<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-28388
CNB CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 NORTH MAIN STREET, CHEBOYGAN, MI 49721
(Address of principal executive offices, including Zip code)
Registrant's telephone number (616) 627-7111
Securities registered under 12(b) of the Act: None
Securities registered under 12(g) of the 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 Securities Exchange Act of 1934 during the preceding 12
months (or for such 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998 was $ 45,098,000. For this purpose only, the
affiliates of the registrant have been assumed to be the executive officers,
directors and 10% or more shareholders.
As of March 20, 1998 there were outstanding 1,025,844 shares of the
registrant's common stock, $ 2.50 par value.
The registrant's annual report to security holders for fiscal year ended
December 31, 1997 is incorporated by reference in Part I and Part II of this
report, and the registrant's proxy statement for its annual meeting of
shareholders is incorporated by reference in Part III of this report.
<PAGE> 2
PART I
ITEM 1 - BUSINESS
CNB Corporation ("the Company") was incorporated in June, 1985 as a business
corporation under the Michigan Business Corporation Act, pursuant to the
authorization and direction of the Board of Directors of The Citizens National
Bank of Cheboygan ("the Bank").
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act with the Bank as its only wholly-owned subsidiary. The Bank was
acquired by the Company effective December 31, 1985. The Company has corporate
power to engage in such activities as permitted to business corporations under
the Michigan Business Corporation Act, subject to the limitations of the Bank
Holding Company Act and regulations of the Federal Reserve Board. In general,
the Bank Holding Company Act and regulations restrict the Company with respect
to its own activities and activities of any subsidiaries to the business of
banking or such other activities which are closely related to the business of
banking.
The Bank offers a full range of banking services to individuals, partnerships,
corporations, and other entities. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers.
The Bank's lending function provides a full range of loan products. These
include real estate mortgages, secured and unsecured commercial and consumer
loans, check credit loans, lines of credit, home equity loans and construction
financing. The Bank also participates in specialty loan programs through the
Michigan State Housing Development Authority, Small Business Administration,
Federal Home Loan Mortgage Corporation, Consolidated Farm Service Agency, and
Mortgage Guaranty Insurance Corporation. Through correspondent relationships,
the Bank also makes available credit cards and student loans. The Bank's loan
portfolio is over 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 secured
by real estate. 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.
The Bank makes first and second mortgage loans to its customers for the
purchase of residential and commercial properties. Historically, the Bank has
sold its residential mortgage 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 $ 27 million at December 31,
1997.
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.
Page 1
<PAGE> 3
Under various agency relationships, the Bank provides trust and discount
brokerage services, and mutual fund, annuity and life insurance products to its
customers.
Investments
Securities and their fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Available for sale Gross Gross
Amortized Unrealize Unrealize Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
1997
U.S. government and agency $ 16,085 $ 39 $ (8) $ 16,116
State and municipal 2,997 49 3,046
--------- ------- ------- ------------
$ 19,082 $ 88 $ (8) $ 19,162
1996 ========= ======= ======= ============
U.S. government and agency $ 7,988 $ 7 $ (10) $ 7,985
--------- ------- ------- ------------
$ 7,988 $ 7 $ (10) $ 7,985
========= ======= ======= ============
1995
U.S. government and agency $ 11,448 $ 86 $ (11) $ 11,523
State and municipal 295 3 298
--------- ------- ------- ------------
$ 11,743 $ 89 $ (11) $ 11,821
========= ======= ======= ============
Held to Maturity
1997
U.S. government and agency $ 28,529 $ 137 $ 26 $ 28,640
State and municipal 13,95 135 $ 11 $ 14,078
--------- ------- ------- ------------
$ 42,483 $ 272 $ (37) $ 42,718
========= ======= ======= ============
1996
U.S. government and agency $ 42,013 $ 271 $ (75) $ 42,209
State and municipal 11,072 142 $ (7) 11,207
--------- ------- ------- ------------
$ 53,085 $ 413 $ (82) $ 53,416
========= ======= ======= ============
1995
U.S. government and agency $ 34,307 $ 270 $ (18) $ 34,559
State and municipal 12,523 74 (12) 12,585
--------- ------- ------- ------------
$ 46,830 $ 344 $ (30) $ 47,144
========= ======= ======= ============
</TABLE>
Page 2
<PAGE> 4
Scheduled maturities of securities available for sale and held to maturity at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Due in Due from Due from Due
one year one to five to after ten
or less five years ten years years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government and agencies $17,477 $ 27,010 $ - $ - $ 44,487
State and municipal 6,449 8,272 1,994 493 $ 17,158
------- --------- -------- ------- ---------
$23,926 $ 35,282 $ 1,994 $ 493 $ 61,645
======= ========= ======== ======= =========
Yield 5.77% 5.94% 4.95% 5.65% 5.84%
</TABLE>
Loans
The following is a summary of loans at December 31:
1997 1996 1995 1994 1993
(In thousands)
Residential real estate $ 60,754 $ 56,699 $46,689 $42,391 $ 40,848
Consumer 10,009 9,239 9,395 8,882 10,493
Commercial real estate 20,899 21,331 21,487 23,081 21,602
Commercial 11,705 9,632 10,765 9,592 12,979
--------- -------- ------- ------- --------
103,367 96,901 88,336 83,946 85,922
Deferred loan origination fees, (128) (160) (189) (240) (213)
Allowance for loan losses (1,442) (1,361) (1,305) (1,247) (1,258)
--------- -------- ------- ------- --------
$ 101,797 $ 95,380 $86,842 $82,459 $ 84,451
========= ======== ======= ======= ========
Maturity and Rate Sensitivity of Selected Loans
The following table presents the remaining maturity of total loans outstanding
(excluding residential real estate mortgage and consumer loans) at December 31,
1997, according to scheduled repayments of principal. The amounts due after
one year are classified according to the sensitivity of changes in interest
rates.
Total
------
(In thousands)
In one year or less $ 9,087
After one year but within five years
Interest rates are floating or adjus 4,814
Interest rates are fixed or predeter 13,422
After five years
Interest rates are floating or adjus 4,948
Interest rates are fixed or predeter 333
---------
$ 32,604
=========
Page 3
<PAGE> 5
Summary of loan loss experience is as follows:
Additional information relative to the allowance for loan losses is presented
in the following table. This table summarizes loan balances at the end of each
period and daily average balances, changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off
by loan category, and additions to the allowance for loan losses through
provisions charged to expense.
1997 1996 1995 1994 1993
(In thousands)
Balance at the beginning of the $ 1,361 $ 1,305 $ 1,246 $ 1,258 $ 1,072
Charge-offs:
Residential real estate 2 44 15
Consumer 36 63 25 21 33
Commercial real estate
Commercial 27
-------- -------- -------- -------- --------
Total charge-offs 38 63 69 63 33
-------- -------- -------- -------- --------
Recoveries:
Residential real estate 4 2 17 3 4
Consumer 15 17 11 13 28
Commercial real estate
Commercial 37
-------- -------- -------- -------- --------
Total recoveries 19 19 28 16 69
-------- -------- -------- -------- --------
Provision charged to expense 100 100 100 36 150
Allowance for possible loan
-------- -------- -------- -------- --------
losses, end of period $ 1,442 $ 1,361 $ 1,305 $ 1,247 $ 1,258
======== ======== ======== ======== ========
Total loans outstanding at
end of period $103,367 $ 96,901 $ 88,336 $83,946 $85,922
Average total loans outstanding
for the year $101,518 $93,193 $86,158 $84,302 $85,694
Ratio of net charge-offs to
daily average loans outsta 0.02% 0.05% 0.05% 0.06% (0.04)%
Ratio of net charge-offs to
total loans outstanding 0.02% 0.05% 0.05% 0.06% (0.04)%
Page 4
<PAGE> 6
The allocation of the allowance for loan losses for the years ended
December 31 is:
Residential Commercial
Real Estate Consumer Real Commercial Unallocated Total
Estate
----------- ------ ------- --------- ---------- -----
(In thousands)
1997 Allowance amount 28 28 74 57 1,255 1,442
% of Total loans 58.8% 9.7% 20.2% 11.3% 100.0%
1996 Allowance amount 42 38 7 51 1,225 1,361
% of Total loans 58.5% 9.5% 22.0% 10.0% 100.0%
1995 Allowance amount 43 36 23 65 1,138 1,305
% of Total loans 52.9% 10.6% 24.3% 12.2% 100.0%
1994 Allowance amount 5 18 50 46 1,128 1,247
% of Total loans 50.5% 10.6% 27.5% 11.4% 100.0%
1993 Allowance amount 42 46 82 41 1,047 1,258
% of Total loans 47.6% 12.2% 25.1% 15.1% 100.0%
The review of the loan portfolio revealed no undue concentrations of credit,
however, the portfolio continues to be highly concentrated in residential real
estate mortgages and highly dependent upon the tourist industry for the source
of repayment. Because the reliance on tourism is both primary, (i.e. loans to
motels, hotels and restaurants, etc.) and secondary (i.e. loans to employees of
tourist related businesses), it is difficult to assess a specific dollar amount
of inherent loss potential. Likewise, the residential real estate market has
been stable or increasing, so inherent loss potential in this concentration is
also difficult to reasonably assess. Therefore, it is believed that a
reasonable margin should be maintained in the allowance for loan loss to cover
this undefined potential for loss within the loan portfolio.
