<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 this 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 25, 1999 was $ 61,762,000.
As of March 25, 1999 there were outstanding 1,078,943 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, 1998 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 to be held May 18, 1999 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 63% 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 $ 30 million at December 31, 1998.
Banking services are delivered through a system of five full-service banking
offices and three drive-in branches plus seven automated teller machines in
Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the
Counties is primarily tourism with light manufacturing. The Bank maintains
correspondent bank relationships with several larger banks, which involve check
clearing operations, transfer of funds, loan participation, and the purchase and
sale of federal funds and other similar services.
Under various agency relationships, the Bank provides trust and discount
brokerage services and
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mutual fund, annuity and life insurance products to its customers.
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.
As of December 31, 1998, the Bank employed 66 full-time and 14 part-time
employees. This compares to 64 full-time and 17 part-time employees as of
December 31, 1997. 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.
INVESTMENTS
Securities and their fair values at December 31 were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
1998
<S> <C> <C> <C> <C>
U.S. government and agency $ 21,046 $ 211 $ - $ 21,257
State and municipal 2,763 137 - 2,900
----------- -------- -------- ---------
$ 23,809 $ 348 $ - $ 24,157
=========== ======== ======== =========
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
=========== ======== ======== =========
HELD TO MATURITY
1998
U.S. government and agency $ 14,053 $ 95 $ - $ 14,148
State and municipal 22,314 388 (1) 22,701
----------- -------- -------- ---------
$ 36,367 $ 483 $ (1) $ 36,849
=========== ======== ======== =========
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
=========== ======== ======== =========
</TABLE>
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Scheduled maturities of the carrying value of securities available for sale and
held to maturity at December 31, 1998 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 $ 21,095 $ 14,215 $ - $ - $ 35,310
State and municipal 10,406 10,784 2,814 1,210 $ 25,214
---------- ---------- --------- -------- ---------
$ 31,501 $ 24,999 $ 2,814 $ 1,210 $ 60,524
========== ========== ========= ======== =========
Yield 5.65% 5.59% 4.85% 6.01% 5.60%
</TABLE>
LOANS
The following is a summary of loans at December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate $ 69,319 $ 60,754 $ 56,699 $ 46,689 $ 42,391
Consumer 10,229 10,009 9,239 9,395 8,882
Commercial real estate 20,202 20,899 21,331 21,487 23,081
Commercial 10,836 11,705 9,632 10,765 9,592
--------- --------- --------- -------- --------
110,586 103,367 96,901 88,336 83,946
Deferred loan origination fees, net (81) (128) (160) (189) (240)
Allowance for loan losses (1,518) (1,442) (1,361) (1,305) (1,247)
--------- --------- --------- -------- --------
$ 108,987 $ 101,797 $ 95,380 $ 86,842 $ 82,459
========= ========= ========= ======== ========
</TABLE>
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,
1998, according to scheduled repayments of principal. The amounts due after one
year are classified according to the sensitivity of changes in interest rates.
<TABLE>
<CAPTION>
Total
(In thousands)
<S> <C>
In one year or less $ 11,485
After one year but within five years
Interest rates are floating or adjustable 4,118
Interest rates are fixed or predetermined 10,510
After five years
Interest rates are floating or adjustable 4,172
Interest rates are fixed or predetermined 753
---------
$ 31,038
=========
</TABLE>
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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.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the period $ 1,442 $ 1,361 $ 1,305 $ 1,246 $ 1,258
Charge-offs:
Residential real estate 4 2 - 44 15
Consumer 45 36 63 25 21
Commercial real estate - - - - -
Commercial 3 - - - 27
--------- -------- -------- -------- --------
Total charge-offs 52 38 63 69 63
--------- -------- -------- -------- --------
Recoveries:
Residential real estate 1 4 2 17 3
Consumer 10 15 17 11 13
Commercial real estate
Commercial 17
--------- -------- -------- -------- --------
Total recoveries 28 19 19 28 16
Provision charged to expense 100 100 100 100 36
Allowance for possible loan
losses, end of period --------- -------- -------- -------- --------
$ 1,518 $ 1,442 $ 1,361 $ 1,305 $ 1,247
========= ======== ======== ======== ========
Total loans outstanding at
end of period $ 110,586 $103,367 $ 96,901 $ 88,336 $ 83,946
Average total loans outstanding
for the year $ 106,661 $101,518 $ 93,193 $ 86,158 $ 84,302
Ratio of net charge-offs to
daily average loans outstanding 0.02% 0.02% 0.05% 0.05% 0.06%
Ratio of net charge-offs to
total loans outstanding 0.02% 0.02% 0.05% 0.05% 0.06%
</TABLE>
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The allocation of the allowance for loan losses for the years ended December 31
is:
<TABLE>
<CAPTION>
Residential Commercial
Real Estate Consumer Real Estate Commercial Unallocated Total
----------- -------- ----------- ---------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
1998 Allowance amount 15 54 5 77 1,367 1,518
% of Total loans 62.7% 9.2% 18.3% 9.8% 100.0%
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 36 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%
</TABLE>
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 losses 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:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ - $ 21 $ 70 $ - $ 161
Loans past due 90 days or more 62 78 61 80 132
Troubled debt restucturings - - - - -
-------- --------- -------- ------- -------
$ 62 $ 99 $ 131 $ 80 $ 293
======== ========= ======== ======= =======
</TABLE>
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DEPOSITS
The following table presents the remaining maturity of time deposits
individually exceeding $ 100,000 at December 31, 1998. Dollars are reported in
thousands.
Up to 3 Months $ 4,473
3 to 6 Months 3,208
7 to 12 Months 1,854
Over 12 Months 2,909
------------
$ 12,444
============
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 therefrom its losses and
bad debts, and no dividends may be paid unless the bank will have a
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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,
1998 is presented on page 21 of the Registrant's 1998 Annual Report which is
incorporated herein by reference.
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 the
fourth quarter of 1998.
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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, 1998, 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,
1998, which is hereby incorporated by reference.
There are no public offerings pending.
There are approximately 715 shareholders of record of the common stock of the
Company as of March 25, 1999.
During 1998, the Company declared regular dividends of $ 1.34 per share plus a
special dividend of $ .52. In 1997, the Company declared regular dividends of $
1.25 plus a special dividend of $ .46. These per share statistics have been
retroactively adjusted for the 5% stock dividend of June 25,1997, February 20,
1998 and March 1, 1999. Subject to approval of the Board of Directors of the
Company and applicable law, the Company anticipates that it will continue to pay
a regular cash dividend equal to or greater than the prior years. Special
dividends are considered each December based on the current year's earnings.
These have resulted in a dividend payout ratio averaging 65.0% 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.
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ITEM 6-SELECTED FINANCIAL DATA.
The information required by this item is included on Page 1 under the caption
"Financial Highlights" of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1998, which is hereby incorporated by reference.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included on pages 25 through 35 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1998, which is hereby incorporated by reference.
ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included on pages 29 through 30 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1998, which is hereby incorporated by reference.
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information is included on pages 2 through 23 of the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1998, which is
hereby incorporated by reference.
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
Certain 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 18, 1999, which is hereby
incorporated by reference.
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Information about the executive officers of the Corporation is set forth below.
<TABLE>
<CAPTION>
Name and Age Position
- ------------ --------
<S> <C>
Robert E. Churchill, 58 President and Chief Executive Officer of
the Corporation; Chairman and Chief
Executive Officer of Citizens National
Bank of Cheboygan. Mr. Churchill has been
an officer of the Corporation since its
inception in 1985 and an employee of the
Bank since 1975. He has been in his
current position for more than 10 years.
