increase in
future compensation 5.00% 5.00% 5.00%
Expected long term return
on plan assets 8.00% 8.00% 8.00%
Plan assets are administered by Empire National Bank as trustee of the plan.
Plan assets are invested in diversified mutual funds issued by the Frank
Russell Investment Company.
DEFERRED COMPENSATION PLAN
The Company has adopted a deferred compensation plan to provide retirement
benefits to the directors, at their option, in lieu of annual directors' fees.
The present value of future benefits are accrued annually over the period of
active service of each participant. The expense for the plan was $144,712,
$151,015 and $166,740 in 1996, 1995 and 1994 respectively.
The Company has also purchased insurance on the lives of participating
directors with the Company as the owner and beneficiary of the policies.
401(K) PLAN
The Company has a 401(k) savings and retirement plan covering substantially all
employees. Under the plan, employees may defer up to 20% of their
compensation. During 1996, 1995 and 1994, the Board of Directors elected to
contribute a matching contribution equal to 100% of the first 2% and 50% of the
next 2% of the employee's deferred compensation. Employee contributions and
the Company's matching percentages are vested immediately. The Company's
matching percentages are determined annually by the Board of Directors and
resulted in total contributions of $56,143, $54,246 and $52,945 in 1996, 1995
and 1994 respectively.
STOCK OPTION PLAN
The shareholders approved an incentive stock option plan in May, 1996 and
authorized 50,000 options for future grant. Under this plan, options may be
issued at market prices to employees. During 1996, 12,500 options were granted
at an exercise price of $32.00 per share. The right to exercise the options
vests over a one-year period and the options have a term of 10 years.
Accordingly, at December 31, 1996, 37,500 options were available for future
grant and none of the shares granted in 1996 were exercisable at December 31,
1996.
SFAS No. 123, which became effective for 1996, requires pro forma disclosures
for companies that do not adopt its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income and earnings per share had the fair value
method been used to measure compensation cost for stock option plans. The
exercise price of options granted is equivalent to the market value of
underlying stock at the grant date. Accordingly, compensation cost actually
recognized for stock options was $0 for 1996.
The fair value of options granted during 1996 is estimated using the following
weighted-average information: risk-free interest rate of 6.5%, expected life of
5 years, expected volatility of stock price of .054% and expected dividends of
5.75% per year.
Net income as reported $2,601
Pro forma net income $2,597
Earnings per share as reported $ 2.79
Pro forma earnings per share $ 2.79
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
26
<PAGE> 27
NOTE 8 - INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current $1,166 $1,017 $895
Deferred (44) 42 (87)
------ ------ ----
$1,122 $1,059 $808
====== ====== ====
</TABLE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 315 $ 296
Deferred loan fees 35 55
Other real estate 37 37
Excess servicing fees 22 39
Other 2 1
------ ------
Total deferred tax assets 411 428
------ ------
Deferred tax liabilities:
Pension $ 22 $ 9
Unrealized appreciation of
securities available for sale 0 27
Fixed assets 35 38
Accretion 53 37
------ ------
Total deferred tax liabilities 110 111
------ ------
Net deferred tax asset $ 301 $ 317
====== ======
</TABLE>
The effective tax rate differs from the statutory federal income tax rate
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory rate applied to
income before taxes $1,266 $1,164 $896
Add (deduct)
Tax-exempt interest
income (139) (102) (99)
Other (5) (3) 11
------ ------ ----
$1,122 $1,059 $808
====== ====== ====
</TABLE>
NOTE 9 - RELATED PARTIES
Related parties include executive officers, directors and significant
shareholders, and their affiliates. Loans to such related parties over $60,000
at year-end 1996 (in thousands) were as follows:
<TABLE>
<S> <C>
Balance outstanding, December 31, 1995 $ 980
New loans and rewrites 8,163
Payments and payoffs (7,676)
Other (90)
-------
Balance outstanding, December 31, 1996 $ 1,377
=======
</TABLE>
Related party deposits totaled $932,933 and $819,283 at year-end 1996 and 1995.
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected
to have a material effect on financial condition or results of operations.
At year end 1996 and 1995, reserves of $1,060,000 and $1,001,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet
the financing needs of customers and to reduce exposure to interest rate
changes. These financial instruments include commitments to extend credit and
standby letters of credit. These involve, to a varying degree, credit and
interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. The same credit policies are used for commitments and conditional
obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of
27
<PAGE> 28
a fee. Since many of the commitments are expected to expire without being used,
the total commitments does not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party.