The following is a summary of nonaccrual, past due and restructured loans as of
December 31:
1997 1996 1995 1994 1993
(In thousands)
Nonaccrual loans $ 21 $ 70 $ - $ 161 $ 161
Loans past due 90 days or more 78 61 80 132 338
Troubled debt restucturings - - - - -
----- ----- ----- ------ ---------
$ 99 $ 131 $ 80 $ 293 $ 499
===== ===== ===== ====== =========
The gross interest income that would have been recorded for the period ending
December 31, 1997 if the loans would have been current in accordance with their
original terms was $ 4 thousand dollars.
Page 5
<PAGE> 7
Deposits
The following table presents the remaining maturity of time deposits
individually exceeding $ 100,000 at December 31, 1997.
Up to 3 Months $ 7,184
3 to 6 Months 4,940
7 to 12 Months 2,035
Over 12 Months 3,562
--------
$ 17,721
========
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 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
Page 6
<PAGE> 8
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.
An analysis of the Corporation's regulatory capital requirements at December
31, 1997 is presented on page 20 of the Registrant's 1997 Annual Report which
is incorporated herein by reference.
Competition
In its primary market, which includes Cheboygan County and parts of Emmet,
Mackinac, Presque Isle and Montmorency Counties, 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. 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, 1997, the Bank employed 64 full-time and 17 part-time
employees. This compares to 62 full-time and 14 part-time employees as of
December 31, 1996. 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.
Page 7
<PAGE> 9
ITEM 2 - PROPERTIES
The Company and the Bank have their primary office at 303 North Main Street,
Cheboygan Michigan. In addition, the Bank owns and operates the following
facilities: Onaway Office, 20581 W. State Street, Onaway; Mackinaw City Office,
580 S. Nicolet Street, Mackinaw City; Pellston Office, 200 Stimpson, Pellston;
Indian River Office, 3990 Straits Highway, Indian River; South Side 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. All
properties are owned by the Bank free of any mortgages or encumbrances.
ITEM 3- LEGAL PROCEEDINGS.
Neither the Company nor the Bank are a party to any pending legal proceedings
other than the 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 REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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.
The information detailing the range of high and low bid information for the
equity for each full quarterly period within the two most recent fiscal years
can be found under the caption "Financial Highlights" of the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1997, which is
hereby incorporated by reference.
The information which indicates the amount of common equity that is subject to
outstanding options or warrants to purchase, or securities convertible into,
common equity of the registrant can be found in Note 8 on page 16 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997, which is hereby incorporated by reference.
Page 8
<PAGE> 10
There are no public offerings pending.
There are approximately 640 shareholders of record of the common stock of the
Company as of December 31,1997.
During 1997, the Company declared regular dividends of $ 1.31 per share plus a
special dividend of $ .48. In 1996, the Company declared regular dividends of
$ 1.25 plus a special dividend of $ .45. These per share statistics have been
retroactively adjusted for the 2 for 1 stock split of May 31, 1996 and the 5%
stock dividend of June 25,1997 and February 20, 1998. 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 66.0% for the past three years.
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 and (2) the prospective rate
of earnings retention must be consistent with the Company's capital needs,
asset quality and overall financial condition.
ITEM 6-SELECTED FINANCIAL DATA.
This information is included on Page 4 under the caption "Financial Highlights"
of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997, which is hereby incorporated by reference.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This information is included on pages 24 through 31 of the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1997, which is
hereby incorporated by reference.
ITEM 7a-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required as company meets requirements to be a small business filer.
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information is included on pages 7 through 22 of the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1997, which is
hereby incorporated by reference.
Page 9
<PAGE> 11
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 19, 1998, which is hereby
incorporated by reference.
Information about the executive officers of the Corporation is set forth below.
Name
- ---- Position
--------
Robert E. Churchill President and Chief Executive Officer of
the Corporation and Citizens National Bank
of Cheboygan
John P. Ward Senior Vice President, Secretary/Treasurer
of the Corporation and Senior Vice President
and Cashier of Citizens National Bank of
Cheboygan
John F. Ekdahl Senior Vice President of the Corporation and
Citizens National Bank of Cheboygan
Susan A. Eno Senior Vice President of the Corporation and
Citizens National Bank of Cheboygan
ITEM 11-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 19, 1998, which is hereby
incorporated by reference.
Page 10
<PAGE> 12
ITEM 12-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 19, 1998, which is hereby incorporated by
reference.
ITEM 13-CERTAIN RELATIONSHIPS 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 19, 1998,
which is hereby incorporated by reference.
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The following financial statements and
independent auditor's report of CNB Corporation and its subsidiary
are filed as part of this report:
Consolidated Balance Sheets-December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31,1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Independent Auditor's Report dated February 4, 1998.
The financial statements, the notes to financial statements and the report of
independent auditors listed above are incorporated by reference in Item 8 of
this report.
(2) Financial Statement Schedules. Not applicable
(3) Exhibits.
(3a) Articles of Incorporation. Previously filed as exhibit
to the registrant's Form 10-KSB filed April 26, 1996.
(3b) By-laws. Previously filed as exhibit to the
registrant's Form 10-KSB filed April 26, 1996.
Page 11
<PAGE> 13
(11) Statement regarding computation per share earnings.
This information is disclosed in Note 10 to the Company's
Financial Statements for the year ended December 31, 1997,
which is hereby incorporated by reference.
(13) Annual report to shareholders for the year ended
December 31, 1997 (filed herewith).
(21) Subsidiaries of the Company. Citizens National Bank of
Cheboygan is the subsidiary of the Company.
(27) Financial Data Schedule.
(b) Reports of Form 8-K. No reports of Form 8-K were filed during
the last calendar quarter of the year covered by this report.
Page 12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CNB CORPORATION
(Registrant)
Date March 26, 1998
/s/ Robert E. Churchill
- ------------------------------------
Robert E. Churchill
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 26, 1998.
/s/ Thomas J. Fisher /s/ Vincent J. Hillesheim
- ------------------------- --------------------------------
Thomas J. Fisher Vincent J. Hillesheim
Chairman of the Board Director
/s/ Robert E. Churchill /s/ John L. Ormsbee
- ------------------------- --------------------------------
Robert E. Churchill John L. Ormsbee
Director Director
President and
Chief Executive Officer
/s/ Kathleen M. Darrow /s/ Francis J. VanAntwerp, Jr.
- ------------------------- --------------------------------
Kathleen M. Darrow Francis J. VanAntwerp, Jr.
Director Director
/s/ Thomas J. Ellenberger /s/ John P. Ward
- ------------------------- --------------------------------
Thomas J. Ellenberger John P. Ward
Director Director
Senior Vice President, Secretary
and Treasurer
/s/ Susan A. Eno /s/ John F. Ekdahl
- ------------------------- --------------------------------
Susan A. Eno John F. Ekdahl
Senior Vice President Senior Vice President
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------- --- -----------
(3a) Articles of Incorporation. Previously filed as exhibit
to the registrant's Form 10-KSB filed April 26, 1996.