James C. Conboy, Jr., 51 Executive Vice President of the
Corporation; President and Chief
Operating Officer of Citizens National
Bank of Cheboygan. Mr. Conboy joined the
Corporation and Bank during 1998.
John F. Ekdahl, 48 Senior Vice President of the Corporation
and Citizens National Bank of Cheboygan.
Mr. Ekdahl has been an officer of the
Corporation since 1993 and an employee of
the Bank since 1987. He has been in his
current position for more than 6 years.
Susan A. Eno, 44 Senior Vice President of the Corporation;
Senior Vice President and Cashier of
Citizens National Bank of Cheboygan. Ms.
Eno has been an officer of the
Corporation since 1996 and an employee of
the Bank since 1971. She has been in her
current position for more than 2 years.
John P. Ward, 62 Secretary of the Corporation. Mr. Ward
retired from the Bank during 1998.
Irene M. English, 39 Treasurer of the Corporation; Vice
President and Controller of Citizens
National Bank of Cheboygan. Ms. English
was appointed an officer of the
Corporation during 1998 and has been an
employee of the Bank since 1985.
</TABLE>
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 18, 1999, which is hereby
incorporated by reference.
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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 18, 1999, 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 18, 1999,
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, notes to
financial statements and independent auditor's report of CNB Corporation and
its subsidiary are incorporated by reference in Item 8 of this report:
Consolidated Balance Sheets-December 31, 1998 and 1997.
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Auditor's Report dated February 4, 1999.
(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.
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(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, 1998, which is hereby incorporated by reference.
(13) Annual report to shareholders for the year ended December 31, 1998,
which is hereby incorporated by reference.
(21) Subsidiaries of the Company. (filed herewith).
(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.
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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 25, 1999
/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 25, 1999.
/s/ Thomas J. Fisher /s/ John L. Ormsbee
- --------------------------------- --------------------------------
Thomas J. Fisher John L. Ormsbee
Chairman of the Board Director
/s/ Robert E. Churchill /s/ Francis J. VanAntwerp, Jr.
- --------------------------------- --------------------------------
Robert E. Churchill Francis J. VanAntwerp, Jr.
Director Director
President and Chief Executive Officer
/s/ James C. Conboy, Jr. /s/ John P. Ward
- --------------------------------- --------------------------------
James C. Conboy, Jr. John P. Ward
Director Director
Executive Vice President Treasurer
/s/ Kathleen M. Darrow /s/ John F. Ekdahl
- --------------------------------- --------------------------------
Kathleen M. Darrow John F. Ekdahl
Director Senior Vice President
/s/ Thomas J. Ellenberger /s/ Susan A. Eno
- --------------------------------- --------------------------------
Thomas J. Ellenberger Susan A. Eno
Director Senior Vice President
/s/ Vincent J. Hillesheim
- ---------------------------------
Vincent J. Hillesheim
Director
<PAGE> 1
EXHIBIT 13
CNB CORPORATION
ANNUAL REPORT
December 31, 1998, 1997 and 1996
<PAGE> 2
CNB CORPORATION
ANNUAL REPORT
December 31, 1998 1997 and 1996
CONTENTS
FINANCIAL HIGHLIGHTS ....................................................1
CONSOLIDATED BALANCE SHEETS .............................................2
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME....................................................3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ..............4
CONSOLIDATED STATEMENTS OF CASH FLOWS ...................................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..............................6
INDEPENDENT AUDITOR'S REPORT............................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS....................................25
CNB OFFICERS AND ADMINISTRATORS.........................................36
<PAGE> 3
CNB CORPORATION
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
OPERATING STATISTICS
<S> <C> <C> <C> <C> <C>
Interest income $ 14,321 $ 13,728 $ 12,958 $ 12,069 $ 10,274
Interest expense 6,359 6,087 5,699 5,108 3,958
Net interest income 7,962 7,641 7,259 6,961 6,316
Income before income taxes 4,445 4,151 3,723 3,424 2,635
Net income 3,136 2,880 2,601 2,365 1,827
Basic earnings per share 2.91 2.67 2.41 2.20 1.70
Diluted earnings per share 2.88 2.67 2.41 2.20 1.70
Return on average assets
(ROA) 1.61% 1.58% 1.51% 1.48% 1.20%
Return on average
shareholders' equity (ROE) 16.38% 16.10% 15.33% 14.75% 12.04%
BALANCE SHEET STATISTICS
Securities 60,524 61,645 61,070 58,831 55,549
Loans 110,586 103,367 96,901 88,336 83,946
Deposits 174,461 170,326 153,868 148,149 136,000
Total assets 196,510 190,822 173,085 166,560 152,962
CAPITAL STATISTICS
Shareholders' equity 19,494 18,145 17,053 16,251 15,302
Book value per share (1) 18.07 16.85 15.84 15.09 14.20
Cash dividend per share (1) 1.86 1.71 1.62 1.47 1.08
Dividend payout ratio 63.84% 63.92% 67.09% 66.89% 63.65%
Average equity to average
total assets 9.86% 9.82% 9.88% 10.04% 9.98%
CREDIT STATISTICS
Net charge-offs to gross loans .02% .02% .05% .05% .06%
Nonperforming assets
to gross loans .06% .10% .14% .09% .35%
Allowance for loan losses
to gross loans 1.37% 1.40% 1.41% 1.48% 1.49%
Allowance for loan losses
to nonperforming assets 24.48X 14.57X 10.39X 16.33X 4.29X
</TABLE>
(1) Restated for stock dividends, including the five percent stock dividend to
be paid March 1, 1999.
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 1998 and 1997. The Company
had 701 shareholders as of December 31, 1998. The prices and dividends per share
have been restated to reflect the 1997 and 1998 5% stock dividends and the
subsequent 5% stock dividend declared in 1999.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Cash Cash
Market Price Dividends Market Price Dividends
Quarter High Low Declared High Low Declared
------- ---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
1st $ 45.71 $ 32.55 $ .33 $ 31.10 $ 27.64 $ .30
2nd 48.10 44.76 .33 33.56 33.56 .32
3rd 59.05 47.62 .33 33.56 33.11 .32
4th 61.90 57.14 .87 39.00 33.56 .77
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1.
<PAGE> 4
CNB CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
(In thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 6,580 $ 6,004
Federal funds sold 12,700 13,300
------------ ------------
Total cash and cash equivalents 19,280 19,304
Interest-earning deposits - 1,000
Securities available for sale 24,157 19,162
Securities held to maturity (market value of
$36,849 in 1998 and $42,718 in 1997) 36,367 42,483
Other securities 752 716
Loans, net 108,987 101,797
Premises and equipment, net 3,196 2,686
Other assets 3,771 3,674
------------ ------------
Total assets $ 196,510 $ 190,822
============ ============
LIABILITIES
Deposits
Non-interest bearing $ 26,044 $ 23,769
Interest-bearing 148,417 146,557
------------ ------------
Total deposits 174,461 170,326
Other liabilities 2,555 2,351
------------ ------------
Total liabilities 177,016 172,677
------------ ------------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 1,027,701 and 977,289 shares issued
and outstanding in 1998 and 1997 2,569 2,443
Additional paid-in capital 8,597 6,583
Retained earnings 8,099 9,066
Unrealized gains on securities available
for sale, net of tax 229 53
------------ ------------
Total shareholders' equity 19,494 18,145
------------ ------------
Total liabilities and shareholders' equity $ 196,510 $ 190,822
============ ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2.