A summary of the notional or contractual amounts in thousands of financial
instruments with off-balance-sheet risk at year-end follows:
<TABLE>
1996 1995
<S> <C> <C>
Commitments to extend credit $14,736 $10,603
Standby letters of credit 29 29
</TABLE>
Substantially all of these commitments are at variable or uncommitted rates.
NOTE 11- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
value for cash and variable rate loans or deposits that reprice frequently and
fully. Securities fair values are based on quoted market prices or, if no
quotes are available, on the rate and term of the security and on information
about the issuer. For fixed rate loans or deposits and for variable rate loans
or deposits with infrequent repricing or repricing limits, the fair value is
estimated by discounted cash flow analysis or underlying collateral values,
where applicable. The fair value of off-
balance-sheet items approximates cost and are not considered significant to
this presentation.
The estimated year-end values of financial instruments (in thousands) were:
<TABLE>
<CAPTION>
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $10,104 $10,104 $15,290 $15,290
Securities
available
for sale 8,165 8,165 12,001 12,001
Securities held
to maturity 53,085 53,416 46,830 47,144
Loans, net 95,380 95,541 86,842 86,941
-------- -------- -------- --------
$166,734 $167,226 $160,963 $161,376
======== ======== ======== ========
Financial liabilities:
Demand and
savings
deposits $107,129 $107,129 $100,989 $100,989
Time deposits 46,739 46,930 47,160 47,407
-------- -------- -------- --------
$153,868 $154,059 $148,149 $148,396
======== ======== ======== ========
</TABLE>
NOTE 12 - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
28
<PAGE> 29
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
CAPITAL TO RISK-
WEIGHTED ASSETS TIER 1 CAPITAL
TOTAL TIER 1 TO AVERAGE ASSETS
<S> <C> <C> <C>
Well capitalized........... 10% 6% 5%
Adequately capitalized..... 8% 4% 4%
Undercapitalized........... 6% 3% 3%
</TABLE>
At year end, consolidated and Bank actual capital levels (in millions) and
minimum required levels were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM (ADEQUATELY)
REQUIRED CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION REGULATIONS
---------------- --------------- ------------------
1996 AMT RATIO AMT RATIO AMT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets........ $18.2 19.6% $7.4 8.00% $9.2 10.00%
Tier I capital to risk weighted assets....... 17.1 18.3% 3.7 4.00% 5.6 6.00%
Tier I capital to average assets............. 17.1 9.9% 6.9 4.00% 8.6 5.00%
1995
Total capital to risk weighted assets........ $17.3 20.1% $6.9 8.00% $8.1 10.00%
Tier I capital to risk weighted assets....... 16.2 18.9% 3.4 4.00% 4.9 6.00%
Tier I capital to average assets............. 16.2 10.1% 6.4 4.00% 7.9 5.00%
</TABLE>
The Company and Bank were categorized as well capitalized at year-end 1996.
NOTE 13 - PARENT COMPANY CONDENSED
FINANCIAL STATEMENTS
The Company's primary source of funds to pay dividends to shareholders is the
dividends it receives from the Bank. The Bank is subject to certain
restrictions on the amount of dividends that it may declare without prior
regulatory approval. At December 31, 1996, $2,306,901 of retained earnings were
available for dividend declaration without prior regulatory approval.
Following are condensed parent company financial statements (in thousands of
dollars).
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets:
Cash..................................... $ 11 $ 9
Investment in subsidiary................. 17,047 16,241
Other assets............................. 798 768
------- -------
Total assets............................. $17,856 $17,018
======= =======
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Dividend payable $ 791 $ 768
Other liabilities 12
Shareholders' equity 17,053 16,250
------- -------
Total liabilities and
shareholders' equity $17,856 $17,018
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Dividends from subsidiary $1,764 $1,590 $1,176
Operating expense 35 19 14
------ ------ ------
Income before income tax
and equity in undistributed
income of subsidiary 1,729 1,571 1,162
Income tax benefit 12 7 5
Equity in undistributed
income of subsidiary 860 787 660
------ ------ ------
Net income $2,601 $2,365 $1,827
====== ====== ======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flow from
operating activities:
Net income $ 2,601 $ 2,365 $ 1,827
Equity in undistributed net
income of subsidiary (860) (787) (660)
Change in other assets (30) (300) (162)
Change in other liabilities 13 2 (1)
------- ------- -------
Net cash from
operating activities 1,724 1,280 1,004
Cash flow from
financing activities:
Dividends paid (1,722) (1,282) (1,000)
------- ------- -------
Net cash from
financing activities (1,722) (1,282) (1,000)
Net change in cash and
cash equivalents 2 (2) 4
Cash at beginning of year 9 11 7
------- ------- -------
Cash at end of year $ 11 $ 9 $ 11
======= ======= =======
</TABLE>
NOTE 14 -IMPACT OF NEW ACCOUNTING STANDARD
Financial Accounting Standards Board issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
in 1996. It revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and secured
borrowings. This pronouncement is effective for some transactions in 1997 and
others in 1998. While the effect on the financial statements has not yet been
determined, it is not anticipated to have a material impact on the Company's
financial position or results of operation in 1997.