(3b) By-laws. Previously filed as exhibit to the
registrant's Form 10-KSB filed April 26, 1996.
(11) Statement regarding computation per share earnings.
This information is disclosed in Note 10 to the Company's
Financial Statements for the year ended December 31, 1997,
which is hereby incorporated by reference.
(13) Annual report to shareholders for the year ended
December 31, 1997 (filed herewith).
(21) Subsidiaries of the Company. Citizens National Bank of
Cheboygan is the subsidiary of the Company.
(27) Financial Data Schedule.
<PAGE> 1
EXHIBIT 13
CNB CORPORATION 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Table of Contents
A Note of Appreciation........................................... 1
President's Message.............................................. 2
1997 Community Support........................................... 3
Financial Highlights............................................. 4
Progress Report.................................................. 5
Consolidated Balance Sheets...................................... 7
Consolidated Statements of Income................................ 8
Consolidated Statements of Shareholders' Equity.................. 9
Consolidated Statements of Cash Flows............................ 10
Notes to Consolidated Financial Statements....................... 11
Independent Auditor's Report..................................... 23
Management's Discussion And Analysis............................. 24
Mission Statement................................................ 32
CNB Corporation Directors........................................ 34
CNB Officers and Community Advisors.............................. 35
CNB Staff........................................................ 36
<PAGE> 2
CNB CORPORATION 1997 ANNUAL REPORT
PRESIDENT'S MESSAGE
I am pleased to report that 1997 was a successful year for CNB Corporation.
Net income for CNB Corporation for the year ended December 31, 1997, was
$2,880,000 or $2.81 per share, compared to $2,601,000, or $2.53 per share,
earned during the same period last year. Cash dividends declared during 1997
totaled $1.79 per share, including a special dividend of $.48 per share,
compared with $1.70 in dividends during 1996.
Earnings for the year increased 10.70%, due to an increase in interest income
earned on loans and investments as well as other non-interest income. The
corporation's return on average assets (ROA) for 1997 was 1.58% versus 1.51%
the prior year. The return on average equity (ROE) was 16.10% versus 15.33%
for 1996.
Deposits as of December 31, 1997, were $170.3 million, compared with $153.9
million the same time last year, an increase of 10.7%. Loans as of December
31, 1997, were $103.4 million, compared with $96.9 million for the same time
last year, an increase of 6.7%. Assets of the Corporation at year end, were
$190.8 million versus $173.1 million last year, an increase of 10.2%.
During the year, CNB introduced "TeleBanc". With the new service, customers
are able to check account balances, transfer funds, and make loan payments from
anywhere there is a phone, 24 hours a day.
In December, we were saddened by the death of Francis E. Lindsay, former
Chairman of the Board of CNB Corporation and Citizens National Bank. Francis
served on our board for more than 30 years and provided legal advice to the
Bank as general counsel for more than 40 years.
In February of this year, we were saddened by the death of Richard D. Burrus,
assistant vice president and branch manager of our Indian River Office. Dick
was scheduled to retire from the Bank at the end of March. Dick joined CNB in
1982 and was assigned to our Indian River Office since that time.
John P. Ward, senior vice president and secretary-treasurer of the Corporation,
has announced that he will retire at the end of June. John joined Citizens
National Bank in 1973 and became a director of Citizens National Bank in 1994
and was elected a director of CNB Corporation in 1995. Since 1973, John has
made many contributions to our organization for which we are most appreciative.
We wish him a happy and healthy retirement. We are pleased that John will
continue to serve on the board of the Corporation and the Bank after his
retirement.
Irene M. English has been promoted to vice president of the Bank. Irene has
been controller of CNB since 1997. She has been employed with Citizens
National Bank since 1985.
You are undoubtedly aware of the "millennium bug" or the year 2000 computer
problems which pose a threat to businesses everywhere. The problems, which
will evidence themselves in the year 2000, derive from a two digit limitation
in source programming for calendar years. CNB has assembled an internal
technology committee to thoroughly identify and correct any potential problems
in this area well ahead of the year 2000.
The remodeling of the Onaway office has begun. The renovation will include a
new teller line and upgraded drive-in service. The new facility will allow us
to provide more convenient and efficient service to our customers.
We anticipate another good tourist season this year. The national economy
remains strong and the economy in the State of Michigan is generally good.
The progress made by your bank during the past year would not have been
possible if it were not for our dedicated staff and committed board of
directors and community advisors. The support of our stockholders and many
other friends has also been greatly appreciated.
I look forward to seeing you at our annual meeting.
Sincerely,
/s/ Robert E. Churchill
Robert E. Churchill
President
2
<PAGE> 3
CNB CORPORATION 1997 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING STATISTICS
Interest income $ 13,728 $ 12,958 $ 12,069 $ 10,274 $ 9,809
Interest expense 6,087 5,699 5,108 3,958 3,648
Net interest income 7,641 7,259 6,961 6,316 6,161
Income before income taxes 4,151 3,723 3,424 2,635 2,443
Net income 2,880 2,601 2,365 1,827 1,737
Basic earnings per share 2.81 2.53 2.31 1.78 1.69
Diluted earnings per share 2.80 2.53 2.31 1.78 1.69
Return on average assets
(ROA) 1.58% 1.51% 1.48% 1.20% 1.20%
Return on average
shareholders' equity (ROE) 16.10% 15.33% 14.75% 12.04% 11.92%
BALANCE SHEET STATISTICS
Securities 61,645 61,070 58,831 55,549 51,356
Loans 103,367 96,901 88,346 83,946 85,922
Deposits 170,326 153,868 148,149 136,000 133,366
Total assets 190,822 173,085 166,560 152,962 149,655
CAPITAL STATISTICS
Shareholders' equity 18,145 17,053 16,251 15,302 14,754
Book value per share (1) 17.69 16.63 15.84 14.91 13.70
Cash dividend per share (1) 1.79 1.70 1.54 1.13 .93
Dividend payout ratio 63.92% 67.09% 66.89% 63.65% 53.97%
Average equity to average
total assets 9.82% 9.88% 10.04% 9.98% 10.13%
CREDIT STATISTICS
Net charge-offs to gross loans .02% .05% .05% .06% (.04)%
Nonperforming assets
to gross loans .10% .14% .09% .35% .58%
Allowance for loan losses
to gross loans 1.40% 1.41% 1.48% 1.49% 1.47%
Allowance for loan losses
to nonperforming assets 14.57X 10.39X 16.33X 4.29X 2.52X
</TABLE>
(1) Restated for stock dividends, including the five percent stock dividend
to be paid February 20, 1998.
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 1997 and 1996. The Company
had 640 shareholders as of December 31, 1997. The prices and dividends per
share have been restated to reflect the 1996 stock split, 1997 5% stock
dividend and the subsequent 5% stock dividend declared in 1998.