<PAGE> 5
CNB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
INTEREST INCOME
<S> <C> <C> <C>
Loans, including fees $ 9,959 $ 9,608 $ 8,934
Securities
Taxable 3,281 3,194 3,349
Tax-exempt 502 391 402
Federal funds sold 579 535 273
------------ ------------ ------------
Total interest income 14,321 13,728 12,958
INTEREST EXPENSE ON DEPOSITS 6,359 6,087 5,699
------------ ------------ ------------
NET INTEREST INCOME 7,962 7,641 7,259
Provision for loan losses 100 100 100
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,862 7,541 7,159
------------ ------------ ------------
NON-INTEREST INCOME
Service charges and fees 875 816 711
Net realized gains from sale of loans 103 69 17
Loan servicing fees, net of amortization 178 148 123
Other income 282 268 187
------------ ------------ ------------
Total non-interest income 1,438 1,301 1,038
------------ ------------ ------------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,900 2,715 2,573
Occupancy 635 620 589
Supplies 187 186 161
Other expenses 1,133 1,170 1,151
------------ ------------ ------------
Total non-interest expenses 4,855 4,691 4,474
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,445 4,151 3,723
Income tax expense 1,309 1,271 1,122
------------ ------------ ------------
NET INCOME 3,136 2,880 2,601
Other comprehensive income (loss)
Net change in unrealized gains (losses) on
securities available for sale 267 83 (82)
Tax effects 91 28 (28)
------------ ------------ ------------
Total other comprehensive income (loss) 176 55 (54)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 3,312 $ 2,935 $ 2,547
============ ============ ============
Basic earnings per share $ 2.91 $ 2.67 $ 2.41
Diluted earnings per share $ 2.88 $ 2.67 $ 2.41
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE> 6
CNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Outstanding Common Paid-In
Shares Stock Capital
------ ----- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Balance - January 1, 1996 465,386 $ 2,327 $ 4,979
Net income
Cash dividends - $1.62 per share
Two for one stock split 465,386
Net change in unrealized gains (losses) on
securities available for sale
------------ ------------ ------------
Balance - December 31, 1996 930,772 2,327 4,979
Net income
Cash dividends - $1.71 per share
5% stock dividend 46,332 116 1,599
Shares issued under stock option plan, net 185 5
Net change in unrealized gains (losses) on
securities available for sale
------------ ------------ ------------
Balance - December 31, 1997 977,289 2,443 6,583
Net income
Cash dividends - $1.86 per share
5% stock dividend 48,595 121 1,968
Shares issued under stock option plan, net 1,902 5 51
Purchase and retirement of common stock (85) (5)
Net change in unrealized gains (losses) on
securities available for sale
------------ ------------ ------------
Balance - December 31, 1998 1,027,701 $ 2,569 $ 8,597
============ ============ ============
<CAPTION>
Unrealized
Gains (Losses)
On Securities
Available
for Sale,
Retained Net Total
Earnings of Tax Equity
-------- ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Balance - January 1, 1996 $ 8,893 $ 52 $ 16,251
Net income 2,601 2,601
Cash dividends - $1.62 per share (1,745) (1,745)
Two for one stock split
Net change in unrealized gains (losses) on
securities available for sale (54) (54)
------------ ------------ ------------
Balance - December 31, 1996 9,749 (2) 17,053
Net income 2,880 2,880
Cash dividends - $1.71 per share (1,841) (1,841)
5% stock dividend (1,722) (7)
Shares issued under stock option plan, net 5
Net change in unrealized gains (losses) on
securities available for sale 55 55
------------ ------------ ------------
Balance - December 31, 1997 9,066 53 18,145
Net income 3,136 3,136
Cash dividends - $1.86 per share (2,002) (2,002)
5% stock dividend (2,101) (12)
Shares issued under stock option plan, net 56
Purchase and retirement of common stock (5)
Net change in unrealized gains (losses) on
securities available for sale 176 176
------------ ------------ ------------
Balance - December 31, 1998 $ 8,099 $ 229 $ 19,494
============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE> 7
CNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,136 $ 2,880 $ 2,601
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 277 275 267
Accretion and amortization of investment
securities, net 42 121 312
Provision for loan losses 100 100 100
Loans originated for sale (12,970) (7,741) (3,710)
Proceeds from sales of loans originated for sale 12,976 7,745 3,727
Gain on sales of loans (103) (69) (17)
(Increase) decrease in other assets (91) 35 15
Increase (decrease) in other liabilities 110 146 (26)
------------ ------------ ------------
Total adjustments 341 612 668
------------ ------------ ------------
Net cash from operating activities 3,477 3,492 3,269
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-earning deposits 1,000 (1,000) -
Proceeds from maturities of securities
available for sale 5,227 3,000 5,780
Purchase of securities available for sale (10,005) (14,105) (2,029)
Proceeds from maturities of securities held
to maturity 20,301 25,144 31,853
Purchase of securities held to maturity (14,177) (14,651) (38,417)
Purchase of other securities (36) (536) -
Net increase in portfolio loans (7,290) (6,517) (8,638)
Premises and equipment expenditures (787) (282) (1,001)
------------ ------------ ------------
Net cash from investing activities (5,767) (8,947) (12,452)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 4,135 16,458 5,719
Dividends paid (1,920) (1,808) (1,722)
Proceeds from exercise of stock options 56 5 -
Purchases of common stock (5) - -
------------ ------------ ------------
Net cash from financing activities 2,266 14,655 3,997
------------ ------------ ------------
Net change in cash and cash equivalents (24) 9,200 (5,186)
Cash and cash equivalents at beginning of year 19,304 10,104 15,290
------------ ------------ ------------
Cash and cash equivalents at end of year $ 19,280 $ 19,304 $ 10,104
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 6,426 $ 6,046 $ 5,693
Income taxes 1,306 1,123 1,056
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE> 8
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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.
Segments: The Company, through its subsidiary, the Bank, provides a broad range
of financial services to individuals and companies in northern Michigan. These
services include demand, time and savings deposits; lending; ATM processing and
cash management. Operations of the Company are managed and financial performance
is evaluated on a company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
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 deposits.
- --------------------------------------------------------------------------------
(Continued)
6.
<PAGE> 9
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and an allowance for loan losses. 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 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.
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 10
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 as additional options are granted. Options granted vest
over one year and have a maximum term of ten years. There are 26,041 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.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 11
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Basic earnings per share is based on the net income divided
by the weighted average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional potential shares
issuable under stock options.
Stock Splits and Stock Dividends: Dividends issued in stock are reported by
transferring the market value of the stock issued from retained earnings to
common stock and additional paid-in capital. 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 1998 and 1997, and a
two-for-one stock split was declared in 1996. On January 28, 1999 the Board of
Directors declared a five percent stock dividend to be paid on March 1, 1999 to
shareholders. Basic earnings per share, diluted earnings per share and dividends
per share have been restated for all stock splits and stock dividends, including
the five percent stock dividend declared January 28, 1999. In 1997 and 1996,
shareholders of the Company approved an increase in the number of authorized
shares from 1,000,000 to 2,000,000 and from 500,000 to 1,000,000, respectively.
