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10-K FINANCIAL SECTION
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-11011
CB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2340045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Jackson Square, Jackson, Michigan 49201-1446
(Address of principal executive offices) (Zip Code)
(517) 788-2701
(Registrant's telephone number, including area code.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $7.50 par value
(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 such shorter period that the registrant
has been 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 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. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of January 31, 1996, computed by reference
to the average closing bid and asked price for such stock on that date was
$87,726,000.
The number of shares of the registrant's common stock outstanding as of
January 31, 1996 was 2,801,053.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or portions thereof, have been incorporated by
reference in this Annual Report on Form 10-K: Proxy Statement for 1996 Annual
Meeting of Shareholders (Part III).
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PART I
ITEM 1--BUSINESS
GENERAL
CB Financial Corporation (the "Corporation") is a bank holding company
incorporated under the laws of the State of Michigan on January 21, 1981. The
principal assets of the Corporation are its stock ownership in its
subsidiaries, City Bank and Trust Company ("City Bank and Trust"), City Bank
("City Bank") and CB North ("CB North"), which are referred to herein
collectively as the "Banks."
The Corporation became the sole shareholder of City Bank and Trust on
August 6, 1981. City Bank and Trust was organized as a private banking
corporation in 1848, became a Michigan banking corporation in 1865 and became a
national banking association in 1964. In June 1994, City Bank and Trust
converted to a Michigan banking corporation. City Bank and Trust is the oldest
continuously operating financial institution in Michigan. The main office is in
Jackson, Michigan. There are 15 branches in Jackson County, one branch in
Albion and one in Homer, which are in the eastern part of Calhoun County. City
Bank and Trust operates 15 automated teller machines.
The Corporation became the sole shareholder of City Bank (formerly Clinton
Bank and Trust) on December 31, 1983. City Bank was organized in 1865 as a
national bank, and in 1979 converted to a Michigan banking corporation. City
Bank has 18 offices with its main office, auto bank and one branch located in
St. Johns, Michigan. In addition, City Bank has branches in Elsie, Laingsburg,
Fowler and Bath, which are located in Clinton County. Ten branches are located
in the Lansing area, one of which is within the City of Lansing.
On February 28, 1992, the Corporation acquired all of the common stock of
CCSB Corporation, a one-bank holding company of Charlevoix County State Bank
("CCSB") located in Charlevoix, Michigan. At the time of the acquisition, CCSB
was a Michigan banking corporation with its main office and one branch located
in Charlevoix, Michigan. In addition, CCSB operated offices in East Jordan,
located in Charlevoix County, as well as Eastport and Ellsworth which are
located in Antrim County.
On January 15, 1993, the Corporation acquired First of Charlevoix
Corporation, a one-bank holding company of First State Bank of Charlevoix
("FSBC"). At the time of the acquisition, FSBC was a Michigan banking
corporation with its main office located in Charlevoix, Michigan. In addition,
FSBC operated a branch in Boyne City and on Beaver Island.
Effective October 1, 1993, the Corporation merged CCSB and FSBC into one
bank, CB North. On December 17, 1994, CB North acquired three branch offices
from Republic Bank ("Republic Bank acquisition"). CB North continues as a
Michigan banking corporation with its main office and two branches located in
Charlevoix, Michigan, one of which is the former main office of CCSB. Including
the three offices acquired from Republic Bank, CB North operates a total of
eight branches in East Jordan, Eastport, Ellsworth, Boyne City, Traverse City,
Bellaire, Central Lake and on Beaver Island.
All three subsidiary banks offer a full range of services to individuals,
corporations and other institutions. Banking services include checking,
savings, NOW accounts, money market deposit accounts, time deposit accounts,
safe deposit facilities, money transfers and corporate cash management. The
Banks provide secured and unsecured personal loans, real estate loans, consumer
installment loans, check credit (overdraft) loans, line of credit loans,
accounts receivable financing and construction financing. The Banks offer
electronic funds transaction processing including direct deposit of social
security and pension payments.
The trust department of City Bank and Trust offers a wide variety of
fiduciary services to individuals, corporations, non-profit organizations, and
government entities, including services as trustee for personal, corporate,
pension, profit-sharing and other employee benefit trusts. It also provides
securities custody services as an agent, acts as the personal representative
for estates and as a fiscal paying and escrow agent for corporate customers and
government entities. Pursuant to contractual arrangements permitted by Michigan
law, the trust department of City Bank and Trust provides trust services to
customers of City Bank and CB North.
City Bank and Trust makes available to its customers full and discount
brokerage services through a contract with a third party vendor independent of
the Bank.
Each Bank maintains correspondent bank relationships with several larger
banks, which involve check clearing operations, transfer of funds, loan
participations, the purchase and sale of federal funds, and other similar
services. The Corporation has no foreign operations or activities.
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MONETARY POLICIES
The commercial banking business is affected by the monetary and fiscal
policies of various regulatory agencies, including the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). Among the techniques
available to the Federal Reserve Board are open market operations in United
States Government securities; changing the discount rate for bank borrowings;
and imposing and changing the reserve requirements applicable to bank deposits
and to certain borrowings by banks and their affiliates (including parent
companies). These policies influence to a significant extent the overall growth
and distribution of bank loans, investments and deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. In view of the changing conditions
in the national economy and the money market, as well as the effect of acts by
monetary and fiscal authorities, including the Federal Reserve Board, no
predictions can be made by the Corporation as to future changes in interest
rates or credit availability.
SUPERVISION AND REGULATION
Bank holding companies and banks are subject to extensive regulation under
both federal and state law. To the extent the following material describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. A change in
applicable law or regulation could have a material effect on the business of
the Corporation.
1. Bank Holding Companies
The Corporation, as a bank holding company, is regulated under the Bank
Holding Company Act of 1956, as amended ("BHC Act"), and is subject to the
supervision of the Federal Reserve Board. The Corporation is registered as a
bank holding company with the Federal Reserve Board and is required to file
with the Federal Reserve Board an annual report and such additional information
as the Federal Reserve Board may require pursuant to the BHC Act. The Federal
Reserve Board may also make inspections and examinations of the Corporation and
its subsidiaries.
Under the BHC Act, bank holding companies such as the Corporation are
generally prohibited from engaging in activities other than banking and from
acquiring any company which is not a bank or bank holding company, unless such
company is engaged in activities which the Federal Reserve Board determines to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Under the BHC Act, bank holding companies generally
may not acquire the ownership or control of more than 5% of any class of voting
shares or substantially all of the assets of any company, including a bank or
bank holding company, without the prior written approval of the Federal Reserve
Board.
Before September 29, 1995 the BHC Act generally prohibited the Federal
Reserve Board from approving the direct or indirect acquisition, by a bank
holding company, such as the Corporation, the principal banking operations of
which are conducted in one state, of any voting shares of, interest in or all
or substantially all of the assets of a bank or bank holding company
conducting its principal banking operations in another state, unless the
statutory laws of the state in which the principal banking operations of the
bank holding company or bank to be acquired are conducted explicitly authorize
such an acquisition. Effective September 29, 1995, the BHC Act no longer
prevents the Federal Reserve Board from approving the acquisition of a bank
because of contrary State law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") substantially changes the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
application of a bank holding company located in one State (the "home State")
to acquire a bank located in any other State (the "host State") may be approved
by the Federal Reserve Board under the BHC Act notwithstanding any prohibition
of such acquisition in the law of the host State. The Riegle-Neal Act permits
States to require that a target bank have been in operation for a minimum
period, up to five years, and to impose non-discriminatory limits on the
percentage of the total amount of deposits with insured depository institutions
in the State which may be controlled by a single bank or bank holding company.
In addition, the Riegle-Neal Act imposes Federal deposit concentration limits
(10% of nationwide total deposits, and 30% of total deposits in the host State
on applications subsequent to the applicant's initial entry to the host State),
and adds new statutory conditions to Federal Reserve Board approval, i.e., the
applicant meets or exceeds all applicable Federal regulatory capital standards
and is "adequately managed."
Also effective September 29, 1995, any bank subsidiary (and, in certain
circumstances thrift subsidiary) of a bank holding
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company may receive deposits to existing accounts, renew time
deposits, and close, service and receive payments on (but not disburse proceeds
of) loans, as an agent for its depository institution affiliates without being
considered a branch of the affiliate under any otherwise applicable law. Such
agency activities must be conducted on terms consistent with safe and sound
banking practices.
The Riegle-Neal Act also authorizes, effective June 1, 1997, the
responsible Federal banking agency to approve applications for the interstate
acquisition of branches or mergers of depository institutions across State
lines without regard to whether such activity is contrary to State law. Any
State may, however, by adoption of a non-discriminatory law after September 29,
1994 and before June 1, 1997, either elect to have this provision take effect
before June 1, 1997 or opt-out of the provision. The effect of opting out is to
prevent banks chartered by, or having their main office located in, such State
from participating in any interstate branch acquisition or merger. Each State
is permitted to prohibit interstate branch acquisitions (i.e., acquisition of a
branch without acquisition of the entire target bank), to examine acquired or
de novo branches of out-of-State banks with respect to compliance with certain
host State laws, and to retain a minimum age requirement of up to five years, a
non-discriminatory deposit cap, and non-discriminatory notice or filing
requirements. The responsible Federal agency will apply the same Federal
concentration limits and capital and management adequacy requirements noted
above with respect to BHC Act applications. Branches acquired in a host State
by a State-chartered bank will be subject to the activity limits and other laws
of the host State to the same extent as a branch of a bank chartered by the
host State. Branches acquired in a host State by an out-of-State national bank
will be subject to community reinvestment, consumer protection, fair lending
and intrastate branching laws of the host State (except to the extent the
application of such laws to national banks is preempted by Federal law or is
determined by the Comptroller of the Currency to be discriminatory), and to
other non-tax laws of the host State to the same extent as branches of a
national bank having its main office in the host State. The establishment of de
novo branches by an out-of-State bank will continue to require express
statutory authority under the law of the host State and of the chartering
jurisdiction.
Among other things, the Riegle-Neal Act also preserves State taxation
authority, prohibits the operation by out-of-State banks of interstate branches
as deposit production offices, imposes additional notice requirements upon
interstate banks proposing to close branch offices in a low or moderate-income
area, and creates new Community Reinvestment Act evaluation requirements for
interstate depository institutions. The Act mandates new restrictions on
interstate activities of foreign banks, and requires public notice of, and
opportunity to comment on, any proposed ruling by a Federal banking agency
which would preempt certain State laws.
Under existing Michigan law and with the approval of the Commissioner
of the Michigan Financial Institutions Bureau ("FIB"), a Michigan-based bank or
bank holding company (such as the Corporation) may be acquired by a bank
holding company located in any state. Most states have adopted legislation that
permits out-of-state bank holding companies to acquire local banks and bank
holding companies.