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------- -------
Cash Cash
Market Price Dividends Market Price Dividends
Quarter High Low Declared High Low Declared
------- ------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
1st $32.65 $29.02 $0.32 $25.85 $24.04 $0.29
2nd 35.24 35.24 0.33 27.21 25.85 0.32
3rd 35.24 34.76 0.33 29.02 29.02 0.32
4th 40.95 35.24 0.81 29.02 29.02 0.77
</TABLE>
4
<PAGE> 4
CNB CORPORATION 1997 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $6,004 $6,054
Federal funds sold 13,300 4,050
-------- --------
Total cash and cash equivalents 19,304 10,104
Interest-earning deposits 1,000 -
Securities available for sale 19,162 7,985
Securities held to maturity (market value of
$42,718 in 1997 and $53,416 in 1996) 42,483 53,085
Other securities 716 180
Loans, net 101,797 95,380
Premises and equipment, net 2,686 2,679
Other assets 3,674 3,672
-------- --------
Total assets $190,822 $173,085
======== ========
LIABILITIES
Deposits
Non-interest bearing $23,769 $22,419
Interest-bearing 146,557 131,449
-------- --------
Total deposits 170,326 153,868
Other liabilities 2,351 2,164
-------- --------
Total liabilities 172,677 156,032
-------- --------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 977,289 and 930,772 shares issued
and outstanding in 1997 and 1996 2,443 2,327
Additional paid-in capital 6,583 4,979
Retained earnings 9,066 9,749
Unrealized gains (losses) on securities available
for sale, net of tax 53 (2)
-------- --------
Total shareholders' equity 18,145 17,053
-------- --------
Total liabilities and shareholders' equity $190,822 $173,085
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 5
CNB CORPORATION 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 9,608 $ 8,934 $ 8,456
Securities
Taxable 3,194 3,349 2,864
Tax-exempt 391 402 264
Federal funds sold 535 273 485
------- ------- -------
Total interest income 13,728 12,958 12,069
INTEREST EXPENSE ON DEPOSITS 6,087 5,699 5,108
------- ------- -------
NET INTEREST INCOME 7,641 7,259 6,961
Provision for loan losses 100 100 100
------- ------- ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,541 7,159 6,861
------- ------- ------
NON-INTEREST INCOME
Service charges and fees 816 711 703
Loan sales and servicing fees 217 140 182
Other income 268 187 151
------- ------- -------
Total non-interest income 1,301 1,038 1,036
------- ------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,715 2,573 2,517
Occupancy 620 589 552
FDIC insurance premiums 19 2 157
Supplies 186 161 154
Other expenses 1,151 1,149 1,093
------- ------- -------
Total non-interest expenses 4,691 4,474 4,473
------- ------- -------
INCOME BEFORE INCOME TAXES 4,151 3,723 3,424
Income tax expense 1,271 1,122 1,059
------- ------- -------
NET INCOME $ 2,880 $ 2,601 $ 2,365
======= ======= =======
Basic earnings per share $ 2.81 $ 2.53 $ 2.31
Diluted earnings per share $ 2.80 $ 2.53 $ 2.31
</TABLE>
8
<PAGE> 6
CNB CORPORATION 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
AVAILABLE
ADDITIONAL FOR SALE,
COMMON PAID-IN RETAINED NET TOTAL
STOCK CAPITAL EARNINGS OF TAX EQUITY
------ ------------- ------------- -------------- -------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
BALANCE - JANUARY 1, 1995 $2,327 $4,979 $8,111 $ (115) $15,302
Net income 2,365 2,365
Cash dividends - $1.54 per share (1,583) (1,583)
Net change in unrealized gains (losses)
on securities available for sale 167 167
------- ------- ------- ------- --------
BALANCE - DECEMBER 31, 1995 2,327 4,979 8,893 52 16,251
Net income 2,601 2,601
Cash dividends - $1.70 per share (1,745) (1,745)
Net change in unrealized gains (losses)
on securities available for sale (54) (54)
------- ------- ------- ------- --------
BALANCE - DECEMBER 31, 1996 2,327 4,979 9,749 (2) 17,053
Net income 2,880 2,880
Cash dividends - $1.79 per share (1,841) (1,841)
5% stock dividend 116 1,599 (1,722) (7)
Shares issued under stock option plan 5 5
Net change in unrealized gains (losses)
on securities available for sale 55 55
------- ------- ------- ------- --------
BALANCE - DECEMBER 31, 1997 $ 2,443 $ 6,583 $ 9,066 $ 53 $ 18,145
======= ======= ======= ======= ========
</TABLE>
9
<PAGE> 7
CNB CORPORATION 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,880 $ 2,601 $ 2,365
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 275 267 230
Accretion and amortization of investment
securities, net 121 312 722
Provision for loan losses 100 100 100
Loans originated for sale (7,741) (3,710) (5,361)
Proceeds from sales of loans originated for sale 7,745 3,727 5,396
Gain on sales of loans (4) (17) (35)
(Increase) decrease in other assets (30) 15 (121)
Increase (decrease) in other liabilities 146 (26) 200
-------- -------- --------
Total adjustments 612 668 1,131
-------- -------- --------
Net cash from operating activities 3,492 3,269 3,496
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning deposits (1,000) - -
Proceeds from maturities of securities
available for sale 3,000 5,780 -
Purchase of securities available for sale (14,105) (2,029) (1,978)
Proceeds from maturities of securities held
to maturity 25,144 31,853 27,054
Purchase of securities held to maturity (14,651) (38,417) (28,829)
Purchase of other securities (536) - -
Net increase in portfolio loans (6,517) (8,638) (4,483)
Premises and equipment expenditures (282) (1,001) (135)
-------- -------- --------
Net cash from investing activities (8,947) (12,452) (8,371)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 16,458 5,719 12,149
Dividends paid (1,808) (1,722) (1,282)
Proceeds from exercise of stock options 5 - -
-------- -------- --------
Net cash from financing activities 14,655 3,997 10,867
Net change in cash and cash equivalents 9,200 (5,186) 5,992
Cash and cash equivalents at beginning of year 10,104 15,290 9,298
-------- -------- --------
Cash and cash equivalents at end of year $ 19,304 $ 10,104 $ 15,290
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 6,046 $ 5,693 $ 5,028
Income taxes 1,123 1,056 1,050
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer from securities held to maturity
to securities available for sale $ - $ - $ 4,941
</TABLE>
10
<PAGE> 8
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include CNB
Corporation (the Company) and its wholly-owned subsidiary, Citizens National
Bank (the Bank). All significant intercompany accounts and transactions are
eliminated in consolidation.
NATURE OF OPERATIONS AND CONCENTRATIONS OF CREDIT RISK: The Company is a
one-bank holding company which conducts no direct business activities. All
business activities are performed by the Bank.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to
individuals for home mortgages, automobiles and personal expenditures, and
loans to business enterprises for current operations and expansion. The Bank
offers a variety of deposit accounts, including checking, savings, money
market, individual retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the Michigan
communities in which the Bank is located and the area immediately surrounding
these communities. The Bank serves these markets through eight offices located
in Cheboygan, Presque Isle, and Emmet Counties in Northern Lower Michigan.
USE OF ESTIMATES: To prepare financial statements in conformity with 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, and
future results could differ. The allowance for loan losses, fair values of
financial instruments, and status of contingencies are particularly subject to
change in the near term.
CASH FLOW REPORTING: Cash and cash equivalents include cash and due from banks
and federal funds sold. Net cash flows are reported for customer loan and
deposit transactions and interest-earning time deposits with other financial
institutions.
SECURITIES: Securities classified as held to maturity are carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in shareholders' equity, net
of tax. Trading securities are carried at fair value, with changes in
unrealized holding gains and losses included in income. Realized gains and
losses are based on specific identification of amortized cost. Securities are
written down to fair value when a decline in fair value is not temporary.
Interest income includes amortization of purchase premium or discount.
Other securities, which include Federal Reserve Bank and Federal Home Loan Bank
stocks, are carried at cost.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
LOAN INCOME: Interest income on loans is accrued over the term of the loans
based upon the principal outstanding and includes amortization of net deferred
loan fees and costs over the loan term. Interest income is not reported when
full loan repayment is in doubt, typically when 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: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan
losses and decreased by charge-offs less recoveries. Management estimates the
allowance balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated
11
<PAGE> 9
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in total for smaller-balance loans of similar nature such as residential
mortgage, consumer and credit card loans, and on an individual loan basis for
other loans. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when it is
probable that all principal and interest amounts will not be collected according
to the original terms of the loan.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method
over the assets useful lives. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable. Maintenance and
repairs are charged to expense and improvements are capitalized.
OTHER REAL ESTATE OWNED: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at acquisition. Any
reduction to fair value from the carrying value of the related loan is
accounted for as a loan loss. After acquisition, a valuation allowance reduces
the reported amount to the lower of the initial amount or fair value less costs
to sell. Expenses, gains and losses on disposition, and changes in the
valuation allowance are reported in other expenses.
SERVICING RIGHTS: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and then, secondarily, as to geographic
and prepayment characteristics. Any impairment of a grouping is reported as a
valuation allowance.
EMPLOYEE BENEFITS: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Contributions to the plan are based on the maximum amount
deductible for income tax purposes. A 401(k) savings and retirement plan has
also been established and covers substantially all employees. Contributions to
the 401(k) plan are made and expensed annually.