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. A summary of these commitments is
disclosed in Note 12.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes the net
change in net unrealized appreciation (depreciation) on securities available for
sale, net of tax which is also recognized as a separate component of
shareholders' equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
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.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 12
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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
Available for sale Cost Gains Losses Value
---- ----- ------ -----
1998 (In thousands)
----
<S> <C> <C> <C> <C>
U.S. Government and agency $ 21,046 $ 211 $ - $ 21,257
State and municipal 2,763 137 - 2,900
------------ ------------ ------------ ------------
$ 23,809 $ 348 $ - $ 24,157
============ ============ ============ ============
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
============ ============ ============ ============
Held to maturity
1998
----
U.S. Government and agency $ 14,053 $ 95 $ - $ 14,148
State and municipal 22,314 388 (1) 22,701
------------ ------------ ------------ ------------
$ 36,367 $ 483 $ (1) $ 36,849
============ ============ ============ ============
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
============ ============ ============ ============
</TABLE>
There were no sales of securities during 1998, 1997 and 1996.
Contractual maturities of debt securities at year end 1998 were as follows.
Expected maturities may differ from contractual maturity because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available For Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 6,229 $ 6,267 $ 25,234 $ 25,382
Due from one to five years 16,750 16,968 8,031 8,178
Due from five to ten years 830 922 1,892 2,022
Due after ten years - - 1,210 1,267
------------ ------------ ------------ ------------
$ 23,809 $ 24,157 $ 36,367 $ 36,849
============ ============ ============ ============
</TABLE>
NOTE 2 - SECURITIES (Continued)
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 13
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
Securities with a carrying value of $994,000 and $997,000 were pledged at
December 31, 1998 and 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
1998 and 1997, the amortized cost of securities issued by the state of Michigan
and all of its political subdivisions totaled $10,305,000 and $9,778,000 with an
estimated fair value of $10,631,000 and $9,906,000, respectively. At year end
1998 and 1997, the amortized cost of securities issued by the state of Illinois
and all of its political subdivisions totaled $3,800,000 and $2,639,000 with an
estimated fair value of $3,851,000 and $2,663,000, respectively.
NOTE 3 - LOANS
Year end loans were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Residential real estate $ 69,319 $ 60,754
Consumer 10,229 10,009
Commercial real estate 20,202 20,899
Commercial 10,836 11,705
------------ ------------
110,586 103,367
Deferred loan origination fees, net (81) (128)
Allowance for loan losses (1,518) (1,442)
------------ ------------
$ 108,987 $ 101,797
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 1,442 $ 1,361 $ 1,305
Provision for loan losses 100 100 100
Charge-offs (52) (38) (63)
Recoveries 28 19 19
------------ ------------ ------------
Ending balance $ 1,518 $ 1,442 $ 1,361
============ ============ ============
</TABLE>
The Company had no impaired loans for 1998 and 1997. There were no loans held
for sale at year end 1998 and 1997.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 14
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These loans
totaled $30,895,000 and $27,414,000 at year end 1998 and 1997, respectively.
Related escrow deposit balances were $49,000 and $29,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Real estate and buildings $ 3,588 $ 3,355
Furniture and fixtures 2,986 2,866
------------ ------------
6,574 6,221
Less accumulated depreciation (3,378) (3,535)
------------ ------------
$ 3,196 $ 2,686
============ ============
</TABLE>
Depreciation expense amounted to $277,000, $275,000 and $267,000 in 1998, 1997
and 1996, respectively.
NOTE 6 - DEPOSITS
Time deposit accounts individually exceeding $100,000 total $12,444,000 and
$17,721,000 at year end 1998 and 1997, respectively.
At year end 1998, the scheduled maturities of time deposits are as follows for
the years ending December 31:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999 $ 46,416
2000 12,835
2001 2,341
2002 1,798
2003 907
------------
$ 64,297
============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 15
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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>
1998 1997
---- ----
(In thousands)
Change in benefit obligation:
<S> <C> <C>
Beginning benefit obligation $ (2,658) $ (2,453)
Service cost (126) (109)
Interest cost (211) (197)
Actuarial gain (195) (43)
Benefits paid 82 144
------------ ------------
Ending benefit obligation (3,108) (2,658)
Change in plan assets, at fair value:
Beginning plan assets 2,940 2,489
Actual return 337 428
Employer contribution - 167
Benefits paid (82) (144)
------------ ------------
Ending plan assets 3,195 2,940
Funded status 87 282
Unrecognized net actuarial loss 186 96
Unrecognized transition amount (114) (125)
Unrecognized prior service amount (40) (43)
------------ ------------
Accrued pension cost $ 119 $ 210
============ ============
</TABLE>
Net pension expense and related year end assumptions consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost $ 126 $ 109 $ 106
Interest cost on benefit obligation 211 197 185
Expected return on plan assets (232) (196) (185)
Net amortization and deferral (14) (10) (11)
------------ ------------ ------------
Pension expense $ 91 $ 100 $ 95
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 16
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 7 - EMPLOYEE BENEFITS (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 7.50% 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.
Deferred Compensation Plan: The Company has a deferred compensation plan to
provide retirement benefits to certain 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 $170,000, $152,000 and $145,000 in 1998, 1997 and 1996,
respectively.
The Company has also purchased insurance on the lives of participating directors
with the Company as the owner and beneficiary of the policies.
In 1997, the Company adopted a deferred compensation plan that allows Executive
officers of the Bank, at Senior Vice President and above, and certain Directors
an opportunity to defer a portion of their compensation. On a monthly basis, the
account of each participant accrues interest based on the interest rate
determined for that year. The expense of the plan was $4,000 and $1,000 in 1998
and 1997, respectively.
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 1998, 1997 and 1996, 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 $58,000, $54,000 and $56,000 in 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 17
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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. The exercise price
of options granted is equivalent to the market value of underlying stock at the
grant date.
SFAS No. 123 requires proforma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. Accordingly,
the following proforma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
option plans. Compensation cost actually recognized for stock options was $-0-
for 1998, 1997 and 1996.
The fair value of options granted during 1998 and 1996, is estimated using the
following weighted average information: risk-free interest rate of 5% and 6.5%,
expected life of 10 years, expected dividends of 4.50% and 5.75% per year and
expected stock price volatility of .11. There were no options granted for the
year ended December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands, except for per share data)
<S> <C> <C> <C>
Net income as reported $ 3,136 $ 2,880 $ 2,601
Proforma net income $ 3,104 $ 2,870 $ 2,591
Reported earnings per share
Basic (1) $ 2.91 $ 2.67 $ 2.41
Diluted (1) $ 2.88 $ 2.67 $ 2.41
Proforma earnings per share
Basic (1) $ 2.88 $ 2.66 $ 2.40
Diluted (1) $ 2.85 $ 2.66 $ 2.40
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 18
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 8 - STOCK OPTIONS (Continued)
Activity in the option plan for the years ended is summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
------- ----- ----- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 - $ - $ -
Granted 12,500 32.00 32.00 $ 1.63
------------ ----------------- ------------
Balance at December 31, 1996 12,500 32.00 32.00
Effect of 5% stock 625 - -
Exercised (1,050) 30.48 30.48
------------ ----------------- ------------
Balance at December 31, 1997 12,075 30.48 30.48
Effect of 5% stock dividends 599 - -
Granted 16,550 40.85-60.00 44.32 $ 2.54
Exercised (2,853) 29.03 29.03
------------ ----------------- ------------
Balance at December 31, 1998 26,371 29.03-60.00 38.63
Effect of subsequent 5%
stock dividend 1,316 - -
------------ ----------------- ------------
Restated balance at December 31,
1998 (1) 27,687 $ 27.65-57.14 $ 36.79
============ ================= ============
</TABLE>
Options exercisable at December 31 are as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
Of Exercise
Options(1) Price (1)
---------- ----------
<S> <C> <C>
1996 - $ -
1997 13,313 27.65
1998 10,312 27.65
</TABLE>
At December 31, 1998, options outstanding had a weighted-average remaining life
of 9.3 years.