Under Michigan law, if the capital of a Michigan state-chartered bank
(such as the subsidiary banks) has become impaired by losses or otherwise, the
Commissioner of the FIB may require that the deficiency in capital be met by
assessment upon the bank's shareholders pro rata on the amount of capital stock
held by each, and if any such assessment is not paid by any shareholder within
30 days of the date of mailing of notice thereof to such shareholder, cause the
sale of the stock of such shareholder to pay such assessment and the costs of
sale of such stock. The Commissioner may appoint a receiver for any bank
failing for two months after receiving such notice from the Commissioner either
to restore its capital or to take steps to liquidate its business.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and are entitled to a priority of payment. This
priority could apparently apply to guarantees of capital plans under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
The Federal Reserve Board has adopted capital adequacy guidelines to
provide a framework for supervisory evaluation of the capital adequacy of bank
holding companies. The guidelines measure four principal ratios: (1) primary
capital to total assets; (2) total capital to total assets; (3) qualifying
capital to weighted-risk assets; and (4) Tier 1 capital to total assets. In
addition to other elements not present in the case of the Corporation, primary
capital consists of common stock, surplus, undivided profits, reserves for loan
and lease losses and certain types and amounts of convertible debt instruments.
Total capital consists of primary capital plus certain limited-life preferred
stock (and related surplus), certain unsecured long-term debt, and certain
subordinated
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notes and debentures of subsidiary banks. Total assets for purposes of
ratios (1) and (2) consist of total assets plus the reserves for loan and lease
losses, less, at the discretion of the Federal Reserve Board, amounts of
intangible assets (including goodwill), all measured as of the end of
appropriate fiscal periods. For purposes of ratio (3), weighted-risk assets
consist of total risk-adjusted assets (as described below) less amounts
excluded from Tier 1 and Tier 2 capital, all measured as of the end of
appropriate fiscal periods. For purposes of ratio (4), total assets consist of
quarterly average total assets (net of the reserves for loan and lease losses)
less (i) goodwill, (ii) excess purchased mortgage servicing rights and
purchased credit card relationships, (iii) all other intangibles, (iv)
investments in subsidiaries deducted from Tier 1 capital, and (v) excess
deferred tax assets realizable only from future taxable income.
The Federal Reserve Board measures ratios (3) and (4) pursuant to its
risk-based capital adequacy guidelines. These guidelines are intended to make
regulatory capital requirements more sensitive to the risk profile of each bank
holding company, to factor off-balance-sheet exposures into capital adequacy
assessment, to minimize disincentives to holding liquid, low-risk assets, and
to further uniformity of capital measurement on a worldwide basis.
Under the risk-based guidelines, qualifying capital is measured against a
bank holding company's risk-based assets. Each asset on the balance sheet, as
well as a balance sheet equivalent amount of certain contingent liabilities
that are off-balance-sheet, is assigned to a broad risk category, ranging from
zero to 100%. The sum of these risk-weighted items is the bank holding
company's risk-based assets.
Qualifying capital consists of Tier 1 capital and Tier 2 capital (limited
to an amount equal to Tier 1 capital), less (i) aggregate investments in
banking or finance subsidiaries which are not consolidated for financial
accounting or regulatory purposes and in consolidated subsidiaries to the
extent designated by the Federal Reserve Board, and (ii) aggregate reciprocal
holdings of capital instruments of other banking organizations. Tier 1 capital
must comprise at least 4% of risk-adjusted assets and consists of common stock,
related surplus, and retained earnings, net of any treasury stock, less (i)
goodwill, (ii) all other identifiable intangible assets other than limited
amounts of readily marketable purchased mortgage servicing rights and purchased
credit card receivables, and (iii), deferred tax assets realizable only from
future taxable income, other than such assets not exceeding the lesser of the
Corporation's projected taxable income within one year of the relevant
quarter-end report date or 10% of Tier 1 capital (before deduction of any
disallowed deferred tax assets). Tier 2 capital consists of certain amounts of
the reserves for loan and lease losses, term subordinated debt and
intermediate-term preferred stock (including related surplus). The Federal
Reserve Board does not recognize unrealized appreciation of such assets in
capital ratio calculations. Unrealized net losses on marketable equity
securities are, however, excluded from Tier 1 capital.
Under current regulations, the following minima are prescribed for the
capital adequacy ratios: (1) primary capital to total assets, 5.5%; (2) total
capital to total assets, 6.0%; (3) qualifying capital (Tier 1 plus Tier 2) to
weighted-risk assets, 8.0%; and (4) Tier 1 capital to total assets, 3.0 to
5.0%.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities and to do so taking into account the size and activities of
depository institutions and the avoidance of undue reporting burdens. The
agencies have not yet adopted final regulations concerning interest rate risk.
2. Bank Subsidiaries
All of the Corporation's subsidiary banks are subject to regulation and
examination primarily by the Commissioner of the FIB and, as insured banks
which are not members of the Federal Reserve System, by the Federal Deposit
Insurance Corporation ("FDIC"). Deposit accounts of all of the subsidiary banks
are insured to the extent provided by law by the Bank Insurance Fund ("BIF")
administered by the FDIC.
These agencies and federal and state laws extensively regulate various
aspects of the banking business including, among other things, permissible
types and amounts of loans, investments and other activities, branching,
interest rates on loans and on deposits, the maintenance of non-interest
bearing reserves on deposit accounts, and the safety and soundness of banking
practices. Federal bank regulations require each institution to adopt
comprehensive real estate lending policies, including underwriting standards
and measurable loan to value ratios consistent with safe and sound banking
practices, and documentation, approval and administration standards, all of
which are reviewed and approved annually by the institution's board of
directors. The FDIC imposes capital adequacy guidelines on each of the
Corporation's subsidiary banks. Subject to certain variations and exceptions,
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these guidelines are generally similar to those of the Federal Reserve
Board discussed above with respect to bank holding companies.
Banking laws and regulations also restrict transactions by insured banks
owned by a bank holding company, including loans to and certain purchases from
the parent holding company, non-bank and bank subsidiaries of the parent
holding company, principal shareholders, officers, directors and their
affiliates, and investments by the subsidiary banks in the shares or securities
of the parent holding company (or of any other non-bank or bank affiliates),
and acceptance of such shares or securities as collateral security for loans to
any borrower. The banks' regulators also review other payments, such as
management fees, made by subsidiary banks to affiliated companies.
The Banks are also subject to legal limitations on the frequency and
amount of dividends that can be paid to the Corporation. A Michigan state bank
(such as the Banks) may not declare a cash dividend or a dividend in kind
except out of net profits then on hand after deducting all losses and bad
debts, and then only if it will have a surplus amounting to not less than 20%
of its capital after the payment of the dividend. Moreover, a Michigan state
bank may not declare or pay any cash dividend or dividend in kind until the
cumulative dividends on its preferred stock, if any, have been paid in full.
Further, if the surplus of a Michigan state bank is at anytime less than the
amount of its capital, before the declaration of a cash dividend or dividend in
kind, it must transfer to surplus not less than 10% of its net profits for the
preceding half-year (in the case of quarterly or semi-annual dividends) or the
preceding two consecutive half-year periods (in the case of annual dividends).
The payment of dividends by the Corporation and the Banks are also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines. The
"prompt corrective action" provisions of FDICIA impose further restrictions on
the payment of dividends by insured banks which fail to meet specified capital
levels and, in some cases, their parent bank holding companies.
FDICIA establishes five capital categories, and the federal banking
regulators, as directed by FDICIA, have adopted, subject to certain exceptions,
the following minimum requirements for each of such categories:
TOTAL TIER 1
RISK-BASED RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO OTHER
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Well capitalized 10% or above 6% or above 5% or above Not subject to a capital directive.
Adequately
capitalized 8% or above 4% or above(1) 4% or above Does not meet definition of well-capitalized.
Undercapitalized Less than 8% Less than 4%(2) Less than 4%
Significantly
undercapitalized Less than 6% Less than 3% Less than 3%
Critically under-
capitalized -- -- A ratio of tangible equity to total assets of 2% or less.
(1)3% or above for institutions rated CAMEL 1 in most recent examination.
(2)Less than 3% for institutions rated CAMEL 1 in most recent examination.
Subject to certain exceptions, these capital ratios are generally
determined on the basis of periodic Reports of Condition and Income ("Call
Reports") submitted by each depository institution and the reports of
examination by each institution's appropriate federal bank regulatory agency.
FDICIA also requires the federal banking regulators to take prompt
corrective action in respect to depository institutions that do not meet
minimum capital requirements. The scope and degree of regulatory intervention
is linked to the capital category to which a depository institution is
assigned. A depository institution may be reclassified to a lower category than
is indicated by its capital position if the appropriate federal bank regulatory
agency determines the institution to be otherwise in an unsafe or unsound
condition or to be engaged in an unsafe or unsound practice. This could include
a failure by the institution, following receipt of a less-than-satisfactory
rating on its most recent examination report, to correct the deficiency.
Among other things, undercapitalized depository institutions are subject
to growth limitations and are required to submit capital restoration plans. A
depository institution's holding company must guarantee a capital restoration
plan, up to an amount
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equal to the lesser of 5% of the depository institution's assets at the
time it becomes undercapitalized or the amount of the capital deficiency when
the institution fails to comply with the plan. The federal banking agencies may
not accept a capital plan without determining, among other things, that the plan
is based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, or fails in any material respect to implement an approved plan,
it is treated as if it is significantly undercapitalized.
In addition to these restrictions applicable to undercapitalized
institutions, significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, reduce total assets,
make changes in management personnel, prohibit payment of dividends by its
parent holding company, and require such holding company to divest or liquidate
any affiliate of the institution under certain circumstances. Subject to
certain exceptions, critically undercapitalized depository institutions are
required to be placed in conservatorship or receivership, generally within 90
days.
FDICIA added numerous other provisions, including new accounting, audit
and reporting requirements, new regulatory standards in areas such as asset
quality, earnings and compensation, and revised regulatory standards for, among
other things, powers of state chartered banks, branch closures, and reduction
of systemic risk in the payments system.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, payment of dividends by a bank may be prevented by the applicable
federal regulatory authority if such payment is determined, by reason of the
financial condition of such bank, to be an unsafe and unsound banking practice.
The Federal Reserve Board has issued a policy statement providing that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings.
These regulations and restrictions may limit the Corporation's ability to
obtain funds from the Banks for its cash needs, including funds for
acquisitions, payment of dividends and interest and the payment of operating
expenses.
Each of the Banks is subject to FDIC deposit insurance assessments paid to
the BIF. Pursuant to FDICIA, the FDIC is required to set deposit insurance
rates at a level that will maintain the BIF reserve ratio at a mandated level
and has implemented a risk-based assessment scheme. Under this arrangement,
each depository institution is assigned to one of nine categories (based upon
three categories of capital adequacy and three categories of perceived risk to
the BIF). The deposit insurance assessment ranges from 0 basis points for
well-capitalized institutions displaying little risk, to 27 basis points for
undercapitalized institutions displaying high risk.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any insured bank or savings
association subsidiary of a holding company may be required to reimburse the
FDIC for any loss incurred or reasonably anticipated to be incurred by the FDIC
in connection with a default of any of such holding company's other insured
subsidiary banks or savings associations or from assistance provided to such
other subsidiaries in danger of default. This right of recovery by the FDIC
generally is superior to any claim of the shareholders of the depository
institution that is liable or any affiliate of such institution. The Banks are
subject to such cross-guarantees.