STOCK OPTIONS: No expense for stock options is recorded, as the grant price
equals the market price of the stock at grant date. Pro forma disclosures show
the effect on income and earnings per share had the options' fair value been
recorded using an option pricing model. The pro forma effect is expected to
increase in the future. Options granted vest over one year and have a maximum
term of ten years. There are 41,343 shares authorized for future grant.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
EARNINGS AND DIVIDENDS PER SHARE: Basic earnings per share is based on
weighted-average shares outstanding. Diluted earnings per share further
assumes issuance of any dilutive potential shares. The accounting standard for
computing earnings per share was revised for 1997, and all earnings per share
previously reported are restated to follow the new standard. On January 18,
1998 the board of directors declared a five percent stock dividend to be paid
on February 20, 1998 to shareholders. Earnings per share and dividends per
share have been restated for all subsequent stock splits and stock dividends,
including the five percent stock dividend declared January 18, 1998.
In 1996 and 1997, shareholders of the Company approved an increase in the
number of authorized shares from 500,000 to 1,000,000 and from 1,000,000 to
2,000,000, respectively.
STOCK SPLITS AND STOCK DIVIDENDS: Cash dividends per share are based on the
number of shares outstanding at the date of declaration, retroactively adjusted
for stock dividends. Dividends issued in stock are reported by transferring
the market value of the stock issued from retained earnings to
12
<PAGE> 10
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
common stock and additional paid-in capital. Stock splits are recorded
by adjusting par value. Fractional shares are paid in cash for all stock splits
and dividends. A five percent stock dividend was declared in 1997 and 1998 and
a two-for-one stock split was declared in 1996.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company, in the normal
course of business, makes commitments to extend credit which are not reflected
in the consolidated financial statements.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates. The fair value
estimates of existing on- and off-balance-sheet financial instruments do not
include the value of anticipated future business or the values of assets and
liabilities not considered financial instruments.
RECLASSIFICATION: Some items in prior financial statements have been
reclassified to conform with the current presentation.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities at year end, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale --------- ---------- ---------- -------
1997 (In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency $ 16,085 $ 39 $ (8) $16,116
State and municipal 2,997 49 - 3,046
--------- ---------- ---------- -------
$ 19,082 $ 88 $ (8) $19,162
========= ========== ========== =======
1996
U.S. Government and agency $ 7,988 $ 7 $ (10) $ 7,985
--------- ---------- ---------- -------
$ 7,988 $ 7 $ (10) $ 7,985
========= ========== ========== =======
Held to maturity
1997
U.S. Government and agency $ 28,529 $ 137 $ (26) $28,640
State and municipal 13,954 135 (11) 14,078
--------- ---------- ---------- -------
$ 42,483 $ 272 $ (37) $42,718
========= ========== ========== =======
1996
U.S. Government and agency $ 42,013 $ 271 $ (75) $42,209
State and municipal 11,072 142 (7) 11,207
--------- ---------- ---------- -------
$ 53,085 $ 413 $ (82) $53,416
========= ========== ========== =======
</TABLE>
There were no sales of securities during 1997, 1996 or 1995.
Contractual maturities of debt securities at year end 1997 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.
13
<PAGE> 11
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 2 - SECURITIES (Continued)
Available For Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 5,201 $ 5,205 $ 18,721 $ 18,730
Due from one to five years 12,922 12,967 22,315 22,456
Due from five to ten years 959 990 954 987
Due after ten years - - 493 545
--------- --------- --------- --------
$ 19,082 $ 19,162 $ 42,483 $ 42,718
========= ========= ========= ========
</TABLE>
Securities with a carrying value of $997,000 were pledged at December 31, 1997,
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 1997 and 1996, the amortized cost of securities issued by the state of
Michigan and all of its political subdivisions totaled $9,778,000 and
$5,279,000 with an estimated fair value of $9,906,000 and $5,329,000,
respectively. At year end 1997 and 1996, the amortized cost of securities
issued by the state of Illinois and all of its political subdivisions totaled
$2,639,000 and $3,153,000 with an estimated fair value of $2,663,000 and
$3,209,000, respectively.
NOTE 3 - LOANS
<TABLE>
<CAPTION>
Year end loans were as follows:
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Residential real estate $ 60,754 $56,699
Consumer 10,009 9,239
Commercial real estate 20,899 21,331
Commercial 11,705 9,632
-------- -------
103,367 96,901
Deferred loan origination fees, net (128) (160)
Allowance for loan losses (1,442) (1,361)
-------- -------
$101,797 $95,380
======== =======
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance $1,361 $1,305 $1,246
Provision for loan losses 100 100 100
Charge-offs (38) (63) (69)
Recoveries 19 19 28
------ ------ -------
Ending balance $1,442 $1,361 $1,305
====== ====== =======
</TABLE>
The Company had no impaired loans for 1997 and 1996. There were no loans held
for sale at year end 1997 and 1996.
14
<PAGE> 12
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These loans
totaled $27,414,000 and $23,184,000 at year end 1997 and 1996, respectively.
Related escrow deposit balances were $29,000 and $35,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Year end premises and equipment were as follows:
1997 1996
------- -------
<S> <C> <C>
(In thousands)
Real estate and buildings $3,355 $3,215
Furniture and fixtures 2,866 2,724
------- -------
6,221 5,939
Less accumulated depreciation (3,535) (3,260)
------- -------
$2,686 $2,679
======= =======
</TABLE>
Depreciation expense amounted to $275,000, $267,000 and $230,000 in 1997, 1996
and 1995, respectively.
NOTE 6 - DEPOSITS
Time deposit accounts individually exceeding $100,000 total $17,721,000 and
$9,732,000 at year end 1997 and 1996, respectively.
At year end 1997, the scheduled maturities of time deposits are as follows for
the years ending December 31:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998 $46,087
1999 14,857
2000 3,613
2001 1,886
2002 1,516
-------
$67,959
=======
</TABLE>
NOTE 7 - EMPLOYEE BENEFITS
DEFINED BENEFIT RETIREMENT PLAN: The Company has a defined benefit,
noncontributory pension plan which provides retirement benefits for essentially
all employees. The following sets forth the plan's funded status and amounts
recognized in the financial statements:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(In thousands)
Present values using actuarial assumptions
Accumulated benefit obligation
Vested $ 1,796 $ 1,626
Non vested 1 1
-------- -------
Total $ 1,797 $ 1,627
======== =======
Projected benefit obligation $(2,658) $(2,453)
Plan assets at fair value 2,940 2,489
-------- -------
Funded status 282 36
Unrecognized transition obligation (125) (136)
Unrecognized prior service cost (43) (46)
Unrecognized net loss 96 288
-------- -------
Net pension asset $ 210 $ 142
======== =======
</TABLE>
NOTE 7 - EMPLOYEE BENEFITS (Continued)
Net pension expense and related year end assumptions consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost $ 109 $ 106 $ 100
Interest cost on benefit obligation 197 184 173
Actual return on plan assets (203) (191) (158)
Net amortization and deferral (3) (4) -
----- ------- -------
Pension expense $ 100 $ 95 $ 115
===== ======= =======
Weighted average discount rate 8.00% 8.00% 8.00%
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%
</TABLE>
Plan assets are administered by Empire National Bank as trustee of the plan.
Plan assets are invested in diversified mutual funds operated and administered
by the Frank Russell Investment Company.
15
<PAGE> 13
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - EMPLOYEE BENEFITS (CONTINUED)
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 $152,000, $145,000 and $151,000 in 1997, 1996, and 1995,
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 the
lesser of 20% of their eligible compensation or the limitations set by the IRS.
During 1997, 1996 and 1995, 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 $54,000, $56,000 and $54,000 in 1997, 1996 and 1995,
respectively.