(1) Restated for stock dividends, including the 5% stock dividend to be paid
March 1, 1999.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 19
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current $ 1,338 $ 1,204 $ 1,166
Deferred (29) 67 (44)
------------ ------------ ------------
$ 1,309 $ 1,271 $ 1,122
============ ============ ============
</TABLE>
Year end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
Deferred tax assets
<S> <C> <C>
Allowance for loan losses $ 369 $ 343
Deferred compensation 403 368
Other 19 40
------------ ------------
Total deferred tax assets 791 751
------------ ------------
Deferred tax liabilities
Pension 41 45
Unrealized gains on securities
available for sale 118 27
Fixed assets 53 43
Mortgage servicing rights 54 16
Accretion 36 69
------------ ------------
Total deferred tax liabilities 302 200
------------ ------------
Net deferred tax asset $ 489 $ 551
============ ============
</TABLE>
Income tax expense calculated at the statutory rate of 34% differs from actual
income tax expense as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Statutory rate applied to income before taxes $ 1,511 $ 1,411 $ 1,266
Deduct
Tax-exempt interest income (161) (133) (139)
Other (41) (7) (5)
------------ ------------- ------------
$ 1,309 $ 1,271 $ 1,122
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 20
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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>
1998 1997 1996
---- ---- ----
Basic earnings per share
<S> <C> <C> <C>
Net income available to common
shareholders (in thousands) $ 3,136 $ 2,880 $ 2,601
============ ============ ============
Weighted average shares outstanding,
adjusted for subsequent five percent stock
dividend to be paid March 1, 1999 1,077,852 1,077,489 1,077,557
============ ============ ============
Basic earnings per share $ 2.91 $ 2.67 $ 2.41
============ ============ ============
Diluted earnings per share
Net income available to common
shareholders (in thousands) $ 3,136 $ 2,880 $ 2,601
============ ============ ============
Weighted average shares outstanding,
adjusted for subsequent five percent stock
dividend to be paid March 1, 1999 1,077,852 1,077,489 1,077,557
Add dilutive effects of assumed exercises
of stock options 9,676 2,380 -
------------ ------------ ------------
Weighted average dilutive
potential shares outstanding 1,087,528 1,079,869 1,077,557
============ ============ ============
Diluted earnings per share $ 2.88 $ 2.67 $ 2.41
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 21
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Balance outstanding, January 1 $ 2,311 $ 1,848
New loans and rewrites 1,909 7,598
Payments and payoffs (1,570) (7,194)
Other (268) 59
--------------- --------------
Balance outstanding, December 31 $ 2,382 $ 2,311
=============== ==============
</TABLE>
Related party deposits totaled $862,000 and $1,352,000 at year end 1998 and
1997, 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 1998 and 1997, reserves of $1,009,000 and $1,065,000 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.
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE> 22
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
(Continued)
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 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Commitments to extend credit $ 15,336 $ 14,045
Standby letters of credit 49 30
</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.
The estimated year end values of financial instruments were:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 19,280 $ 19,280 $ 19,304 $ 19,304
Interest-earning deposits - - 1,000 1,000
Securities available for sale 24,157 24,157 19,162 19,162
Securities held to maturity 36,367 36,849 42,483 42,718
Other securities 752 752 716 716
Loans, net 108,987 108,988 101,797 101,883
Liabilities
Deposits
Non-interest bearing $ 26,044 $ 26,044 $ 23,769 $ 23,769
Interest-bearing 148,417 148,406 146,557 146,540
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE> 23
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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>
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
------ ----- ------ ----- ------ -----
1998
- ----
Total capital (to risk weighted assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 20.6 19.3% $ 8.5 8.0% $ 10.6 10.0%
Bank 20.5 19.3% 8.5 8.0% 10.6 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated 19.2 18.1% 4.3 4.0% 6.4 6.0%
Bank 19.2 18.1% 4.2 4.0% 6.4 6.0%
Tier 1 capital (to average assets)
Consolidated 19.2 9.8% 7.8 4.0% 9.8 5.0%
Bank 19.2 9.8% 7.8 4.0% 9.8 5.0%
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%
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE> 24
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company financial statements:
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
ASSETS
<S> <C> <C>
Cash $ 31 $ 1
Investment in subsidiary 19,444 18,138
Other assets 944 837
------------ ------------
$ 20,419 $ 18,976
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 925 $ 831
Shareholders' equity 19,494 18,145
------------ ------------
$ 20,419 $ 18,976
============ ============
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Dividends from subsidiary $ 2,043 $ 1,875 $ 1,764
Operating expenses (54) (45) (35)
------------ ------------ ------------
Income before income tax and equity
in undistributed income of subsidiary 1,989 1,830 1,729
Income tax benefit 18 15 12
Equity in undistributed income of subsidiary 1,129 1,035 860
------------ ------------ ------------
NET INCOME $ 3,136 $ 2,880 $ 2,601
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE> 25
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,136 $ 2,880 $ 2,601
Equity in undistributed net income of subsidiary (1,129) (1,035) (860)
Change in other assets (108) (40) (30)
Change in other liabilities - (12) 13
------------ ------------ ------------
Net cash from operating activities 1,899 1,793 1,724
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (1,920) (1,808) (1,722)
Net shares issued 51 5 -
------------ ------------ ------------
Net cash from financing activities (1,869) (1,803) (1,722)
------------ ------------- ------------
Net change in cash and cash equivalents 30 (10) 2
Cash at beginning of year 1 11 9
------------ ------------ ------------
CASH AT END OF YEAR $ 31 $ 1 $ 11
============ ============ ============
</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, 1998, $5,067,000 of retained earnings were available
for dividend declaration without prior regulatory approval.
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE> 26
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
CNB Corporation
Cheboygan, Michigan
We have audited the accompanying consolidated balance sheets of CNB Corporation
as of December 31, 1998 and 1997, and the related consolidated statements of
income and comprehensive income, changes in shareholders' equity and cash flows
for the years ended December 31, 1998, 1997 and 1996. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Corporation as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 4, 1999
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE> 27
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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 2 and the related
footnotes.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The Company's balances of cash and cash equivalents remained unchanged from 1998
to 1997. During the year, $2.3 million of cash was provided from financing
activities due to increases in deposits, while $3.5 million of cash was provided
from operating activities. Investing activities utilized $5.8 million of cash
during 1998. The balances maintained in cash and cash equivalents vary 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.
The amount of clearings can vary by as much as $3 million in one day, causing
the Company's cash position to vary.
SECURITIES
The Company maintains securities portfolios that include obligations of the U.S.
Treasury and government sponsored agencies as well as securities issued by
states and political subdivisions. Security balances decreased $1.1 million
during 1998. Securities available for sale represent 39.9% of the portfolio.
Currently, the Company primarily maintains a short-term securities portfolio.
The average life of the security 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 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>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
U.S. Government and agency securities $ (9,335) $ (5,353) $ 4,168
Tax exempt state and municipal 3,509 1,108 (219)
Taxable state and municipal 4,705 4,820 (1,530)
----------- ----------- -----------
Total change in securities $ (1,121) $ 575 $ 2,419
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
25.