As part of the Omnibus Budget Reconciliation Act of 1993, Congress amended
the Federal Deposit Insurance Act to require receivers of failed depository
institutions to give priority to depositors over general creditors,
subordinated creditors and shareholders when distributing assets of a failed
bank. This depositor preference applies on a nationwide basis.
3. Regulation of Proposed Acquisitions
In general, any direct or indirect acquisition by the Corporation of any
voting shares of any bank which would result in the Corporation's direct or
indirect ownership or control of more than 5% of any class of voting shares of
such bank, and any merger or consolidation of the Corporation with another bank
holding company, will require the prior written approval of the Federal Reserve
Board under the BHC Act. In reaching its decision on an application for such
approval, the Federal Reserve Board must consider a number of factors,
including the effect of the proposed acquisition or merger on competition in
relevant geographic and product markets, the financial condition of both
parties, capital adequacy before and after the proposed acquisition, the
managerial resources and future prospects of the parties, the convenience and
needs of the communities to be served, and the
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prior record of both the Corporation's existing bank subsidiaries and the
bank to be acquired (or the bank subsidiaries of the other party to the merger)
under the Community Reinvestment Act. Amendments made to the BHC Act by FDICIA
further require the Federal Reserve Board (a) to disapprove any application by a
bank holding company which fails to provide the Board with adequate assurances
that it will furnish to the Board information on the operations and activities
of such bank holding company and its affiliates determined by the Board to be
appropriate to determine and enforce compliance with the statute, and (b) in its
consideration of managerial resources, to include consideration of the
competence, experience and integrity of the officers, directors, and principal
shareholders of the parties.
The merger or consolidation of an existing bank subsidiary of the
Corporation with another bank, or the acquisition by such a bank subsidiary of
assets of another bank, or the assumption of liability by such a bank
subsidiary to pay any deposits in another bank, will require the prior written
approval of the responsible federal bank regulatory agency under the Bank
Merger Act. In reaching its decision, the responsible federal bank regulatory
agency must consider a number of factors, including the effect of the proposed
transaction on competition in relevant geographic and product markets, the
financial and managerial resources and future prospects of the parties, capital
adequacy before and after the proposed transaction, the convenience and needs
of the communities to be served, and the prior record of both the Corporation's
existing bank subsidiaries and the other bank under the Community Reinvestment
Act. In addition, an application to, and the prior approval of, the Federal
Reserve Board may be required under the BHC Act in certain such cases.
In all of the foregoing cases, the required regulatory approvals are
subject to public notice and comment procedures. Adverse public comments
received, or adverse considerations raised by the regulatory agencies, may
delay or prevent consummation of the proposed transaction. In addition, such a
transaction generally may not be consummated before the 30th calendar day (or
if the Attorney General has made no adverse comment to the Federal Reserve
Board thereon, such shorter period not less than 15 calendar days as the Board
may specify with the concurrence of the Attorney General ) after final approval
of the transaction by the federal regulatory agency. In some of the foregoing
cases, prior approvals of state bank regulatory authorities must also be
obtained prior to consummation of the proposed transactions.
The BHC Act generally prohibits bank holding companies, such as the
Corporation, from acquiring direct or indirect ownership or control of voting
shares or assets of any company other than a bank, unless the company involved
is engaged solely in one or more activities which the Federal Reserve Board has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Any such acquisition will require, except
in certain limited cases, the prior approval of the Federal Reserve Board.
In evaluating an application for its approval of such an acquisition, the
Federal Reserve Board will consider whether the performance by an affiliate of
the Corporation of the activity can reasonably be expected to produce benefits
to the public (such as greater convenience, increased competition, or gains in
efficiency) that outweigh possible adverse effects (such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or
unsound banking practices). The Board may apply different standards to
activities proposed to be commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern. The Board's consideration
will also include an evaluation of the financial and managerial resources of
the Corporation, including its existing subsidiaries, and of any entity to be
acquired, and the effect of the proposed transaction on those resources. This
required regulatory approval is subject to public notice and comment
procedures, and adverse public comments received, or adverse considerations
raised by the regulatory agencies, may delay or prevent consummation of such an
acquisition. Such an acquisition may also require 30 days prior notice to the
Department of Justice and the Federal Trade Commission.
FIRREA amended the BHC Act in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate a
savings association as a non-bank subsidiary of such bank holding company. A
bank holding company such as the Corporation may apply to the Board for
permission to acquire and operate a savings association engaged only in
deposit-taking, lending and other activities that the Board has determined to
be permissible for bank holding companies, in accordance with the procedures
and standards described in the preceding paragraph.
The direct or indirect acquisition of control of a savings association by
a bank holding company would also require the prior approval of the Director of
the Office of Thrift Supervision ("OTS") of the Department of the Treasury
under the Home Owners Loan Act ("HOLA"), and may also require prior approval of
state regulatory officials. In the case of an application by a bank holding
company such as the Corporation, which did not already control a savings
association, to acquire control of a single sav-
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CB FINANCIAL CORPORATION
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10-K
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ings association, the OTS may deny the application under the HOLA if it
determines that the financial and managerial resources and future prospects of
the applicant and the savings association involved are such that the acquisition
would be detrimental to the savings association or to the insurance risk of the
applicable deposit insurance fund of the FDIC. FDICIA amended HOLA to require
the OTS to include, in its determination of the managerial resources of the
applicant and the association, consideration of the competency, experience and
integrity of the officers, directors and principal shareholders of both parties.
In addition, the OTS will consider other factors in connection with such an
application, including capital adequacy before and after the proposed
acquisition and potential anti-competitive effects. Applications to acquire more
than one savings association, and applications by entities which are already
savings and loan holding companies, require the application by the OTS of
different and more restrictive standards in reaching its determination whether
to approve such applications.
The direct or indirect acquisition of control of a savings association by
a bank holding company such as the Corporation which does not already control a
savings association will cause the bank holding company to become a savings and
loan holding company. Each company becoming a savings and loan holding company
must register as such with the OTS within 90 days after becoming a savings and
loan holding company. Thereafter, the savings and loan holding company is
subject to regulation, periodic reporting requirements, and examination by the
OTS. In the case of a bank holding company which is also a savings and loan
holding company, such OTS regulation is in addition to continuing regulation by
the Federal Reserve Board under the BHC Act.
COMPETITION
Active competition exists in all principal markets in which the
Corporation and its subsidiary banks presently operate. This competition stems
from other commercial banks, savings and loan associations, securities brokers,
mutual funds, credit unions, finance companies, mortgage bankers, leasing
companies and various non-financial intermediaries.
EMPLOYEES
The consolidated number of full-time equivalent employees for the
Corporation as of December 31, 1995, 1994 and 1993 was 387, 434 and 431,
respectively. The operations and business of the parent company, CB Financial
Corporation, are carried out primarily by its officers and employees.
ITEM 2--PROPERTIES
The executive offices of the Corporation are located at the main office of
City Bank and Trust, the lead bank of the holding company, in Jackson,
Michigan. City Bank and Trust leases approximately 57,000 square feet (about
five and one half floors or 45%) in an 11 story office building whose lease
expires in 2001 under the original term. CB Financial reimburses City Bank and
Trust on a prorata basis for approximately 20,000 square feet of space used by
functional areas with corporate responsibilities.
City Bank and Trust has six branch offices within the City of Jackson,
eight in surrounding townships and communities and two community branches
located in the eastern portion of Calhoun County, Michigan. All of these
branches are within a 25 mile radius of the main office. Of these 16 branch
offices, 12 are owned and four are leased whose terms expire at various times
through 2000. City Bank and Trust's offices range in size from approximately
800 square feet to 4200 square feet with nine of them providing drive-in
facilities. All of the branch offices are full-service facilities with the
exception of its Jackson Square Drive-In, which provides only drive-up banking,
including a drive-up ATM.
City Bank has its main office at 200 W. Higham Street, St. Johns,
Michigan, which is a one story building of approximately, 19,000 square feet.
This office and ten branch offices are owned by the Bank. Branch sizes vary
from approximately 400 square feet to 8,000 square feet. All of City Bank's
branch offices are full-service facilities with the exception of its Auto Bank
in St. Johns, Michigan, which is a drive-up facility only.
CB North has its main office at 201 State Street, Charlevoix, Michigan.
Eight branch offices are owned and are full-service facilities. Two offices are
leased, one of which is a limited service office. Seven of the offices provide
drive-up banking service. The main office occupies the first floor, basement
and a portion of the second floor of a two story building which is in the
central business district of Charlevoix. The operations center occupies a
portion of the M-66 branch which is located in the southeast section of
Charlevoix.
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ITEM 3--LEGAL PROCEEDINGS
The Corporation is party to routine litigation arising in the normal
course of business. In the opinion of management, the liabilities arising from
these legal proceedings, if any, will not have a material effect upon the
Corporation's financial position or results of operations.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1995 to a vote of
the Corporation's security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the corporation are as follows:
NAME AGE POSITION
- --------------------------------------------------------------------------------
Brian D. Bell 58 Chairman and Chief Executive Officer of CB Financial Corporation since December 1995
(previously Chairman, President and Chief Executive Officer since 1990); President and Chief Executive Officer
of City Bank and Trust Company since 1987; Director of CB Financial Corporation, City Bank and Trust Company,
City Bank, and (since 1993) CB North.
Steven W. Seely 45 President and Chief Operating Officer of CB Financial Corporation since December 1995 (previously Executive
Vice President and Chief Operating Officer since March 1995);
Director of CB Financial Corporation, City Bank and Trust Company, City Bank, and CB
North since December 1995; Vice President NBD Bancorp Inc. 1985 to March 1995.
A. Wayne Klump 53 Treasurer of CB Financial Corporation; Senior Vice President and Chief Financial Officer of City Bank and
Trust Company since 1991 (previously Senior Vice President and
Controller since 1987).
Officers of the corporation are elected in the spring of each year at the
annual organizational meeting of the Board of Directors to serve for the
ensuing year.
There is no family relationship between any of the foregoing individuals.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The common stock of CB Financial Corporation is traded on a limited basis
in the over-the-counter market. At December 31, 1995, there were 2,801,053
shares of common stock outstanding held by 2,094 shareholders of record. The
table below lists the range of high and low bid price during each quarter for
CB Financial Corporation's common stock, as obtained from the National
Quotation Bureau, Inc. and the quarterly dividend declared per share, in each
of the last three years. The prices are inter-dealer quotations and do not
reflect actual transactions nor commissions to brokers. Information with
respect to restrictions on dividend payments is presented in Note 16 of the
Notes to Consolidated Financial Statements.