NOTE 8 - STOCK OPTIONS
STOCK OPTION PLAN: The shareholders approved an incentive stock option plan in
May 1996 under which options may be issued at market prices to employees. The
right to exercise the options vests over a one year period. No options were
exercisable at December 31, 1996. The options outstanding and exercisable at
year end December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Number
of Options
Price Exercisable and
Issue Date Expiration Date Per Share (1) Outstanding (1)
---------- --------------- ------------- ---------------
<S> <C> <C> <C>
May 1996 May 2006 $ 29.03 12,679
</TABLE>
Pro forma disclosures are required for companies that do not adopt the fair
value accounting method for stock-based employee compensation. Proforma
compensation is not material for 1997 or 1996. The proforma effect is expected
to increase in future years as additional options are granted. The exercise
price of options granted is equivalent to the market value of underlying stock
at the grant date. Accordingly, no compensation cost was actually recognized
for stock options in 1997 or 1996. There was no compensation cost in 1995, as
the plan was not approved until 1996.
The following is a summary of the option transactions for the period January 1,
1996 through December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Average
Available Options Exercise
For Grant Outstanding Price
--------- ----------- ---------
<S> <C> <C> <C>
Balance at January 1, 1996 - - $ -
Options authorized 50,000 - -
Options issued (12,500) 12,500 32.00
--------- ----------- ---------
Balance at December 31, 1996 37,500 12,500 32.00
Effect of 5% stock
dividend 1,875 625 -
Options exercised - (1,050) 30.48
--------- ----------- ---------
Balance at December 31, 1997 39,375 12,075 30.48
Effect of subsequent 5%
stock dividend 1,968 599 -
--------- ----------- ---------
Restated balance at December 31, 1997 41,343 12,674 $ 29.03
========= =========== =========
</TABLE>
(1) Restated for stock dividends, including the five percent stock dividend
to be paid February 20, 1998.
16
<PAGE> 14
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense consists of:
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current $1,204 $1,166 $1,017
Deferred 67 (44) 42
------ ------ -------
$1,271 $1,122 $1,059
====== ======= ======
</TABLE>
Year end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $343 $315
Unrealized losses on securities
available for sale - 1
Deferred compensation 368 344
Other 40 96
---- ----
Total deferred tax assets 751 756
---- ----
Deferred tax liabilities
Pension 45 22
Unrealized gains on securities
available for sale 27 -
Fixed assets 43 35
Mortgage servicing rights 16 -
Accretion 69 53
---- ----
Total deferred tax liabilities 200 110
---- ----
Net deferred tax asset $551 $646
==== ====
</TABLE>
Income tax expense calculated at the statutory rate of 34% differs from actual
income tax expense as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Statutory rate applied to income before taxes $1,411 $1,266 $1,164
Deduct
Tax-exempt interest income (133) (139) (102)
Other (7) (5) (3)
------ ------ ------
$1,271 $1,122 $1,059
====== ====== ======
</TABLE>
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common
shareholders (in thousands) $ 2,880 $ 2,601 $ 2,365
========= ========= =========
Weighted average shares outstanding,
adjusted for subsequent five percent stock
dividend to be paid February 20, 1998 1,026,124 1,026,174 1,026,174
========= ========= =========
Basic earnings per share $ 2.81 $ 2.53 $ 2.31
========= ========= =========
Diluted earnings per share
Net income available to common
shareholders (in thousands) $ 2,880 $ 2,601 $ 2,365
========= ========= =========
Weighted average shares outstanding,
adjusted for subsequent five percent stock
dividend to be paid February 20, 1998. 1,026,124 1,026,174 1,026,174
Add dilutive effects of assumed exercises
of stock options 2,267 - -
--------- --------- ---------
Weighted average dilutive
potential shares outstanding 1,028,391 1,026,174 1,026,174
========= ========= =========
Diluted earnings per share $ 2.80 $ 2.53 $ 2.31
========= ========= =========
</TABLE>
17
<PAGE> 15
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the Bank
(including family members, affiliates and companies in which they are principal
owners) had loans outstanding with the Bank in the ordinary course of business.
A summary of the aggregate loans outstanding which exceeded $60,000 to these
individuals follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
(In thousands)
Balance outstanding, January 1 $1,377 $980
New loans and rewrites 7,664 8,163
Payments and payoffs (7,158) (7,676)
Other - (90)
------- -------
Balance outstanding, December 31 $1,883 $1,377
======= =======
</TABLE>
Related party deposits totaled $1,352,000 and $933,000 at year end 1997 and
1996, respectively.
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected
to have a material effect on financial condition or result of operations.
At year end 1997 and 1996, reserves of $1,065,000 and $1,060,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet
the financing needs of customers and to reduce exposure to interest rate
changes. These financial instruments include commitments to extend credit and
standby letters of credit. These involve, to a varying degree, credit and
interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. The same credit policies are used for commitments and conditional
obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being used, the total commitments do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments to guarantee a customer's performance to a third party.
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk at year end follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Commitments to extend credit $14,045 $14,736
Standby letters of credit 30 29
</TABLE>
Substantially all of these commitments are at variable or uncommitted rates.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
value for cash and variable rate loans or deposits that reprice frequently and
fully. Securities fair values are based on quoted market prices or, if no
quotes are available, on the rate and term of the security and on information
about the issuer. For fixed rate loans or deposits and for variable rate loans
or deposits with infrequent repricing or repricing limits, the fair value is
estimated by discounted cash flow analysis or underlying collateral values,
where applicable. The fair value of off-balance-sheet items approximates cost
and is not considered significant to this presentation.
18
<PAGE> 16
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated year end values of financial instruments were:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 19,304 $ 19,304 $ 10,104 $ 10,104
Interest-earning deposits 1,000 1,000 - -
Securities available for sale 19,162 19,162 7,985 7,985
Securities held to maturity 42,483 42,718 53,085 53,416
Other securities 716 716 180 180
Loans, net 101,797 101,883 95,380 95,541
Liabilities
Deposits
Non-interest bearing $ 23,769 $ 23,769 $ 22,419 $ 22,419
Interest-bearing 146,557 146,540 131,449 131,631
</TABLE>
NOTE 14 - REGULATORY CAPITAL
The Company and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings and other
factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements.
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>
19
<PAGE> 17
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - REGULATORY CAPITAL (CONTINUED)
The Company and Bank were categorized as well capitalized at year end. Actual
capital levels (in millions) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital (to risk weighted assets)
Consolidated $19.4 19.2% $8.1 8.0% $10.1 10.0%
Bank 19.3 19.2% 8.1 8.0% 10.1 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 18.1 17.9% 4.0 4.0% 6.1 6.0%
Bank 18.1 17.9% 4.0 4.0% 6.1 6.0%
Tier 1 capital (to average assets)
Consolidated 18.1 9.6% 7.6 4.0% 9.4 5.0%
Bank 18.1 9.6% 7.6 4.0% 9.4 5.0%
1996
Total capital (to risk weighted assets)
Consolidated $18.2 19.6% $7.4 8.0% $9.3 10.0%
Bank 18.2 19.6% 7.4 8.0% 9.3 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 17.1 18.3% 3.7 4.0% 5.6 6.0%
Bank 17.1 18.3% 3.7 4.0% 5.6 6.0%
Tier 1 capital (to average assets)
Consolidated 17.1 9.9% 6.9 4.0% 8.6 5.0%
Bank 17.1 9.9% 6.9 4.0% 8.6 5.0%
</TABLE>
20
<PAGE> 18
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company financial statements:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
ASSETS
Cash $ 1 $ 11
Investment in subsidiary 18,138 17,047
Other assets 837 798
------- -------
$18,976 $17,856
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 831 $ 791
Other liabilities - 12
Shareholders' equity 18,145 17,053
------- -------
$18,976 $17,856
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
(In thousands)
Dividends from subsidiary $ 1,875 $ 1,764 $1,590
Operating expenses 45 35 19
------- ------- ------
Income before income tax and equity
in undistributed income of subsidiary 1,830 1,729 1,571
Income tax benefit 15 12 7
Equity in undistributed income of subsidiary 1,035 860 787
------- ------- ------
NET INCOME $ 2,880 $ 2,601 $2,365
======= ======= ======
</TABLE>
21
<PAGE> 19
CNB CORPORATION 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,880 $ 2,601 $ 2,365
Equity in undistributed net income of subsidiary (1,035) (860) (787)
Change in other assets (40) (30) (300)
Change in other liabilities (12) 13 2
------- ------- -------
Net cash from operating activities 1,793 1,724 1,280
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (1,808) (1,722) (1,282)
Net shares issued (5) - -
------- ------- -------
Net cash from financing activities (1,803) (1,722) (1,282)
------- ------- -------
Net change in cash and cash equivalents (10) 2 (2)
Cash at beginning of year 11 9 11
------- ------- -------
CASH AT END OF YEAR $ 1 $ 11 $ 9
======= ======= =======
</TABLE>
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, 1997, $4,557,000 of retained earnings
were available for dividend declaration without prior regulatory approval.