<PAGE> 28
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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>
1998 1997
---- ----
<S> <C> <C>
U.S. Government and agency securities 58.34% 72.42%
Tax exempt state and municipal 23.14 15.23
Taxable state and municipal 18.52 12.35
---------- ---------
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, 1998 was $229,000, 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 security 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 1999, management feels that there will be sufficient liquidity to
increase maturity of the investment portfolio, thereby potentially increasing
the yield.
LOANS
Total loans increased $7.2 million or 7.1% during 1998. Substantial growth
occurred in our residential real estate lending which grew to $69.3 million in
1998 from $60.8 million in 1997, or a 14.0% increase. 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 $13.0
million in loans for sale in 1998 and $7.7 million in 1997. 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 services area.
The Company maintains a conservative loan policy and strict credit underwriting
standards. All loans are domestic. An annual review of loan concentrations at
December 31, 1998 indicated 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 9.8% of total
loans.
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE> 29
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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, problem loans and delinquent
loans) and establishes specific loss allowances on these loans. Historical loss
information, local economic conditions and other factors 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 0.06% of total loans at December 31, 1998 and 0.10%
at December 31, 1997. Loans charged off were 0.05% of total loans during 1998
and 0.04% in 1997. The allowance for loan losses increased in 1998 and 1997 to
an amount considered adequate by management to cover 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,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ - $ 21
Loans past due 90 days or more 62 78
Troubled debt restructurings - -
-------- ---------
Total nonperforming loans $ 62 $ 99
======== =========
Percent of total loans .06% .10%
======== =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE> 30
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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 $4.1 million or 2.4%
during 1998. Insured money market deposits increased $4.2 million, non
interest-bearing demand increased $2.3 million and interest-bearing demand
increased $1.0 million. Time deposits decreased $3.7 million from 1997. The
Company held time deposits for a local school building project that was
completed during 1998.
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.
As of December 31, 1998 the loan to deposit ratio was 63.3% compared to 60.7%
for December 31, 1997. Management continues to emphasize loan growth and would
like to see this ratio at a minimum of 65%. This change in asset mix from
securities to higher yielding loans will increase the net interest margin.
EQUITY
Total equity for the Company at year end 1998 was $19.5 million compared to
$18.1 million in 1997. The Company realized $3.1 million in income and paid out
$2.0 million in dividends during 1998. The unrealized gain on securities
available for sale increased equity an additional $176,000.
LIQUIDITY AND FUNDS MANAGEMENT
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of the Company are
met. The Company's sources of funds have been dividends from the Bank. The
Company manages its liquidity position to provide cash necessary to pay
dividends to shareholders and satisfy other operating requirements.
The Bank manages liquidity to insure adequate funds are available to meet the
cash flow needs of depositors and borrowers. The Banks' most readily available
sources of liquidity are federal funds sold, securities classified as available
for sale and securities classified as held to maturity maturing within one year.
These sources of liquidity are supplemented by new deposits and by loan payments
received from customers. As of December 31, 1998 the Company held $12.7 million
in federal funds sold, $24.2 million in securities available for sale and $25.2
million in held to maturity maturing within one year. These short-term assets
represents 35.6% of total deposits as of December 31, 1998. Historically, the
Company's security portfolio has been short-term in nature, with the average
life of the portfolio consistently being less than two years. The company serves
a market which is highly tied to the tourist industry. Consequently, the Company
experiences seasonal swings in liquidity. Deposit growth occurs during July,
August, and September, then may decline through the fall and winter months.
The Company does not anticipate any significant change in its seasonal pattern.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE> 31
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
The following schedule details the maturities and yields of interest-bearing
financial instruments at December 31, 1998, for the next five years and
thereafter. The values represent the contractual maturity of each instrument.
For loan instruments without contractual maturities management has allocated
principal payments based upon historical trends of payment activity. Where there
is no set maturity, as in the case of some interest-bearing liabilities,
management has allocated the amounts based upon its expectation of cash flows,
incorporating internal core deposit studies and current expectations of customer
behavior. For loans, securities and liabilities with contractual maturities, the
table presents principal cash flows and related weighted-average interest rates
by contractual maturities. The data in the table was aggregated by type of
financial instrument-fixed and variable rate loans, fixed and variable rate
securities and fixed and variable rate deposits. The Company has no interest
rate swaps, interest rate caps, or interest rate floors. Therefore, data
concerning these instruments is not included in the table.
The primary source of market risk for the financial instruments presented is
interest rate risk. That is, the risk that an adverse change in market rates
will adversely affect the market value of the instruments. Generally, the longer
the maturity, the higher the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the Company's
net interest margin to swings in interest rates, to assuring sufficient capital
and liquidity to support future balance sheet growth. The Company manages
interest rate risk through the Asset/Liability Committee. The Asset/Liability
Committee is comprised of bank officers from various disciplines. The Committee
establishes policies and rates which lead to the prudent investment of
resources, the effective management of risks associated with changing interest
rates, the maintenance of adequate liquidity, and the earning of an adequate
return on shareholders' equity.
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE> 32
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
MARKET RISK DISCLOSURE OF SCHEDULED MATURITIES AT DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
RATE-SENSITIVE ASSETS ---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Variable interest rate loans $ 8,510 $ 2,998 $ 2,994 $ 3,682 $ 2,123 $22,231 $42,538
Average interest rate 9.65% 8.45% 8.20% 8.20% 8.04% 7.77% 8.27%
Fixed interest rate loans 16,186 10,226 7,058 5,599 3,577 25,402 68,048
Average interest rate 9.50% 9.36% 8.93% 8.49% 8.47% 7.42% 8.51%
Variable interest rate
securities 2,955 540 - - - - 3,495
Average interest rate 5.61% 5.25% -% -% -% -% 5.55%
Fixed interest rate securities 30,673 16,233 4,627 1,867 1,005 2,624 57,029
Average interest rate 6.16% 5.92% 6.23% 6.48% 6.89% 7.45% 6.18%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing deposits 26,044 - - - - - 26,044
Average interest rate -% -% -% -% -% -% -%
Fixed interest rate
savings and
interest-bearing deposits 43,221 11,686 11,686 11,686 5,841 - 84,120
Average interest rate 3.24% 2.77% 2.77% 2.77% 2.77% -% 3.01%
Fixed interest rate
time deposits 46,415 12,835 2,341 1,798 908 - 64,297
Average interest rate 5.20% 5.44% 5.69% 5.75% 5.85% -% 5.29%
<CAPTION>
Fair Value
12/31/98
RATE-SENSITIVE ASSETS --------
<S> <C>
Variable interest rate loans $ 42,538
Average interest rate
Fixed interest rate loans 68,049
Average interest rate
Variable interest rate
securities 3,495
Average interest rate
Fixed interest rate securities 57,511
Average interest rate
RATE-SENSITIVE LIABILITIES
Noninterest-bearing deposits 26,044
Average interest rate
Fixed interest rate
savings and
interest-bearing deposits 84,115
Average interest rate
Fixed interest rate
time deposits 64,291
Average interest rate
</TABLE>
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 9.8% for the last three years. This strong capital position provides the
Company with the flexibility to leverage its capital so as to be able to take
advantage of expansion opportunities. The Company's strong capital position also
provides the flexibility to continue with a high dividend payout ratio which has
averaged 65.0% 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.
A five percent stock dividend was distributed to shareholders in 1997 and 1998,
and a five percent stock dividend was declared on January 28, 1999 and is
payable on March 1, 1999. 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.