Price Range of Common Stock Dividends Declared
High Low Per Share
- --------------------------------------------------------------------------------
1995
First Quarter $31 $27 $0.30
Second Quarter 32 1/2 32 0.30
Third Quarter 36 1/2 31 1/4 0.30
Fourth Quarter 35 3/4 33 1/2 0.30
- --------------------------------------------------------------------------------
$1.20
1994
First Quarter $33 $33 $0.30
Second Quarter 33 32 0.30
Third Quarter 33 31 1/2 0.30
Fourth Quarter 30 29 1/2 0.30
- --------------------------------------------------------------------------------
$1.20
1993
First Quarter $31 $27 $0.29
Second Quarter 32 1/2 32 0.29
Third Quarter 32 1/2 32 0.30
Fourth Quarter 33 32 1/2 0.30
- --------------------------------------------------------------------------------
$1.18
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is set forth within Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations on the pages indicated below. Such information is incorporated
herein by reference.
Pages in
Annual Report
and Form 10-K
-------------
Consolidated Average Balance Sheet 34
Average Balances - Effective Interest Differential Rates 19
Analysis of Changes in Volume and Rates on Net Interest Income 20
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following financial review covers significant factors affecting the
Corporation's balance sheet and statement of income during the period of 1993
through 1995. The information provides a more comprehensive review of the
financial condition and operating results than could be obtained from reading
the financial statements, footnotes and financial statistics. The major
components of the Corporation's operating results in 1995, 1994 and 1993 are
presented in the accompanying tables 1-4 and are discussed in greater detail on
subsequent pages.
TABLE 1. SELECTED FINANCIAL DATA
For The Year Ended December 31,
(Dollar Amounts In Thousands Except Per Share Data) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Interest Income On:
Consumer Loans $ 9,958 $ 8,947 $ 8,489
Commercial Loans 16,179 12,338 10,138
Tax Exempt Loans 927 658 597
Real Estate Mortgage Loans 9,291 6,882 9,397
Securities Available for Sale:
U. S. Treasury 3,372 5,086 --
U.S. Government Agencies 2,065 2,629 --
States and Political Subdivisions 23 -- --
Other 5 79 --
Securities Held to Maturity 8,122 8,438 17,530
Money Market Assets 550 428 627
- ---------------------------------------------------------------------------------------------------------
Total Interest Income 50,492 45,485 46,778
- ---------------------------------------------------------------------------------------------------------
Interest Expense On:
Demand Deposits 3,907 4,095 4,216
Savings Deposits 3,272 3,314 3,615
Time Deposits 11,994 7,725 7,889
Other Liabilities 811 745 749
- ---------------------------------------------------------------------------------------------------------
Total Interest Expense 19,984 15,879 16,469
- ---------------------------------------------------------------------------------------------------------
Net Interest Income 30,508 29,606 30,309
Provision for Possible Loan Losses 672 534 392
- ---------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 29,836 29,072 29,917
- ---------------------------------------------------------------------------------------------------------
Non-Interest Income:
Trust Income 2,012 2,008 2,015
Service Charges on Deposit Accounts 2,704 2,276 2,400
Security Gains 82 942 1,787
Other Operating Income 1,517 1,805 1,711
- ---------------------------------------------------------------------------------------------------------
Total Non-Interest Income 6,315 7,031 7,913
- ---------------------------------------------------------------------------------------------------------
Non-Interest Expenses:
Salaries and Wages 10,303 9,955 9,752
Employee Benefits 2,650 2,674 2,647
Occupancy and Furniture and Equipment Expenses, Net 5,028 4,682 4,216
Restructuring Charges 2,278 -- --
Other Operating Expenses 9,124 9,211 9,150
- ---------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 29,383 26,522 25,765
- ---------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 6,768 9,581 12,065
Provision for Federal Income Tax 2,152 2,987 3,646
- ---------------------------------------------------------------------------------------------------------
Net Income before Cumulative Effect of Change in Accounting 4,616 6,594 8,419
Change in Accounting, Net of Tax Effect of $557 -- -- 1,081
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 4,616 $ 6,594 $ 7,338
=========================================================================================================
Total Assets $719,883 $720,264 $670,891
Average Assets 697,286 672,656 677,348
Net Income Per Share before Cumulative Effect of Change in Accounting 1.65 2.35 3.00
Net Income Per Share 1.65 2.35 2.62
Cash Dividends Declared Per Share 1.20 1.20 1.18
Return on Average Assets before Cumulative Effect of Change in Accounting .66% .98% 1.24%
Return on Average Assets .66 .98 1.08
Return on Average Equity before Cumulative Effect of Change in Accounting 6.02 8.78 12.14
Return on Average Equity 6.02 8.78 10.59
Dividend Payout Ratio 72.82 50.97 45.04
Net Interest Margin 4.94 4.99 5.12
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 2. AVERAGE BALANCES-EFFECTIVE INTEREST DIFFERENTIAL RATES
(Interest Income and Rates on a Tax Equivalent Basis)
1995 1994 1993
AVERAGE AVERAGE Average Average Average Average
(Dollar Amounts in Thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Money Market Assets $ 10,051 $ 550 5.47% $ 10,441 $ 428 4.10% $ 16,798 $ 627 3.73%
Securities Available for Sale:
U.S. Treasury 47,134 3,372 7.15 66,373 5,086 7.66 -- -- --
U.S. Government Agencies 27,439 2,065 7.53 33,295 2,629 7.90 -- -- --
States and Political Subdivisions (1) 381 33 8.66 -- -- -- -- -- --
Other 65 5 7.69 1,552 79 5.09 -- -- --
Securities Held to Maturity 141,236 8,404 5.95 148,908 8,775 5.89 258,857 18,183 7.02
Loans (2):
Consumer Loans 110,674 9,958 9.00 101,509 8,947 8.81 90,726 8,489 9.36
Commercial Loans 172,512 16,179 9.38 152,257 12,338 8.10 134,677 10,138 7.53
Tax Exempt Loans (1) 13,168 1,276 9.69 10,404 898 8.63 9,429 829 8.79
Real Estate Mortgage Loans 108,025 9,291 8.60 80,782 6,882 8.52 98,850 9,397 9.51
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS
AND INTEREST INCOME 630,685 51,133 8.11 605,521 46,062 7.61 609,337 47,663 7.82
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve for Possible Loan Losses (3,977) (3,540) (3,663)
Cash and Due from Banks 32,003 33,724 38,383
Premises and Equipment, Net 16,104 15,538 13,404
Goodwill and Premium on Core Deposits 11,220 8,377 7,754
Unrealized Gains (Losses) on
Securities Available For Sale 607 2,339 --
Other Assets 10,644 10,697 12,133
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $697,286 $672,656 $677,348
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-Bearing Demand Deposits $151,943 $ 3,907 2.57% $159,858 $ 4,095 2.56% $163,794 $ 4,216 2.57%
Savings Deposits 124,132 3,272 2.64 135,360 3,314 2.45 136,436 3,615 2.65
Time Deposits 223,346 11,994 5.37 181,889 7,725 4.25 184,902 7,889 4.27
Short-Term Interest-Bearing
Liabilities 7,009 440 6.28 4,362 228 5.23 8,454 147 1.74
Note Payable 5,052 320 6.33 6,978 449 6.43 8,472 530 6.25
Capital Leases 344 51 14.83 425 68 16.00 527 72 13.66
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES AND INTEREST
EXPENSE 511,826 19,984 3.90 488,872 15,879 3.25 502,585 16,469 3.28
- ----------------------------------------------------------------------------------------------------------------------------------
Demand and Other Non-Interest
Bearing Deposits 100,968 101,605 99,741
Other Liabilities 7,865 7,112 5,700
Shareholders' Equity 76,627 75,067 69,322
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $697,286 $672,656 $677,348
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE
RELATED TO EARNING ASSETS 3.17 2.62 2.70
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $31,149 $30,183 $31,194
==================================================================================================================================
NET INTEREST MARGIN 4.94% 4.99% 5.12%
==================================================================================================================================
(1) The amounts are adjusted to a tax equivalent basis for Federal income tax.
(2) Non-accrual loans and overdrafts are included in the average balances and
fees on loans are included in interest income for computation of yields.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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TABLE 3. ANALYSIS OF CHANGES IN VOLUME AND RATES ON NET INTEREST INCOME
The following table sets forth, for the periods indicated, the effect of
volume and rate changes on net interest income on a tax equivalent basis. The
changes in interest attributable to volume are calculated by multiplying the
annual change in average balance times the prior year's rate. The rate
variance is calculated by multiplying the annual change in the average rate
times the prior year's volume. The volume/rate is calculated by multiplying
the change in average balance times the change in average rate.
1995 COMPARED TO 1994 1994 Compared to 1993
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN: Due to Change in:
AVERAGE AVERAGE VOLUME/ NET Average Average Volume/ Net
(In Thousands) BALANCE RATE RATE CHANGE Balance Rate Rate Change
- --------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Income:
Loans:
Consumer Loans $ 805 $ 189 $ 17 $ 1,011 $ 1,009 $ (499) $ (52) $ 458
Commercial Loans 1,638 1,944 259 3,841 1,324 768 108 2,200
Tax Exempt Loans 239 110 29 378 86 (15) (2) 69
Real Estate Mortgage Loans 2,322 65 22 2,409 (1,718) (979) 182 (2,515)
Securities Available for Sale:
U. S. Treasury and Government Agencies (1,695) (463) (120) (2,278) (6,517) (3,157) 1,282 (8,392)
States and Political Subdivisions 33 -- -- 33 (1,075) 302 (154) (927)
Other (75) 34 (33) (74) (89) -- -- (89)
Securities Held To Maturity (455) 89 (5) (371) 7,794 -- -- 7,794
Money Market Assets (16) 143 (5) 122 (237) 62 (24) (199)
- --------------------------------------------------------------------------------------------------------------------------
Total 2,796 2,111 164 5,071 577 (3,518) 1,340 (1,601)
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing Demand Deposits (201) 14 (1) (188) (101) (16) (4) (121)
Savings Deposits (280) 259 (21) (42) (29) (273) 1 (301)
Time Deposits 1,762 2,042 465 4,269 (129) (37) 2 (164)
Short Term Interest-Bearing Liabilities 138 46 28 212 (71) 295 (143) 81
Note Payable and Capital Leases (131) (12) (3) (146) (107) 25 (3) (85)
- --------------------------------------------------------------------------------------------------------------------------
Total 1,288 2,349 468 4,105 (437) (6) (147) (590)
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Interest Income $ 1,508 $ (238) $ (304) $ 966 $ 1,014 $(3,512) $1,487 $(1,011)
==========================================================================================================================
RESULTS OF OPERATIONS
As depicted in Table 1, net income amounted to $4,616,000 in 1995, a
reduction of $1,978,000 from the $6,594,000 figure reported for 1994. The
operating results for 1995 reflect a pre-tax restructuring charge of $2,278,000
which is explained in greater detail in the section on non-interest expenses.
Without this expense in 1995, net income would have been $6,169,000 which would
have represented a decrease of $425,000 from 1994. Net income decreased by
$744,000 in 1994 from $7,338,000 in 1993. Securities gains amounted to $82,000,
$942,000 and $1,787,000 for 1995, 1994, and 1993, respectively. In 1993, the
Corporation recognized the change in accounting for SFAS No. 106 of $1,081,000,
net of the tax effect, which represents the transition adjustment for
post-retirement health care costs. The Corporation also adopted SFAS No. 109 in
1993 which had no material effect upon net income. Additional information on
SFAS No. 106 and No. 109 is presented in Notes 1 and 12 in the Notes to
Consolidated Financial Statements.