30
<PAGE> 31
INDEPENDENT AUDITOR'S REPORT
[CROWE CHIZEK LOGO]
Board of Directors and Shareholders
CNB Corporation
Cheboygan, Michigan
We have audited the accompanying consolidated balance sheets of CNB Corporation
as of December 31, 1996 and 1995, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Corporation as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 17, 1997
31
<PAGE> 32
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed its independent public accounting firm since its
inception in 1985.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is included under the caption
"Information About Director Nominees" of the Company's proxy statement for the
annual meeting of shareholders scheduled for May 20, 1997, which is hereby
incorporated by reference.
ITEM 10 - EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Compensation of Executive Officers" of the Company's proxy statement for the
annual meeting of shareholders scheduled for May 20, 1997, which is hereby
incorporated by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Ownership
of Common Stock" of the Company's proxy statement for the annual meeting of
shareholders scheduled for May 20, 1997, which is hereby incorporated by
reference.
ITEM 12 - CERTAIN RELATION SHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Indebtedness of and Transactions with Management" of the Company's proxy
statement for the annual meeting of shareholders scheduled for May 20, 1997,
which is hereby incorporated by reference.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K.
Number Exhibit
3(I) Articles of Incorporation. Previously filed as an exhibit to the
registrant's Form 10-SB filed April 26, 1996.
3(ii) By-laws. Previously filed as an exhibit to the registrant's Form
10-SB filed April 26, 1996.
(11) Statement regarding computation of per share earnings. This
information is disclosed in Note 1 to the Company's Annual
Financial Statements for the year ending December 31, 1996 and is
incorporated herein by reference.
(13) Annual Report. The following financial statements, notes to financial
statements, and independent auditor's reports of the Company and its
subsidiary are filed as part of this report:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income for each of the three years ended
December 31, 1996
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended
32
<PAGE> 33
December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996
Notes to Consolidated Financial Statements
Financial Highlights
(21) Subsidiaries of the Registrant. Previously filed as an exhibit to the
registrant's Form 10-SB filed April 26, 1996.
(27) Financial Data Schedule
33
<PAGE> 34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CNB CORPORATION
Date - March 27, 1997 Date - March 27, 1997
________________________ ________________________
/s/ Robert E. Churchill /s/ Jean K. Hunt
President and Chief Executive Officer Vice President/Chief Financial Officer
In accordance with the Exchange Act, this report has been sighed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
___________________________________ March 27, 1997
/s/ Robert E. Churchill, Director
___________________________________ March 27, 1997
/s/ Kathleen M. Darrow, Director
___________________________________ March 27, 1997
/s/ Thomas J. Ellenberger, Director
___________________________________ March 27, 1997
/s/ Thomas J. Fisher, Director
___________________________________ March 27, 1997
/s/ John L. Ormsbee, Director
___________________________________ March 27, 1997
/s/ John P. Ward, Director
___________________________________ March 27, 1997
/s/ Vincent J. Hillesheim
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
<S> <C> <C>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,054
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,165
<INVESTMENTS-CARRYING> 53,085
<INVESTMENTS-MARKET> 53,416
<LOANS> 96,741
<ALLOWANCE> 1,361
<TOTAL-ASSETS> 173,085
<DEPOSITS> 153,868
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,164
<LONG-TERM> 0
0
0
<COMMON> 2,327
<OTHER-SE> 14,726
<TOTAL-LIABILITIES-AND-EQUITY> 173,085
<INTEREST-LOAN> 8,934
<INTEREST-INVEST> 3,751
<INTEREST-OTHER> 273
<INTEREST-TOTAL> 12,958
<INTEREST-DEPOSIT> 5,699
<INTEREST-EXPENSE> 5,699
<INTEREST-INCOME-NET> 7,259
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,474
<INCOME-PRETAX> 3,723
<INCOME-PRE-EXTRAORDINARY> 3,723
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,601
<EPS-PRIMARY> 2.79
<EPS-DILUTED> 2.79
<YIELD-ACTUAL> 8.01
<LOANS-NON> 70
<LOANS-PAST> 61
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,305
<CHARGE-OFFS> 63
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 1,361
<ALLOWANCE-DOMESTIC> 1,361
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,225
</TABLE>