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE> 33
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME
Interest income is the total amount earned on funds invested in loans,
securities and federal funds sold. Interest expense is the amount of interest
paid on interest-bearing checking, savings and time deposits accounts. Net
interest income is the difference between interest income and interest expense.
The net margin is the net interest income as a percentage of average
interest-earning assets. Interest spread is the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities. In 1998, net interest income increased $321,000 or 4.2%, due to an
increase in average interest-earning assets of $11.5 million or 6.7%. The
overall yield on average interest-earning assets was 7.85% for 1998 compared to
8.02% for 1997, while the cost on average interest-bearing liabilities was 4.31%
for 1998 compared to 4.35% for 1997. The net interest margin decreased to 4.36%
in 1998 compared to 4.46% in 1997. This decrease can be attributable to a lower
yield on an increasing volume of average interest-earning assets.
In 1997, net interest income increased $382,000 or 5.3%, due to increase in
average interest-earning assets of $9.5 million. The yield on average
interest-earning assets was 8.02% for 1997 compared to 8.01% for 1996 while the
cost of average interest-bearing deposits increased to 4.35% for 1997 from 4.32%
in 1996. The net interest margin (net interest income as a percentage of average
interest-earning assets) decreased to 4.46% from 4.49% due to an increase in the
cost of average interest-bearing liabilities.
The following table shows the daily average Consolidated Balance Sheet, revenue
on average interest-earning assets (on a pre-tax basis), expense on average
interest-bearing liabilities, and the annualized effective rate or yield for the
periods ending:
<TABLE>
<CAPTION>
Yield Analysis of Consolidated Average Assets and Liabilities
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
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 $ 534 $ 32 5.99% $ 460 $ 27 5.87% $ 249 $ 16 6.43%
Federal funds sold 10,249 579 5.65 9,293 535 5.76 5,113 273 5.34
Total securities (1) 65,313 3,751 5.76 59,950 3,558 5.93 63,144 3,735 5.92
Loans 106,661 9,959 9.34 101,518 9,608 9.46 93,193 8,934 9.59
-------- --------- -------- --------- --------- -------- --------- --------- -------
Total
interest-earning
assets 182,757 14,321 7.85% 171,221 13,728 8.02% 161,699 12,958 8.01%
--------- -------- --------- -------- --------- -------
Cash and due from
banks 6,251 5,819 5,447
Premises and
equipment, net 2,846 2,590 1,929
Other assets 2,400 2,426 2,656
-------- --------- ---------
Total $194,254 $ 182,056 $ 171,731
======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE> 34
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
Yield Analysis of Consolidated Average Assets and Liabilities (Continued)
(In thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Average Yield/ Average Yield/ Average Yield/
Balance Int Rate Balance Int Rate Balance Int Rate
-------- --------- -------- --------- --------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 14,792 $ 342 2.31% $ 13,943 $ 333 2.39% $ 14,051 $ 337 2.40%
Savings deposits 67,864 2,522 3.72 63,189 2,377 3.76 59,473 2,178 3.66
Time deposits 65,005 3,495 5.38 62,798 3,377 5.38 58,417 3,184 5.45
-------- --------- -------- --------- --------- -------- --------- --------- -------
Total
interest-bearing
liabilities 147,661 6,359 4.31% 139,930 6,087 4.35% 131,941 5,699 4.32%
--------- -------- --------- -------- --------- -------
Non-interest bearing
deposits 25,520 22,484 21,156
Other liabilities 1,922 1,757 1,667
Shareholders' equity 19,151 17,885 16,967
-------- --------- ---------
Total $194,254 $ 182,056 $ 171,731
======== ========= =========
Net interest income $ 7,962 $ 7,641 $ 7,259
========= ========= =========
Net interest spread 3.54% 3.67% 3.69%
======== ======== =======
Net yield on
interest earning
assets 4.36% 4.46% 4.49%
======== ======== =======
Ratio of interest
earning assets
to interest bearing
liabilities 1.24X 1.22X 1.23X
======== ========= =========
</TABLE>
(1) Yield computed using the average amortized cost for securities available for
sale.
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE> 35
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
The table below shows the effect of volume and rate changes on net interest
income on a pre-tax basis.
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 4 $ 1 $ 5 $ 12 $ (1) $ 11
Federal funds sold 54 (10) 44 239 23 262
Total securities 301 (108) 193 (190) 13 (177)
Loans, net 482 (131) 351 789 (115) 674
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 841 (248) 593 850 (80) 770
Interest-bearing demand deposits 20 (11) 9 (3) (1) (4)
Savings deposits 174 (29) 145 139 60 199
Time deposits 119 (1) 118 236 (43) 193
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 313 (41) 272 372 16 388
--------- --------- --------- --------- --------- ---------
Net change in net interest income (a) $ 528 $ (207) $ 321 $ 478 $ (96) $ 382
========= ========= ========= ========= ========= =========
</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.
NON-INTEREST INCOME
Non-interest income is derived primarily from deposit account fees, fees for
customer services and gains on the sale of residential real estate mortgages to
the secondary market. Non-interest income continues to improve, increasing
$137,000 or 10.5% in 1998. Net realized gains from sales of loans and loan
servicing fees, net of amortization increased $64,000 or 29.5%. Service charge
and fee income increased $59,000 or 7.2% and other income increased $14,000 or
5.2%.
Non-interest income improved in 1997, increasing $263,000 or 25.3%. Service
charge and fee income increased $105,000 or 14.8% and other income increased
$81,000 or 43.3%.
NON-INTEREST EXPENSE
Total non-interest expenses were $4.9 million in 1998 and $4.7 million in 1997.
The Company continued in its efforts to control non-interest expenses during
1998, resulting in total non-interest expenses increasing only 4.3% over 1997
operating expenses. Salaries, wages and employee benefits remain the largest
component of non-interest expense. These expenses totaled $2.9 million in 1998
and $2.7 million in 1997 or a 7.4% increase. Occupancy expense totaled $635,000
in 1998 compared to $620,000 in 1997 while other expenses decreased to $1.1
million in 1998 from $1.2 million in 1997.
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.
- --------------------------------------------------------------------------------
(Continued)
33.
<PAGE> 36
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES
Income tax expense increased 3.0% to $1.3 million in 1998. This was primarily
due to an increase in pre-tax income. The Company's effective tax rate decreased
to 29.4% in 1998 from 30.6% in 1997. There was no significant change in the
Company's income tax position from 1998 to 1997.
The effective tax rates for 1998, 1997 and 1996 are shown in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income before tax (In thousands) $ 4,445 $ 4,151 $ 3,723
Income tax expense (In thousands) 1,309 1,271 1,122
Effective tax rate 29.4% 30.6% 30.1%
</TABLE>
NET INCOME
Consolidated net income was $3.1 million for 1998, compared to $2.9 million for
1997. Return on consolidated average assets for 1998 was 1.61%, compared to
1.58% for 1997. Return on average shareholders' equity was 16.38% in 1998
compared to 16.10% in 1997. Basic earnings per share for 1998, 1997 and 1996
were $2.91, $2.67 and $2.41. Improved net interest income, combined with
improved other income have contributed to this increase.
YEAR 2000 ISSUE
The year 2000 issue poses 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. The Company has assembled an internal
technology committee to thoroughly identify and correct any potential problems
in this area well ahead of the year 2000. Our mission is to continue to offer
continuous quality financial services, which meet the needs of the customers and
communities we serve, into the next millennium. We are committed to allocating
sufficient resources, capital, and personnel to accomplish our mission. We will
identify Y2K risks to the bank and holding company, develop plans and programs
to lower risk to acceptable levels, develop backup plans for failure and adhere
to regulatory requirements.