Earnings per share on net income based on the average number of shares
outstanding, were $1.65, $2.35 and $2.62 for 1995, 1994 and 1993 respectively.
The restructuring charge of $2,278,000 amounted to approximately $.58 per share
in 1995, net of the effective tax rate. The transition adjustment for SFAS No.
106 of $1,081,000, net of tax, amounted to $.38 per share in 1993.
The return on average assets (ROA) was .66% in 1995 compared to .98% in
1994 and 1.08% in 1993. The ROA in 1995 and 1993 based on earnings before the
restructuring charge and the change in accounting would have been .88% and
1.24%, respectively. The return on average shareholders' equity (ROE) amounted
to 6.02% in 1995, 8.78% in 1994 and 10.59% in 1993. The ROE before the
restructuring charge and change in accounting would have been
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
8.05% and 12.14%. Excluding the effect of the restructuring charge and change
in accounting, the reduction in ROA and ROE reflects the decline in securities
gains over the past three years and other factors explained in subsequent
sections of management's discussion.
The Corporation's high level of capital has an adverse mathematical effect
on the calculation of ROE. The Corporation's medium-term planning targets for
ROA and ROE are 1.25% and 13.5%, respectively. High capital levels, continued
objectives for future growth and lack of control over external factors such as
the economy and market interest rates may lengthen the period over which these
financial objectives are consistently achieved.
TABLE 4. TRENDS IN AVERAGE ASSETS AND SOURCES OF FUNDS
1995 INCREASE (DECREASE) 1994 Increase (Decrease) 1993
(Dollar Amounts In Thousands) AMOUNT PERCENT Amount Percent
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Securities Available for Sale:
U.S. Treasury and Government Agencies $ 75,049 $(26,316) -26.0% $101,365 $101,365 --% $ --
States and Political Subdivisions 385 385 -- -- -- -- --
Other 192 (2,002) -91.2 2,194 2,194 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale 75,626 (27,933) -27.0 103,559 103,559 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity 141,236 (7,672) -5.2 148,908 (109,949) -42.5 258,857
- -------------------------------------------------------------------------------------------------------------------------------
Loans:
Consumer Loans 110,674 9,165 9.0 101,509 10,783 11.9 90,726
Commercial Loans 172,512 20,255 13.3 152,257 17,580 13.1 134,677
Tax Exempt Loans 13,168 2,764 26.6 10,404 975 10.3 9,429
Real Estate Mortgage Loans 108,025 27,243 33.7 80,782 (18,068) -18.3 98,850
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans 404,379 59,427 17.2 344,952 11,270 3.4 333,682
Reserve for Possible Loan Losses (3,977) (437) -12.3 (3,540) 123 3.4 (3,663)
- -------------------------------------------------------------------------------------------------------------------------------
Net Loans 400,402 58,990 17.3 341,412 11,393 3.5 330,019
- -------------------------------------------------------------------------------------------------------------------------------
Money Market Assets 10,051 (390) -3.7 10,441 (6,357) -37.8 16,798
- -------------------------------------------------------------------------------------------------------------------------------
Total Average Earning Assets 627,315 22,995 3.8 604,320 (1,354) -.2 605,674
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks 32,003 (1,721) -5.1 33,724 (4,659) -12.1 38,383
Other Assets 37,968 3,356 9.7 34,612 1,321 4.0 33,291
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets $697,286 $ 24,630 3.7% $672,656 $ (4,692) -.7% $677,348
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest Bearing Deposits $100,968 $ (637) -.6% $101,605 $1,864 1.9% $ 99,741
Interest-Bearing Demand Deposits 151,943 (7,915) -5.0 159,858 (3,936) -2.4 163,794
Savings Deposits 124,132 (11,228) -8.3 135,360 (1,076) -.8 136,436
Other Time Deposits 223,346 41,457 22.8 181,889 (3,013) -1.6 184,902
- -------------------------------------------------------------------------------------------------------------------------------
Total Deposits 600,389 21,677 3.7 578,712 (6,161) -1.1 584,873
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Interest-Bearing Liabilities 7,009 2,647 60.7 4,362 (4,092) -48.4 8,454
Note Payable and Capital Leases 5,396 (2,007) -27.1 7,403 (1,596) -17.7 8,999
Other Liabilities 7,865 753 10.6 7,112 1,412 24.8 5,700
Shareholders' Equity 76,627 1,560 2.1 75,067 5,745 8.3 69,322
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $697,286 $ 24,630 3.7% $672,656 $ (4,692) -.7% $677,348
===============================================================================================================================
NET INTEREST INCOME
Net interest income, an important indicator of the Corporation's
profitability, is the difference between the income received on earning assets
and the interest expense on interest bearing liabilities. Earning assets are
financed by a large base of interest-bearing funds, consisting of retail and
wholesale deposits and short-term borrowings. In addition to interest-bearing
funds, earning assets are also supported by net non-interest-related funds that
consist of demand deposits and shareholders' equity, the total of which is
reduced by non-interest-earning assets such as cash and due from banks, items
in process of collection, premises and equipment, goodwill and premium on core
deposits and other non-earning assets. Variations in the volume and mix of
earning assets, interest-bearing funds and non-interest-related funds, as well
as their relative sensitivity to interest rate movement, are the most important
factors affecting net interest income.
Table 2, Average Balances-Effective Interest Differential Rates, presents
average daily balances, interest income on tax equivalent basis for Federal
income tax and interest expense as well as rates earned and paid on the
Corporation's major asset and liability items, for the years 1995, 1994 and
1993. Net interest income on a tax equivalent basis for
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Federal income tax was $31,149,000 in 1995 compared to $30,183,000 in
1994 and $31,194,000 in 1993. Net interest income on a Federal tax equivalent
basis is the largest source of earnings for the Corporation, accounting for
83.1% of total income before provision for possible loan losses in 1995
compared to 81.1% in 1994 and 79.8% in 1993.
Additional information relative to the effect that changes in volume and
rates had on net interest income is presented in Table 3. Information in Table
4 will assist with a comparative analysis of changes in the average balance
sheet over the period of 1993 through 1995.
Average earning assets, excluding the reserve for possible loan losses,
were $631.3 million for 1995 and $607.9 million in 1994, an increase of $23.4
million or 3.9%, which reflects the Republic Bank acquisition in December 1994.
Average earning assets declined $1.4 million or .2% in 1994 from 1993.
Average loans outstanding in 1995 were $404.4 million, a growth of $59.4
million or 17.2% from 1994 which includes $22.9 million added by the Republic
Bank acquisition. Average loans outstanding in 1994 and 1993 were $345.0
million and $333.7 million, respectively. Excluding the unrealized gain, total
investment securities consisting of Securities Available for Sale and Held to
Maturity averaged $216.3 million in 1995 compared to $250.1 million in 1994 and
$258.9 million in 1993. Money market assets consisting of Federal Funds Sold
and other liquid short-term investments averaged $10.1 million in 1995 versus
$10.4 million in 1994 and $16.8 million in 1993. Total deposits averaged
$600.4 million in 1995 compared to $578.7 million in 1994 and $584.9 million in
1993.
The net interest margin on a tax equivalent basis for Federal income tax
was 4.94% in 1995, 4.99% in 1994 and 5.12% in 1993, a decline of 18 basis
points over the last three years. The effective yield on total average earning
assets was 8.11%, 7.61% and 7.82% for 1995, 1994 and 1993, respectively, an
increase of 50 basis points in 1995 after a decline of 21 basis points in 1994.
Effective interest rates on total interest-bearing liabilities were 3.90% in
1995, 3.25% in 1994 and 3.28% in 1993, an increase of 62 basis points over the
intervening period.
Beginning in mid-1993 and continuing throughout 1994, the economy steadily
improved and interest rates increased. During this period of economic
expansion, the Federal Reserve was proactive in attempting to counteract the
inflationary pressure within the economy and raised short-term interest rates
seven times from 3% to 6% with the last increase in February 1995. Since the
second quarter 1995, as the economy displayed signs of softening and inflation
appeared to be under control, the Federal Reserve continued its proactive
posture and attempted to stimulate the economy by lowering short-term interest
rates 25 basis points in July and December 1995 and January 1996.
RESERVE AND PROVISION FOR POSSIBLE LOAN LOSSES
Management realizes that loan losses cannot be predicted with absolute
certainty. Consequently, the Corporation adheres to a disciplined loan review
process whereby constant attention is focused on the quality of the loan
portfolio in order to evaluate the adequacy of the reserve for possible loan
losses. In assessing the adequacy of the reserve, management relies
predominately on its ongoing review of the loan portfolio and whether any loans
should be charged-off. In evaluating the reserve, consideration is given to
current and projected loan volume; historical net loan loss experience; the
level and composition of non-accrual, past due and renegotiated or reduced rate
loans (troubled debt refinancing); the condition of borrowers experiencing
particular financial difficulties; current and anticipated economic conditions;
and an evaluation of each borrower's credit-worthiness. Based on these
factors, management determines the amount of the provision which is needed to
maintain an adequate reserve for possible loan losses. The amount of the
provision for possible loan losses, which is recorded as a current expense, may
be greater or less than the actual net charged-off loans in any fiscal period.
The provision for possible loan losses was $672,000, $534,000 and $392,000
for 1995, 1994 and 1993, respectively. The higher amounts in 1995 and 1994
were made in recognition of the considerable growth in total loans outstanding
rather than any material deterioration within the loan portfolio. The ratio of
the reserve for possible loan losses to total loans outstanding at each
year-end was .90%, .98% and 1.08% for 1995, 1994 and 1993, respectively. Even
though the ratio of the reserve to total loans outstanding was below 1.0% at
December 31, 1995 and 1994, management deems the reserve to be adequate to
cover potential loan losses.
Net charge-off of loans amounted to $603,000 in 1995, $575,000 in 1994 and
$289,000 in 1993. During the past five years, gross charge-offs totaled
$2,622,000 while recoveries amounted to $716,000 for a recovery ratio of
approxi-
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
mately 27%. Additional information relative to the impairment of loans is
presented in Note 7 to the Notes to Consolidated Financial Statements. Table 5
presents an analysis of the Reserve for Possible Loan Losses and selected
ratios for the five years ended December 31, 1995.
The Securities and Exchange Commission (SEC) disclosure guidelines require
the reserve for possible loan losses to be broken down into major loan
categories. The entire reserve is available to cover losses from any loan
category. Table 6 presents the allocation of the reserve for possible loan
losses for the five years ended December 31, 1995.
In 1996, management projects gross charge-offs to be $253,000 for
commercial loans, $25,000 for residential real estate mortgage loans and
$522,000 for consumer loans, a combined total of $800,000.