22
<PAGE> 20
CNB CORPORATION 1997 ANNUAL REPORT
INDEPENDENT AUDITOR'S REPORT
[CROWNE 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, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ CROWNE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 4, 1998
23
<PAGE> 21
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation (the Company) and its subsidiary,
Citizens National Bank of Cheboygan (the Bank). This discussion should be read
in conjunction with the financial statements beginning on Page 7 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 $1 million during 1997. Securities available for
sale represent 31.1% of the portfolio. Currently, the Company primarily
maintains a 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.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
U.S. Government and agency securities $ (5,353) $ 4,168 $ (3,748)
Tax exempt state and municipal 1,108 (219) 3,766
Taxable state and municipal 4,820 (1,530) 3,265
-------- ------- --------
Total change in securities $ 575 $ 2,419 $ 3,283
======== ======= ========
</TABLE>
Holdings in state and municipal securities increased during the year primarily
as a result of increases in 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>
1997 1996
------- -------
<S> <C> <C>
U.S. Government and agency securities 72.42% 81.63%
Tax exempt state and municipal 15.23 13.70
Taxable state and municipal 12.35 4.67
------- -------
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 gain on
securities available for sale at December 31, 1997 was $53,000, net of taxes.
The unrealized gains and losses are temporary, since they are a result of
market changes rather than a reflection of credit quality. Management has no
specific intent to sell these securities at the present time.
The Company maintains a conservative 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 1997, 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 1998.
24
<PAGE> 22
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS
Total loans increased $6.5 million, or 6.7% during 1997. The largest percent
growth for 1997 came in the commercial lending 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 the ownership of adjustable rate loans and short to medium term
fixed-rate loans, and originates and sells long term single family residential
fixed-rate mortgage loans to the secondary market. The Company originated $7.7
million in loans for sale in 1997 and $3.7 million in 1996. This practice
allows the Company to meet the housing credit needs of its service area while
maintaining an appropriate interest rate sensitivity and liquidity position.
In addition to mortgage loans, the Company makes loans for personal and
business use, secured and unsecured, to customers in its service area.
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 allowance 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 0.10% of total loans at December 31, 1997 and
0.14% at December 31, 1996. Loans charged off were 0.04% of total loans during
1997 and 0.07% in 1996. The allowance for loan losses increased in 1997 and
1996 to an amount considered adequate by management to cover possible losses
that are currently anticipated based on past experience and specific
identification.
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively managing delinquencies, nonperforming assets and potential problem
loans. The Company performs an ongoing review of all large credits to watch
for any deterioration in quality. Nonperforming loans are comprised of: (1)
loans accounted for on a nonaccrual basis; (2) loans contractually past due 90
days or more as to interest or principal payments (but not included in the
nonaccrual loans in (1) above); and (3) other loans whose terms have been
renegotiated to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower (exclusive
of loans in (1) or (2) above). The aggregate amount of nonperforming loans is
shown in the table below.
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
<S> <C> <C>
(In thousands)
Nonaccrual loans $ 21 $ 70
Loans past due 90 days or more 78 61
Troubled debt restructurings - -
------- -------
Total nonperforming loans $ 99 $ 131
======= =======
Percent of total loans .10% .14%
======= =======
</TABLE>
25
<PAGE> 23
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
DEPOSITS
The Company's service area has experienced steady economic growth. The Company
offers competitive deposit products and has, therefore, shown steady deposit
growth as it increases its market share. Deposits increased $16.5 million or
10.7% during 1997. Time deposits accounted for $10.4 million of this increase.
The Company considers a $16.5 million growth in deposits to be noteworthy
considering the number of individuals who have moved their funds from financial
institutions into the equities markets to seek higher rates of return.
The majority of the Company's deposits are derived from core customers,
relating to long term relationships with local personal, business and public
customers. Deposit rates are monitored continually to assure that the Company
pays a competitive rate. The Company does not support its growth through
purchased or brokered deposits.
LIQUIDITY AND FUNDS MANAGEMENT
Consistent with 1996, as detailed in the Consolidated Statements of Cash Flows,
the Company continued to build its balance sheet in 1997 with cash flows
obtained from operations and increases in deposits. Net income combined with
net cash from operating activities provided approximately $3.5 million in
liquidity. This liquidity combined with increases in deposits of $16.5
million, offset by dividends paid to shareholders, allowed for loan growth of
$6.5 million. Excess funds were invested in federal funds which allowed the
Company to obtain a higher yield without impairing liquidity. The Company
serves a market which is highly tied to the tourist industry. Consequently,
the Company experiences seasonal swings in liquidity. Deposits 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 Company
does not anticipate any significant changes in its seasonal pattern.
26
<PAGE> 24
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FUNDS MANAGEMENT
The following chart shows the Company's interest rate sensitivity as of
December 31, 1997:
<TABLE>
<CAPTION>
Repricing or Maturing Within
(In Thousands)
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 $13,300 $ - $ - $ - $ 13,300
Interest-earning deposits - 1,000 - - 1,000
Taxable investment
securities 9,422 14,483 28,240 - 52,145
Non-taxable investment
securities 203 2,915 4,201 2,181 9,500
Loans 29,338 30,631 32,848 10,550 103,367
-------- ------- ------- ------- --------
Total rate sensitive
assets 52,263 49,029 65,289 12,731 $179,312
-------- ------- ------- ------- ========
Interest-bearing demand
deposits 1,506 4,065 9,480 - 15,051
Savings 5,733 5,158 12,036 - 22,927
Money market savings 19,095 6,459 15,066 - 40,620
Time deposits 20,084 26,004 21,871 - 67,959
-------- ------- ------- ------- --------
Total rate sensitive
liabilities 46,418 41,686 58,453 - $146,557
-------- ------- ------- ------- ========
Gap 5,845 7,343 6,836 12,731
-------- ------- ------- -------
Cumulative gap $ 5,845 $13,188 $20,024 $32,755
======== ======= ======= =======
Cumulative ratio 112.59% 117.62%
======== =======
</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 its competitive position, management believes
that liabilities do not need to be repriced as soon as rates begin to move.
During 1997, the Company originated and retained $8.3 million in 15 year fixed
rate mortgages. This has provided better utilization of its 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 has maintained an average leverage ratio
of 9.7% 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 66.0% 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 represent a yield of
approximately 5.1% in 1997 and 6.2% in 1996. A five percent stock dividend was
27
<PAGE> 25
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
distributed to shareholders in 1997 and a five percent stock dividend was
declared on January 18, 1998 and is payable on February 20, 1998. The stock of
the Company is generally traded locally. Additional information concerning
capital ratios and shareholder return is included in the Financial Highlights
schedule. The Company maintains a five year plan and utilizes a formal
strategic planning process. Management and the Board continue to monitor long
term goals, which include increasing market share and maintaining long term
earnings sufficient to pay consistent dividends.
RESULTS OF OPERATIONS
NET INTEREST INCOME
In 1997, net interest income increased $382,000 or 5.3%, due to increase in
average earning assets of $9.5 million. The yield on interest-earning assets
was 8.02% compared to 8.01% for 1996 while the cost of interest-bearing
deposits increased to 4.35% from 4.32% in 1996. The net interest margin (net
interest income as a percentage of average earning assets) decreased to 4.46%
from 4.49% due to an increase in the cost of interest-bearing deposits.
