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.
During 2001, the Company, through its subsidiary, the Bank, formed the CNB Mortgage Corporation. Residential mortgages were transferred to the new subsidiary in October. The change had no impact on our customers who will continue to have their loans serviced locally by our Bank.
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, 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 62% 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 9% 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 long term fixed rate 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 approximately $ 40 million at December 31, 2001.
Banking services are delivered through five full-service banking offices and three drive-in branches plus eight automated teller machines in Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the counties is primarily tourism with light manufacturing. The Bank maintains
correspondent bank relationships with several larger banks, which involve check clearing operations, transfer of funds, loan participation, and the purchase and sale of federal funds and other similar services.
Under various agency relationships, the Bank provides trust and discount brokerage services and mutual fund, annuity and life insurance products to its customers.
In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac, Presque Isle and Montmorency Counties, the Bank is one of three principal banking institutions located within this market. One is a member of a multi-bank holding company with substantially more assets than the Company, while the other is an independent community bank. There are also two credit unions, one savings and loan association and a brokerage firm.
As of December 31, 2001, the Bank employed 65 full-time and 15 part-time employees. This compares to 68 full-time and 11 part-time employees as of December 31, 2000. Neither the Company or CNB Mortgage Corporation have any full-time employees. Its operation and business are carried out by officers and employees of the Bank who are not compensated by the Company.
SECURITIES
Securities and their fair values at December 31 were as follows:
AVAILABLE FOR SALE
HELD TO MATURITY
Scheduled maturities of the carrying value of securities available for sale and held to maturity at December 31, 2001, were as follows:
LOANS
The following is a summary of loans at December 31:
Maturity and Rate Sensitivity of Selected Loans
The following table presents the remaining maturity of total loans outstanding excluding residential real estate and consumer loans at December 31, 2001, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity of changes in interest rates.
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.
The allocation of the allowance for loan losses for the years ended December 31 is:
The review of the loan portfolio revealed no undue concentrations of credit, however, the portfolio continues 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 these undefined losses within the loan portfolio.
The following is a summary of nonaccrual, past due and restructured loans as of December 31:
DEPOSITS
The following table presents the remaining maturity of time deposits individually exceeding $ 100,000 at December 31, 2001. Dollars are reported in thousands.
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 there from its losses and bad debts, and no dividends may be paid unless the bank will have a surplus amounting to not less than one hundred percent (100%) of its common capital stock.
The Bank is a national banking association and as such is subject to the regulations of, and supervision and regular examination by, the Office of the Comptroller of the Currency ("OCC"). Deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of the State of Michigan and Title 12 of the United States Code include the requirements that banks maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by a bank, and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits, and restrictions relating to investments and other activities of a bank. The Federal Reserve Board has established guidelines for risk based capital by bank holding companies. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different
risk classes, and include certain off-balance-sheet items in the calculation of capital requirements.
An analysis of the Company's regulatory capital requirements at December 31, 2001 is presented on page 20 of the Registrant's 2001 Annual Report in Note 14 Regulatory Capital to the Company's consolidated financial statements, which is incorporated herein by reference.
ITEM 2
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; and East Side drive-in, 816 East State Street, Cheboygan. All properties are owned by the Bank free of any mortgages or encumbrances.
ITEM 3
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
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 2001.
PART II
ITEM 5
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 Company's common stock and cash dividends declared 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, 2001, which is hereby incorporated by reference.
The information which indicates the amount of common stock 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 14 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2001, which is hereby incorporated by reference.
There are no public offerings pending.
There are approximately 870 shareholders of record of the common stock of the Company as of January 31, 2002.
During 2001, the Company declared regular dividends of $ 1.44 per share plus a special dividend of $ .53. In 2000, the Company declared regular dividends of $ 1.35 plus a special dividend of $ .53. These per share statistics have been restated to reflect the 5% stock dividend paid March 1, 2000 and March 8, 2002. The information detailing the cash dividends declared 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, 2001, which is hereby incorporated by reference. These have resulted in a dividend payout ratio averaging 66.7% for the past three years.
The Federal Reserve Board's Policy on the Payment of Cash Dividends by Bank Holding Companies restricts the payment of cash dividends based on the following criteria: (1) The Company's net income from operations over the past year must be sufficient to fully fund the dividend and (2) the prospective rate of earnings retention must be consistent with the Company's capital needs, asset quality and overall financial condition.
ITEM 6
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, 2001, which is hereby incorporated by reference.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The information required by this item is included on pages 26 through 36 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2001, which is hereby incorporated by reference.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included on pages 30 through 31 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2001, which is hereby incorporated by reference.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information is included on pages 2 through 24 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 2001, which is hereby incorporated by reference.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10
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 21, 2002, which is hereby incorporated by reference.
Information about the executive officers of the Corporation is set forth below.
ITEM 11
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 21, 2002, which is hereby incorporated by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption "Ownership of Common Stock" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 21, 2002, which is hereby incorporated by reference.
ITEM 13
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 21, 2002, which is hereby incorporated by reference.
PART IV
ITEM 14
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, 2001 and 2000.
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Independent Auditor's Report dated February 15, 2002.
(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.
(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, 2001, which is hereby incorporated by reference.
(13) Annual report to shareholders for the year ended December 31, 2001. (filed herewith).
(21) Subsidiaries of the Company. (filed herewith).
(b) Reports of Form 8-K. No reports on Form 8-K were filed during the last calendar quarter of the year covered by this report.
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 28, 2002
/s/ Robert E. Churchill - ------------------------------------ Robert E. Churchill Chairman 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 28, 2002.
EXHIBIT INDEX