TABLE 5. ANALYSIS OF RESERVE FOR POSSIBLE LOAN LOSSES
(Dollar Amounts In Thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
Balance at January 1 $ 3,865 $ 3,617 $ 3,273 $ 2,364 $ 2,341
- ------------------------------------------------------------------------------------------------------
Loans Charged-Off:
Consumer Loans 588 414 284 169 335
Commercial, Financial and Agricultural Loans 215 329 102 27 32
Real Estate Mortgage Loans -- 10 25 55 37
- ------------------------------------------------------------------------------------------------------
Total Charge-Offs 803 753 411 251 404
- ------------------------------------------------------------------------------------------------------
Recoveries:
Consumer Loans 141 141 88 85 88
Commercial, Financial and Agricultural Loans 59 37 10 19 21
Real Estate Mortgage Loans -- -- 24 -- 3
- ------------------------------------------------------------------------------------------------------
Total Recoveries 200 178 122 104 112
- ------------------------------------------------------------------------------------------------------
Net Charge-Offs 603 575 289 147 292
- ------------------------------------------------------------------------------------------------------
Provision Charged to Expense 672 534 392 595 315
Addition Due to Acquisition -- 289 241 461 --
- ------------------------------------------------------------------------------------------------------
Net Change in Reserve 69 248 344 909 23
- ------------------------------------------------------------------------------------------------------
Reserve for Possible Loan Losses at December 31 $ 3,934 $ 3,865 $ 3,617 $ 3,273 $ 2,364
======================================================================================================
Total Loans at End of Year $438,883 $393,119 $335,498 $310,229 $248,050
Average Total Loans 404,379 344,952 333,682 295,697 240,667
As a Percent of Year-End Loans:
Net Loan Charge-Offs .14% .15% .09% .05% .12%
Provision for Possible Loan Losses .15 .14 .12 .19 .13
Reserve Balance at Year-End .90 .98 1.08 1.06 .95
As a Percent of Average Total Loans:
Net Loan Charge-Offs .15 .17 .09 .05 .12
Provision for Possible Loan Losses .17 .15 .12 .20 .13
Average Reserve Balance .98 1.03 1.10 .97 .98
TABLE 6. ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
December 31,
1995 1994 1993 1992 1991
(Dollar Amounts In Thousands) RESERVE PERCENT Reserve Percent Reserve Percent Reserve Percent Reserve Percent
- -------------------------------------------------------------------------------------------------------------------------
Commercial, Financial
and Agricultural Loans $ 513 13.0% $ 677 17.5% $1,041 28.8% $1,126 34.4% $ 535 22.6%
Real Estate Mortgage Loans 41 1.0 33 .9 162 4.5 206 6.3 287 12.2
Consumer Loans 832 21.2 490 12.7 375 10.3 298 9.1 416 17.6
Unallocated 2,548 64.8 2,665 68.9 2,039 56.4 1,643 50.2 1,126 47.6
- -------------------------------------------------------------------------------------------------------------------------
Total $3,934 100.0% $3,865 100.0% $3,617 100.0% $3,273 100.0% $2,364 100.0%
=========================================================================================================================
NON-INTEREST INCOME
Non-interest income is comprised of trust department income, service
charges on deposit accounts, fees for providing other services to customers,
securities gains and other income. Total non-interest income was $6,315,000 in
1995, $7,031,000 in 1994 and $7,913,000 in 1993.
Trust income for 1995, 1994 and 1993 was $2,012,000, $2,008,000 and
$2,015,000. Trust income is derived from
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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providing fiduciary, investment management, custodial and related
services to corporate, personal and institutional clients. Fees are based on
the market value of assets administered, portfolio purchases and sales, income
collection transactions and other services rendered.
Service charges on deposit accounts totaled $2,704,000, $2,276,000 and
$2,400,000 for 1995, 1994 and 1993, respectively, an increase of $428,000 in
1995 after a reduction of $124,000 in 1994. The Corporation implemented a
revised schedule of service charge fees in 1995 which was the primary factor
for the increase over 1994. Interest rates effect the earnings credit
allowance factor used to compute service charges on business checking accounts.
The earnings credit factor used for the month of December in each of 1995, 1994
and 1993 was 5.16%, 5.69% and 3.07%, respectively.
To meet liquidity requirements of the parent and subsidiary banks and to
implement strategies of asset-liability management, the Corporation sold
securities in each of the last three years. Securities sold out of the
Available for Sale portfolio amounted to $13.0 million in 1995 and $23.5
million in 1994. Securities of $80.4 million were sold in 1993. The factors
that contributed to additional cash requirements for the parent and the
subsidiary banks are the five year fixed note to fund the acquisition of First
of Charlevoix Corporation and the significant growth in total loans
outstanding. Total security gains amounted to $82,000, $942,000 and $1,787,000
in 1995, 1994 and 1993, respectively.
Other operating income includes fees collected for providing other
services to customers and other miscellaneous income items. Total other income
was $1,517,000 in 1995, $1,805,000 in 1994 and $1,711,000 in 1993. Beginning
in 1994, the Corporation retained more residential mortgage loans than in 1993.
Total residential mortgages sold in 1995 were $11.0 million compared to $19.8
million in 1994 and $56.7 million in 1993. Gains on loans sold amounted to
$66,000 in 1995 compared to $138,000 in 1994 and $603,000 in 1993. During
1994, the Corporation sold a bank facility which resulted in a gain of
$224,000.
NON-INTEREST EXPENSES
Non-interest expenses consist of salaries and wages, employee benefits,
occupancy and equipment expenses and other operating expenses. These expenses
totaled $29.4 million, $26.5 million and $25.8 million for 1995, 1994 and 1993,
respectively.
The Corporation devotes considerable effort to the delivery of quality
service while controlling personnel expenses. The consolidated number of
full-time equivalent employees (FTE) at year-end 1995 was 387 with 38 open
positions which represents an authorized level of 425 FTE employees. The
number of FTE employees at year-end 1994 and 1993 was 434 and 431. The 1994
figure includes 11 FTE employees added as a result of the the Republic Bank
acquisition.
Salaries and wages, the largest single component of non-interest expenses,
amounted to $10,303,000 in 1995, an increase of $348,000 or 3.5% over the
$9,955,000 in 1994 which increased $203,000 or 2.1% over the $9,752,000 in
1993. The increase in salaries and wages in 1995 and 1994 over the preceding
year reflects a new hiring plan as well as normal annual performance merit
reviews.
Employee benefits consist of payroll related taxes, retirement plan
contributions and health care costs. These expenses were $2,650,000,
$2,674,000 and $2,647,000 for 1995, 1994 and 1993, respectively. The
Corporation's contribution for the Money Purchase Pension Plan and 401(k) Plan,
net of forfeitures, amounted to $773,000 in 1995, $700,000 in 1994 and $739,000
in 1993. Select-Flex benefit expenses, net of employees' co-pay, consists of
coverage for health and dental care, life insurance and long-term disability,
amounted to $791,000 in 1995, $815,000 in 1994 and $771,000 in 1993. Payroll
related taxes amounted to $853,000, $821,000 and $841,000 in 1995, 1994 and
1993, respectively. The expense for service and interest costs for
post-retirement benefits was $242,000 in 1995 compared to $217,000 in 1994 and
$156,000 in 1993 which covered all active eligible employees hired prior to
April 1, 1993 and the retirees on that date. Additional information relative
to employee benefit plans and associated expenses is presented in Note 12 of
the Notes to Consolidated Financial Statements.
Net occupancy as well as furniture and equipment expenses were $5,028,000
in 1995 compared to $4,682,000 in 1994 and $4,216,000 in 1993. Depreciation
and amortization expense for premises, furniture and equipment totaled
$1,877,000 in 1995, $1,906,000 in 1994 and $1,528,000 in 1993. Depreciation
expense on computer hardware and software was $438,000 in 1995, $319,000 in
1994 and $151,000 in 1993. Additional expenditures were incurred in 1995 and
1994 to refurbish facilities as well as upgrade furniture and equipment to
enhance productivity and efficiency. The Corporation attempts to manage
occupancy and equipment costs in a manner consistent with quality service
objectives.
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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The Federal Deposit Insurance Act (FDIA), as amended by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) mandates that
deposit insurance premiums be assessed against each insured commercial bank
based upon the probability of loss to the Bank Insurance Fund (BIF) with
respect to that bank, and in the aggregate against all commercial banks at
rates required to maintain the designated reserve ratio of the BIF. The
designated reserve ratio for the BIF is 1.25% of estimated insured deposits, or
such higher percentage as the FDIC determines for particular years to be
justified by circumstances that raise a significant risk of substantial future
losses to the BIF. The current required reserve ratio is 1.25% of estimated
insured deposits. The FDIC has adopted a risk-based assessment system,
effective January 1, 1994, under which each commercial bank is assigned to one
of nine categories, based upon three capital categories and three categories of
perceived risk. In May 1995, the balance of BIF exceeded the 1.25% reserve
ratio which resulted in the FDIC lowering the deposit insurance assessment
rates to 4 basis points for well capitalized banks displaying little risk to 27
basis points for less than adequately capitalized banks displaying high risk.
Each of the subsidiary banks have been assigned to the highest capital
category. For the fourth quarter, 1995, the subsidiary banks' FDIC insurance
assessment rate was reduced which lowered FDIC insurance premium expense by
$272,000 for October - December 1995. The amount of the BIF in excess of the
1.25% reserve ratio was refunded to all insured banks which resulted in a
refund of $350,000 recorded in September 1995 as a reduction to FDIC premium
expense. FDIC insurance premium expense which is reported as a separate line
item on the income statement, totaled $685,000 in 1995, $1,266,000 in 1994 and
$1,305,000 in 1993. The remaining variation in FDIC insurance premium expense
has a direct correlation to the level of total deposits.
Effective January 1, 1996, the FDIC lowered the insurance assessment rate
to zero for the most highly rated well capitalized banks because the BIF
continued to exceed the 1.25% reserve ratio. However, such banks must pay a
minimum annual fee of $2,000 with a consolidated total of $6,000 projected for
1996. Significant changes in the deposit insurance assessment rate imposed by
the FDIC could have a material effect on the earnings of the Corporation such
as the experience in 1996.
During the third and fourth quarters of 1995, the Corporation recorded a
restructuring charge which totaled $2,278,000. In the third quarter, 24
employees, whose combined age and years of service was 80 or more, accepted
early retirement which resulted in an expense of $981,000 for severance
salaries, benefits and post-retirement health care. Fifteen employees with
combined age and years of service of 70-79 accepted early retirement at a cost
of $623,000 in the fourth quarter. A write-down of the excess purchase prices
over assets acquired of $674,000 was taken as a restructuring charge in the
fourth quarter which resulted from the First State Bank of Charlevoix and
Republic Bank acquisitions.
Other operating expenses amounted to $8,439,000 in 1995, $7,945,000 in
1994 and $7,845,000 in 1993. The increase in these expenses reflect increased
operating costs for recent acquisitions and introduction of new customer
products. For example, expenses with a material increase include marketing and
public relations of $132,000; postage of $99,000; employee relations and
hiring expenses of $116,000 and telephone of $87,000 with an aggregate increase
of $434,000.