In 1996, net interest spread (the difference between the average yield on
earning assets and the average cost of interest-bearing deposits) was down but
volumes were up. As a result, the Company experienced an increase of $298,000
in net interest income. The yield on interest-earning assets for 1996
decreased 2 basis points to 8.01% while the cost of interest-bearing deposits
increased 14 basis points to 4.32%. The following table shows the daily
average Consolidated Balance Sheet, revenue on earning assets (on a pre-tax
basis), expense on interest bearing liabilities, and the annualized effective
rate or yield for the periods ending:
Yield Analysis of Consolidated Average Assets and Liabilities
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- -------------------------- -------------------------
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:
Interest-earning
deposits $ 460 $ 27 5.87% $ 249 $ 16 6.43% $ 592 $ 35 5.91%
Federal funds sold 9,293 535 5.76 5,113 273 5.34 7,756 485 6.25
Total securities 59,950 3,558 5.93 63,144 3,735 5.92 55,712 3,093 5.55
Loans 101,518 9,608 9.46 93,193 8,934 9.59 86,158 8,456 9.81
-------- ------- ------ -------- ------- ------- -------- ------ ------
Total interest
earning assets 171,221 13,728 8.02% 161,699 12,958 8.01% 150,218 12,069 8.03%
------- ------ ------- ------- ------ ------
Cash and due from
banks 5,819 5,447 5,198
Premises and
equipment, net 2,590 1,929 1,984
Other assets 2,426 2,656 2,339
-------- -------- --------
Total $182,056 $171,731 $159,739
======== ======== ========
</TABLE>
28
<PAGE> 26
Yield Analysis of Consolidated Average Assets and Liabilities
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- -------------------------- -------------------------
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 $ 13,943 333 2.39% $ 14,051 337 2.40% $ 13,377 321 2.40%
Savings deposits 63,189 2,377 3.76 59,473 2,178 3.66 56,153 2,043 3.64
Time deposits 62,798 3,377 5.38 58,417 3,184 5.45 52,740 2,744 5.20
----------- ------ ------ -------- ------ ------- -------- ------ ------
Total interest
bearing deposits 139,930 6,087 4.35% 131,941 5,699 4.32% 122,270 5,108 4.18%
------ ------ ------ ------- ------ ------
Non-interest bearing
deposits 22,484 21,156 19,859
Other liabilities 1,757 1,667 1,578
Shareholders' equity 17,885 16,967 16,032
----------- -------- --------
Total $ 182,056 $171,731 $159,739
=========== ======== ========
Net interest income $7,641 $7,259 $6,961
====== ====== ======
Net interest spread 3.67% 3.69% 3.85%
====== ====== =====
Net yield on
interest earning
assets 4.46% 4.49% 4.63%
====== ====== =====
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 on a pre-tax basis.
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
------------------------- -------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 12 $ (1) $ 11 $ (22) $ 3 $ (19)
Federal funds sold 239 23 262 (148) (64) (212)
Total securities (190) 13 (177) 431 211 642
Loans, net 789 (115) 674 678 (200) 478
------- ------- ------- ------- ------- -------
Total interest-earning assets 850 (80) 770 939 (50) 889
Interest-bearing demand deposits (3) (1) (4) 16 - 16
Savings deposits 139 60 199 122 13 135
Time deposits 236 (43) 193 305 135 440
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 372 16 388 443 148 591
------- ------- ------- ------- ------- -------
Net change in net interest income (a) $ 478 $ (96) $ 382 $ 496 $ (198) $ 298
======= ======= ======= ======= ======= =======
</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.
29
<PAGE> 27
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS
As of December 31, 1997 loans increased 6.7% in 1997 to $103.4 million compared
to $96.9 million at year end 1996. Substantial growth occurred in our
commercial lending which grew to $11.7 million in 1997 from $9.6 million in
1996, or a 21.9% increase. The largest component of our loan portfolio is
residential real estate which grew to $60.8 million up from $56.7 million in
1996 or 7.2%. The Company generally retains the ownership of adjustable rate
loans and short to medium term fixed rate loans, and originates and sells long
term single family residential fixed rate mortgages to the secondary market.
All loans are domestic. An annual review of loan concentrations at December
31, 1997 indicates that the pattern of loans in the portfolio has not changed.
There is no individual industry with more than a 10% concentration, however,
all tourism related businesses, when combined, total 12.0% of total loans.
The Company did not borrow funds during 1997.
DEPOSITS
Total deposits grew 10.7% to $170.3 million compared to $153.9 million for
1996. The largest increase was in interest-bearing deposits which grew 11.5%
to $146.6 million in 1997 compared to $131.5 million in 1996.
As of December 31, 1997 the loan to deposit ratio was 60.7% compared to 63.0%
at December 31, 1996. 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to $19.3 million from $10.1 million in
1996. Cash from operating activities and financing activities provided $18.1
million which was offset by a decrease from investing activities of $8.9
million.
EQUITY
Total equity for the Company at year end 1997 was $18.1 million compared to
$17.1 million in 1996. The Company had $2.9 million in income and paid out
$1.8 million in dividends during 1997. The unrealized gain on securities
available for sale increased equity $55,000.
OTHER INCOME
Non-interest income continues to improve, increasing $263,000 or 25.3% in 1997.
Service charge and fee income increased $105,000 or 14.8% and other income
increased $81,000 or 43.3%.
In 1996, non-interest income increased $2,000 or .2% compared to 1995. Other
income increased $36,000 or 23.8% while loan sales and servicing fees decreased
$42,000 or 23.1%.
OTHER EXPENSE
Non-interest expense increased $217,000 or 4.9% in 1997. Salary and benefits
increased $142,000 or 5.5%, while net occupancy expense of bank premises
increased $31,000 or 5.3% compared to 1996.
In 1996, non-interest expense increased $1,000 compared to 1995. A change in
the FDIC assessment rates reduced the expense by $155,000 from $157,000 in 1995
to $2,000 in 1996, while salaries and benefits increased $56,000 or 2.2%.
FEDERAL INCOME TAXES
Income tax expense increased 13.3% to $1.3 million in 1997. This was primarily
due to an increase in pre-tax income. The Company's effective tax rate
increased to 30.6% in 1997 from 30.1% in 1996. There was no significant change
in the Company's income tax position from 1996 to 1997.
The effective tax rates for 1997, 1996 and 1995 are shown in the table below:
30
<PAGE> 28
CNB CORPORATION 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income before tax (In thousands) $4,151 $3,723 $3,424
Income tax expense (In thousands) 1,271 1,122 1,059
Effective tax rate 30.6% 30.1% 30.9%
</TABLE>
NET INCOME
Consolidated net income was $2,880,000 for 1997, compared to $2,601,000 for
1996. Return on consolidated average assets for 1997 was 1.58%, compared to
1.51% in 1996. Return on average shareholders' equity was 16.10% in 1997
compared to 15.33% in 1996. Basic earnings per share for 1997, 1996, and 1995
were $2.81, $2.53 and $2.31. Improved net interest income, combined with
improved other income have contributed to this increase.
31
<PAGE> 1
Exhibit 21.)Subsidiary of the Company:
Citizens National Bank of Cheboygan is the sole subsidiary of the Company.
Page 13
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,004
<INT-BEARING-DEPOSITS> 1,000
<FED-FUNDS-SOLD> 13,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,162
<INVESTMENTS-CARRYING> 42,483
<INVESTMENTS-MARKET> 42,718
<LOANS> 103,239
<ALLOWANCE> 1,442
<TOTAL-ASSETS> 190,822
<DEPOSITS> 170,326
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,351
<LONG-TERM> 0
0
0
<COMMON> 2,443
<OTHER-SE> 15,702
<TOTAL-LIABILITIES-AND-EQUITY> 190,822
<INTEREST-LOAN> 9,608
<INTEREST-INVEST> 3,585
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,728
<INTEREST-DEPOSIT> 6,087
<INTEREST-EXPENSE> 6,087
<INTEREST-INCOME-NET> 7,641
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,691
<INCOME-PRETAX> 4,151
<INCOME-PRE-EXTRAORDINARY> 4,151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,151
<EPS-PRIMARY> 2.81
<EPS-DILUTED> 2.80
<YIELD-ACTUAL> 4.46
<LOANS-NON> 21
<LOANS-PAST> 78
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,361
<CHARGE-OFFS> 38
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 1,442
<ALLOWANCE-DOMESTIC> 187
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,255
</TABLE>