The Company is currently in Phase 4 of a 5-Phase plan to prepare for the year
2000 issue. In the first phase, the awareness phase, the Company established a
committee to develop a strategy to test our in-house system, service bureaus for
systems that are outsourced, vendors, auditors, customers and suppliers. The
Company also approved a budget for any year 2000 issues. The expense for 1998
was $28,400 and the projected budget for 1999 is $38,775. In addition, the Board
of Directors approved the purchase of a new in-house computer mainframe costing
$321,707 that was purchased and installed in 1998 as well as various surety
agreement options for an additional $111,120. Our regulators have established
several deadlines for financial institutions to comply with the year 2000 issue.
In addition, the Company has reviewed the year 2000 issue with its Board of
Directors, staff and customers.
- --------------------------------------------------------------------------------
34.
<PAGE> 37
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
Phase 2 is an assessment phase and general risk control phase during which the
committee assessed the size and complexity of the year 2000 issue. This phase
must identify all hardware, software, networks and automated teller machines,
other various processing platforms, customer and vendor interdependencies
affected by the year 2000 change. The Company's committee identified each item
in terms of business risk it poses and assigned one of our risk categories:
mission critical, mission necessary, mission desirable and mission unrelated.
Phase 3 is a renovation phase, which is changing the lines of computer code to
eliminate the year 2000 problem. This phase includes code enhancements, hardware
and software upgrades, system replacements, vendor certification and other
associated changes. Also the testing of all internal and external applications
was completed by year end 1998.
Phase 4 is the validation phase, which is the phase of testing by institutions
relying on service providers for mission critical systems. The Company is
tentatively scheduled to complete testing on year 2000 by April 15, 1999. This
phase is approximately 95% complete.
Phase 5 is the implementation phase. In this phase, systems should be certified
as year 2000 compliant and be accepted by business users.
The Company has developed a Business Resumption Plan which is designed to
mitigate operational risks should core business processes fail, regardless of
whether mission-critical systems were remediated for the Year 2000. Business
resumption contingency planing is critical because, notwithstanding a financial
institution's successful efforts to thoroughly renovate, validate and implement
Year 2000-ready systems, the potential exists that systems will not operate as
expected.
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings involving the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area, and competition, all or some
of which could cause actual results to differ materiality from historical
earnings and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materiality from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
- --------------------------------------------------------------------------------
35.
<PAGE> 38
CNB OFFICERS AND ADMINISTRATORS
<TABLE>
<CAPTION>
CORPORATION OFFICERS
<S> <C> <C>
Robert E. Churchill Florence Caswell Karen K. Schramm
President and Chief Executive Officer Assistant Loan Operations Officer Sandra L. Shawl
Sally A. Spray
James C. Conboy, Jr. Indian River Amy Spray
Executive Vice President ------------ Helen K. Stumpf
Barbara J. Joppich M. Teresa Sullivan
John F. Ekdahl Banking Officer and Branch Manager Kathy S. Swackhamer
Senior Vice President Christina Sweet
Steven J. Baker Darlene L. Vallance
Susan A. Eno Community Advisor Charles N. Veneros
Senior Vice President Wendelin K. Whippo
Larry Middleton Laura L. Whitmore
John P. Ward Community Advisor Sherry M. Wichlacz
Secretary
John J. Olszewski Downtown Drive-in
Irene M. English Community Advisor -----------------
Treasurer Cheboygan
---------
Susan M. Bohn
Mackinaw City Carla S. Roznowski
-------------
OFFICERS AND Susan M. Brandt East Side Drive-in
COMMUNITY ADVISORS Banking Officer and Branch Manager Cheboygan
Merry Major-Brown
Robert E. Churchill Audrey Jaggi Carolyn A. Scheele
Chairman and Chief Executive Officer Community Advisor
South Side Drive-in
James C. Conboy, Jr. Pellston -------------------
President and Chief Operating Officer -------- Cheboygan
Barbara A. Anderson ---------
Banking Officer and Branch Manager
John F. Ekdahl Diane S. Mushlock
Senior Vice President Richard Conrad Diane S. Poirier
Community Advisor
Mackinaw City
-------------
Susan A. Eno Susan M. Brandt
Senior Vice President and Cashier Deborah L. Closs
Onaway Jennifer M. Lahaje
Douglas W. Damm ------
Vice President and Senior Loan Officer Laura L. Schack Pellston
Banking Officer and Branch Manager --------
Irene M. English Barbara A. Anderson
Vice President and Controller Laura E. Kilpatrick
STAFF OF CNB Sheri L. Kindell
Anthony Nowosad
Vice President Data Processing Kristina Barr Onaway
Jamie Brandau ------
Kenneth N. Sheldon Jennifer Brown Laura L. Schack
Vice President Examination Joan T. Clarely Sara L. Lalonde
Lora Clouser Jennifer A. Northrop
Richard L. Wine Patricia K. Comps Lynn D. Porter
Vice President Mortgage Loans Trisha M. Dobias Kathleen T. Robbins
Mary E. Greenwood Dawn R. Welklin
Stephen J. Crusoe Victoria J. Hand Kathleen S. Wilson
Assistant Vice President Jeffrey Hansen
Linda K. Johnson Indian River
Marian L. Harrison Tammy Kirsch ------------
Assistance Vice President Sally J. Lacross Barbara J. Joppich
Leola Lafrinere Barbara J. Bachelder
Paul F. Schwind Miranda Lake Jody L. Jacobs
Auditor Betty J. Lewis Pamela A. Kolasa
Kathleen M. Lindsay Betty L. Laprairie
Susan J. Cleary Laura Merchant Richard E. Parkonnen
Loan Officer Helen R. Moulder Susan Sova
Penny L. Newman Kathryn A. Szarenski
Michelle J. Ostwald Kelli M. Reimann
Loan Officer Katherine H. Rhome
Ronald D. Rose
Susan L. Caswell Leroy Routanen
Assistant Cashier Bernard J. Schramm
</TABLE>
- --------------------------------------------------------------------------------
36.
<PAGE> 1
EXHIBIT 21
Subsidiary of the Company:
Citizens National Bank of Cheboygan is the sole subsidiary of the Company.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,580
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,157
<INVESTMENTS-CARRYING> 36,367
<INVESTMENTS-MARKET> 36,849
<LOANS> 110,505
<ALLOWANCE> 1,518
<TOTAL-ASSETS> 196,510
<DEPOSITS> 174,461
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,555
<LONG-TERM> 0
0
0
<COMMON> 2,569
<OTHER-SE> 16,925
<TOTAL-LIABILITIES-AND-EQUITY> 196,510
<INTEREST-LOAN> 9,959
<INTEREST-INVEST> 3,783
<INTEREST-OTHER> 579
<INTEREST-TOTAL> 14,321
<INTEREST-DEPOSIT> 6,359
<INTEREST-EXPENSE> 6,359
<INTEREST-INCOME-NET> 7,962
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,855
<INCOME-PRETAX> 4,445
<INCOME-PRE-EXTRAORDINARY> 4,445
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,136
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.88
<YIELD-ACTUAL> 4.36
<LOANS-NON> 0
<LOANS-PAST> 62
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,442
<CHARGE-OFFS> 52
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,518
<ALLOWANCE-DOMESTIC> 151
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,367
</TABLE>