PROVISION FOR FEDERAL INCOME TAX
The provision for Federal income tax in 1995 was $2,152,000 compared to
$2,987,000 in 1994 and $3,646,000 in 1993. The provision decreased $835,000 in
1995 from 1994 and $659,000 in 1994 from 1993. The variation in the provision
in 1995 from 1994 and in 1994 from 1993 resulted from a movement in pre-Federal
tax earnings, the level of tax exempt income and the tax effect of the goodwill
amortization for CB North. The Corporation's effective federal tax rate which
is the percent of the Federal tax provision to pre-Federal tax earnings, was
31.8% for 1995, 31.2% for 1994 and 30.2% for 1993. Additional information
relative to the various components of the Federal income tax provision is
presented in greater detail in Note 14 of the Notes to Consolidated Financial
Statements.
The Corporation is required to maintain a sizeable non-earning reserve
balance at the Federal Reserve Bank. The average reserves, excluding vault
cash, were $3,434,000 in 1995, $4,459,000 in 1994 and $5,064,000 in 1993. The
average yield on earning assets was 8.11%, 7.61% and 7.82% for 1995, 1994 and
1993, respectively. The amount of income lost on these required reserves for
each year before Federal income tax was $278,497, $339,330, and $396,000 for
1995, 1994 and 1993, respectively. This was equivalent to $.07, $.08 and $.10
per share after taxes for 1995, 1994 and 1993 computed using the effective tax
rate for each year. The lost income actually represents an indirect tax on our
shareholders since almost all of the net earnings of the Federal Reserve System
are remitted to the U.S. Treasury.
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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ANALYSIS OF BALANCE SHEET AND IMPACT UPON OPERATING RESULTS
A summary of the amount and percent of change in the components of the
consolidated average balance sheet in 1995, 1994 and 1993 is presented in Table
4.
MONEY MARKET ASSETS
The average balance of Money Market Assets was $10.1 million in 1995 versus
$10.4 million in 1994 and $16.8 million in 1993. Additional information
relative to the average balance and effective yield for Money Market Assets is
presented in Tables 2 and 4. Table 3 provides additional information relative
to the effect that changes in volume and rates had on the income from Money
Market Assets.
SECURITIES
The Corporation adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" in January 1994. SFAS No. 115 requires: (1)
debt securities that the Corporation has the positive intent and ability to
hold to maturity are to be classified as "Investment Securities Held to
Maturity" and reported at amortized cost: (2) debt and equity securities that
are purchased and held principally for the purpose of selling in the near term
are to be classified as "Trading Account Securities" and reported at fair
value, with unrealized gains and losses included in earnings; and (3) debt and
equity securities not classified as "Held to Maturity" or "Trading Account" are
to be classified as "Securities Available for Sale" and reported at fair value.
Fair value adjustments for Securities Available for Sale are excluded from
earnings and reported in a separate component of shareholders' equity, net of
tax.
In January 1994, the Corporation transferred all debt securities with a
maturity of less than two years and all equity securities to Available for
Sale. The reason the Corporation transferred these securities to Available for
Sale was to provide flexibility to meet liquidity needs, enhance yield or
implement strategies of the Asset-Liability Management Committee. The
Corporation has never operated a trading account or acquired securities for
trading purposes. As securities were acquired after the adoption of SFAS No.
115, a determination was made to classify such securities as either Available
for Sale or Held to Maturity.
On November 15, 1995, the Financial Accounting Standards Board issued an
implementation guide to SFAS No. 115 that allowed a one-time opportunity
through December 31, 1995 to reclassify securities as Available for Sale from
the Held to Maturity classification. Effective December 19, 1995, the
Corporation transferred $145.1 million of securities to Available for Sale.
Prior to the adoption of SFAS No. 115, the Corporation had classified
certain securities as Held for Sale. Due to the significant changes in
accounting principles for securities classified as Available for Sale and Held
for Sale, the securities classified as Held for Sale in 1993 were reclassified
in 1994 as Held to Maturity. The amount of securities reclassified as Held to
Maturity at December 31, 1993 was $31.6 million and had an average balance of
$35.8 million in 1993. Table 7 presents the Securities Available for Sale and
Held to Maturity for the five years ended December 31, 1995.
TABLE 7. SECURITIES PORTFOLIO
SECURITIES AVAILABLE FOR SALE As of December 31,
(In Thousands) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------
U.S. Treasury $161,390 $ 59,645 -- -- --
U. S. Government Agencies 39,008 29,773 -- -- --
States and Political Subdivisions 11,186 -- -- -- --
Other 161 197 -- -- --
- ----------------------------------------------------------------------------------------------
Total Securities Available for Sale $211,745 $ 89,615 -- -- --
==============================================================================================
SECURITIES HELD TO MATURITY* As of December 31,
(In Thousands) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------
U.S. Treasury -- $132,316 $195,659 $157,515 $184,288
U. S. Government Agencies -- 3,511 40,751 40,288 45,067
States and Political Subdivisions -- 12,159 20,948 49,941 14,863
Other -- -- 1,897 3,622 1,361
- ----------------------------------------------------------------------------------------------
Total Securities Held to Maturity -- $147,986 $259,255 $251,366 $245,579
==============================================================================================
* Amount classified as Held for Sale for 1991-1993 were reclassified in 1994,
as Held to Maturity which is consistent with the 1995 presentation.
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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The Securities Available for Sale had an average balance (fair value)
of $75.6 million in 1995 and $103.6 million in 1994, a decline of $57.9 million
which was used to fund the increased volume of loans. U.S. Treasury Securities
Available for Sale reported an average balance of $47.5 million and $67.4
million for 1995 and 1994. The average balance for U.S. Government Agency
Securities Available for Sale was $27.6 million in 1995 and $33.9 million in
1994. Securities of States and Political Subdivisions Available for Sale had
an average balance only in 1995 which was $385,000 due to the reclassification
that occurred in mid- December, 1995. Other Securities Available for Sale
posted an average balance in 1995 of $192,000 compared to $2,194,000 in 1994.
The average balance for total Securities Held to Maturity amounted to
$141.2 million in 1995, $148.9 million in 1994 and $258.9 million in 1993.
U.S. Treasury and Government Agency Securities Held to Maturity had an average
balance of $130.4 million in 1995 compared to $133.6 million in 1994 and $225.5
million in 1993. The average balance for Securities of States and Political
Subdivisions was $10.9 million, $15.3 million and $31.4 million for 1995, 1994
and 1993, respectively.
The combined average balance for U.S. Treasury and Government Agency
Securities, Available for Sale and Held to Maturity, was $205.4 million in 1995
which represents 94.7% of the total securities portfolio. As a result of the
significant holdings of U.S. Treasury and Government Agency Securities, the
Corporation maintains a high quality of assets that are available to meet
liquidity needs. Other than securities of the U.S. Treasury and Government
Agencies, there were no securities of any one issuer aggregating ten percent
(10%) of consolidated shareholders' equity as of December 31, 1995.
The maturity distribution and weighted average yields, on a tax equivalent
basis, for the major components of the Securities Available for Sale at
December 31, 1995 are presented in Table 8.
TABLE 8. WEIGHTED AVERAGE YIELD OF SECURITIES AVAILABLE FOR SALE
The maturity distribution and weighted average yields on a tax equivalent basis
of the four major components of the Securities Available for Sale, excluding
unrealized gains or losses, at December 31, 1995 are shown below.
U.S. Government States and Political
U.S. Treasury Agencies Subdivisions Other
(Dollar Amounts In Thousands) Amount Yield Amount Yield Amount Yield* Amount Yield
- -----------------------------------------------------------------------------------------------------------------------
Maturities:
Within 1 Year $ 20,843 6.68% $ 8,001 8.24% $ 1,473 8.52% $62 4.29%
After 1 through 5 Years 135,947 5.88 21,998 6.55 8,976 8.51 -- --
After 5 through 10 Years 2,994 6.37 8,657 6.91 -- -- -- --
After 10 Years -- -- -- -- 296 7.35 -- --
- -----------------------------------------------------------------------------------------------------------------------
Total $159,784 5.99% $38,656 6.98% $10,745 8.48% $62 4.29%
=======================================================================================================================
* The weighted average yield has been adjusted to a tax equivalent basis using
a Federal income tax rate of 34 percent without consideration for the corporate
preference disallowance under Internal Revenue Code Section 291.
Additional information relative to the average balance and effective yield
for the securities portfolio is presented in Tables 2 and 4. Table 3 presents
an analysis of the effect changes in volume and rates had on the earnings of
the securities portfolio. Further analysis of the Securities Available for
Sale and Held to Maturity and the unrealized gains and losses is presented in
Note 4 of the Notes to Consolidated Financial Statements. The unrealized gains
and losses of the securities portfolio are not expected to cause a material
change in future income or securities yields.
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CB FINANCIAL CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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TABLE 9. LOAN PORTFOLIO
Loans outstanding, at the end of each of the five years ended 1991
through 1995, are shown in the following table according to type of loan:
December 31,
1995 1994 1993 1992 1991
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
Commercial, Financial
and Agricultural Loans $163,234 37.2% $166,331 42.3% $126,278 37.6% $ 85,907 27.7% $ 83,126 33.5%
Tax-Exempt Loans 14,263 3.2 14,674 3.7 9,750 2.9 10,153 3.3 15,789 6.4
Real Estate Construction
Loans 19,347 4.4 4,286 1.1 6,642 2.0 8,057 2.6 368 .1
Real Estate Mortgage
Loans 121,361 27.7 99,691 25.4 96,190 28.7 126,400 40.7 95,694 38.6
Consumer Loans, Net
of Unearned Interest 120,678 27.5 108,137 27.5 96,638 28.8 79,712 25.7 53,073 21.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total $438,883 100.0% $393,119 100.0% $335,498 100.0% $310,229 100.0% $248,050 100.0%
==================================================================================================================================
TABLE 10. CONCENTRATION OF LOANS BY INDUSTRY SEGMENT
DECEMBER 31, 1995
Dollar Amounts In Thousands) AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------
Industry Segment:
Residential Real Estate $137,031 31.2%
Consumer 119,366 27.2
Finance, Insurance and Real Estate 37,701 8.6
Wholesale and Retail 39,150 8.9
Services/Professional/Business/Health 42,997 9.8
Manufacturing 34,651 7.9
Transportation 8,769 2.0
Schools and Municipals 10,005 2.3
Other 9,213 2.1
- -------------------------------------------------------------------------------------------------------
Total $438,883 100.0%
=======================================================================================================
LOANS
Total loans outstanding at year end were $438.9 million for 1995, $393.1
million for 1994 and $335.5 million for 1993. The Republic Bank acquisition
accounted for $22.9 million of the loan growth in 1994. Total loans
outstanding for the five years ended December 31, 1995 are presented in Table 9
for the major loan categories.
Average total loans outstanding amounted to $404.4 million for 1995,
$345.0 million for 1994 and $333.7 million for 1993.
Consumer loans had an average balance of $110.7 million in 1995, $101.5
million in 1994 and $90.7 million in 1993. For the past several years, the
Corporation has developed specific strategies to increase consumer loan volume
without compromising credit quality.
Average commercial loans outstanding for 1995, 1994 and 1993 were $172.5
million, $152.3 million and $134.7 million, respectively. The increase in
average commercial loans in 1995 and 1994 resulted from recent acquisitions,
improved loan demand by existing customers and development of new business.
The average balance for tax exempt loans improved $2.8 million in 1995 to
$13.2 million from the 1994 average of $10.4 million.
Residential real estate mortgage loans had an average balance of $108.0
million in 1995 compared to $80.8 million in 1994 and $98.9 million in 1993.
Beginning in early 1994, the Corporation retained a greater portion of
residential mortgage loans as a strategy of asset-liability management. Total
residential mortgage loans sold amounted to $11.0 million in 1995, $19.8
million in 1994 and $56.7 million in 1993 which resulted in gains of $66,000,
$138,000 and $603,000 in 1995, 1994 and 1993, respectively. Gains on loans
sold are included with the amount reported as Other Income.
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 11. MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOAN PORTFOLIO
Table 11 presents the remaining maturity distribution and interest rate
sensitivity for commercial loans, tax exempt loans and real estate construction
loans, according to scheduled repayments of principal.
December 31, 1995
Due In
1 Year 1 to 5 Over 5
(In Thousands) or Less Years Years Total
- -----------------------------------------------------------------------------------
Commercial, Financial and Agricultural Loans $113,578 $40,298 $ 9,358 $163,234
Tax-Exempt Loans 6,072 6,726 1,465 14,263
Real Estate Construction 14,332 2,704 2,311 19,347
- -----------------------------------------------------------------------------------
Total $133,982 $49,728 $13,134 $196,844
===================================================================================
Variable Interest Rates:
Commercial, Financial and Agricultural Loans $14,971 $ -- $ 14,971
Tax-Exempt Loans 4,879 -- 4,879
Real Estate Construction 2,345 68 2,413
- -----------------------------------------------------------------------------------
Total $22,195 $68 $ 22,263
===================================================================================
Fixed Interest Rates:
Commercial, Financial and Agricultural Loans $25,327 $ 9,358 $ 34,685
Tax-Exempt Loans 1,847 1,465 3,312
Real Estate Construction 359 2,243 2,602
- -----------------------------------------------------------------------------------
Total $27,533 $13,066 $ 40,599
===================================================================================
Additional information relative to the average balance and effective yield
for the loan portfolio is presented in Tables 2 and 4. Table 3 presents an
analysis of the effect changes in volume and rates had on the earnings of the
various loan categories.
NON-PERFORMING LOANS AND OTHER ASSETS
The Corporation's financial statements are prepared on the accrual basis
of accounting, except loans which are placed in a non-accrual status.
Restructured loans are those for which concessions, including reduction of
interest rates or extended repayment terms, have been granted due to the
borrower's weakened financial condition. Interest on restructured loans is
accrued using the restructured interest rates.
Commercial loans are placed in a non-accrual status when management has
serious doubts regarding the collection of principal and interest or when
payment of interest or principal is 90 days or more past due unless the
collection of principal and interest is not considered in doubt. Amounts
received on non-accrual commercial loans may be recorded as interest or applied
against principal depending upon management's estimation of the collection of
the loan. Consumer loans are placed in a non- accrual status when the loan is
90 days past due, upon repossession of the collateral or when management has
serious doubts regarding the collection of principal and interest. Real estate
mortgage loans are placed in a non-accrual status when foreclosure proceedings
have commenced.
The aggregate amount of non-performing loans and other assets for the five
years ended December 31, 1995, is presented in Table 12. Non-performing loans
comprise (a) loans accounted for on a non-accrual basis, (b) loans
contractually past due 90 days or more as to interest or principal payments and
(c) 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. For purposes of this summary, loans renewed on
market terms existing at the time of renewal are not considered renegotiated
loans. Other non-performing assets are carried at the lower of cost or fair
value and consist of other real estate acquired through loan foreclosures or
other workout situations and other assets acquired through repossession.
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 12. ANALYSIS OF NON-PERFORMING LOANS AND OTHER ASSETS
December 31,
1995 1994 1993 1992
AMOUNT PERCENT Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
Loans:
Non-Accrual $1,591 75.0% $1,063 61.7% $1,647 61.7% $879 46.3%
Past Due 417 19.7 324 18.8 488 18.3 419 22.1
Renegotiated 8 .3 -- -- 84 3.1 -- --
- ----------------------------------------------------------------------------------------------------------------
Subtotal Loans 2,016 95.0 1,387 80.5 2,219 83.1 1,298 68.4
Other Real Estate Owned -- -- 324 18.8 452 16.9 548 28.9
Other Assets Acquired
by Repossession 106 5.0 13 .7 -- -- 53 2.7
- ----------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $2,122 100.0% $1,724 100.0% $2,671 100.0% $1,899 100.0%
================================================================================================================
Non-performing Assets
As a Percent of:
Total Loans, Gross .48% .44% .80% .61%
Total Assets .29 .24 .40 .29
Equity Capital Plus
Reserve for Possible
Loan Losses 2.61 2.21 3.56 2.69
December 31,
1991
Amount Percent
- ----------------------------------------------------
(Dollar Amounts in Thousands)
Loans:
Non-Accrual $ 790 52.6%
Past Due 391 26.0
Renegotiated 140 9.3
- ----------------------------------------------------
Subtotal Loans 1,321 87.9
Other Real Estate Owned 161 10.7
Other Assets Acquired
by Repossession 19 1.4
- ----------------------------------------------------
Total Non-performing Assets $1,501 100.0%
====================================================
Non-performing Assets
As a Percent of:
Total Loans, Gross .61%
Total Assets .27
Equity Capital Plus
Reserve for Possible
Loan Losses 2.34
The following table presents the changes in the balance of other
non-performing assets for the five years ended December 31, 1995.
As of December 31,
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------
(In Thousands)
Balance at beginning of year $337 $452 $601 $181 $224
Additional amount due to acquisition -- -- -- 854 --
Assets acquired 110 68 337 522 288
Disposition and reductions (341) (183) (486) (956) (331)
- -----------------------------------------------------------------------------
Balance at end of year $106 $337 $452 $601 $181
=============================================================================
TABLE 13. INTEREST LOST ON NON-ACCRUAL LOANS
Table 13 shows the effect that non-accrual loans had upon interest revenue
for the five years ended as of December 31, 1995. There has been no loss of
revenue on past due or renegotiated loans for the years presented in the table.
As of December 31,
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
Gross amount of interest that would have
been recorded at original rate $151 $77 $147 $106 $138
Interest that was reflected in revenue 62 19 63 31 61
- ------------------------------------------------------------------------------------------
Reduction of Interest Income $ 89 $ 58 $ 84 $ 75 $ 77
==========================================================================================
Per Share (after tax effect of 34%) .02 .01 .02 .02 .02
- --------------------------------------------------------------------------------
24
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
POTENTIAL PROBLEM LOANS
In addition to the loans classified as non-performing, there are other
potential problem loans of $132,000 at December 31, 1995 that management is
closely monitoring the borrowers ability to comply with repayment terms, but
existing conditions did not warrant either a partial charge-off or
classification as non-performing.
CAPITAL EXPENDITURES
The Corporation had capitalized expenditures for banking premises and
leasehold improvements of $472,000 in 1995, $722,000 in 1994 and $403,000 in
1993. In 1995, City Bank relocated its corporate headquarters to another
facility and spent $414,000 for improvements to the building. The Republic
Bank acquisition added $477,000 to bank premises in 1994. The other
expenditures in 1993 through 1995 were made to enhance customer service,
efficiency and functionality. Capitalized furniture and equipment expenditures
amounted to $748,000 in 1995, $1,317,000 in 1994 and $4,144,000 in 1993. Major
acquisitions in 1995 included $131,000 for personal computers, software and
printers, $136,000 for mainframe computer update and software and $152,000 for
City Bank to refurbish its new corporate headquarters. Other expenditures for
furniture and equipment of $329,000 were made to replace equipment or add new
equipment to improve productivity. The Republic Bank acquisition provided
$182,000 in furniture and equipment. Major acquisitions in 1994 also include
$491,000 for new computer equipment and software and $227,000 for ATM's. The
remaining $417,000 of capitalized additions to furniture and equipment in 1994
was incurred by the Corporation's three subsidiary banks that operate 45
financial center offices. In 1993, computer hardware, software and branch
automation equipment amounted to $3,078,000. The remaining $1,066,000 in 1993
was due to $500,000 acquired with the acquisition of First State Bank of
Charlevoix and $566,000 resulting from new offices, refurbishing facilities and
upgrade of equipment to gain technological advantages.
DEPOSITS
Table 14 presents the average balance for the major deposit categories and
the effective interest paid for the five years ended December 31, 1995.
TABLE 14. AVERAGE DEPOSITS AND EFFECTIVE INTEREST RATES
As of December 31,
1995 1994 1993
AVERAGE INTEREST Average Interest Average Interest
BALANCE RATE Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
Demand and Other
Non-Interest Bearing
Deposits $100,968 --% $101,605 --% $99,741 --%
Interest-Bearing Demand
Deposits 151,943 2.57 159,858 2.56 163,794 2.57
Savings Deposits 124,132 2.64 135,360 2.45 136,436 2.65
Negotiated Rate Time
Deposits 25,715 5.75 15,598 4.21 10,583 3.25
Other Time Deposits 197,631 5.33 166,291 4.25 174,319 4.33
- ----------------------------------------------------------------------------------------
Total $600,389 $578,712 $584,873
========================================================================================
As of December 31,
1992 1991
Average Interest Average Interest
Balance Rate Balance Rate
- ------------------------------------------------------------------
(Dollar Amounts in Thousands)
Demand and Other
Non-Interest Bearing
Deposits $82,724 --% $68,495 --%
Interest-Bearing Demand
Deposits 143,904 3.32 137,991 5.06
Savings Deposits 116,786 3.44 84,738 4.70
Negotiated Rate Time
Deposits 12,984 3.84 12,345 5.97
Other Time Deposits 174,995 5.33 168,722 6.91
- -------------------------------------------------------------------
Total $531,393 $472,291
===================================================================
Average total deposits outstanding were $600.4 million in 1995 compared to
$578.7 million in 1994 and $584.9 million in 1993. The Republic Bank
acquisition provided additional deposits of $47.7 million. During 1995, the
Corporation developed an innovative marketing campaign to introduce new retail
tiered interest rate checking and savings products which were successful in
attracting additional balances.
Non-interest-bearing deposits recorded an average balance outstanding of
$101.0 million, $101.6 million and $99.7 million for 1995, 1994 and 1993,
respectively. As a percentage of total average deposits, the
non-interest-bearing deposits were 16.8%, 17.6% and 17.1% for 1995, 1994 and
1993.
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest-bearing demand deposits had an average balance of $151.9 million,
$159.9 million and $163.8 million for 1995, 1994, and 1993. Average savings
accounts amounted to $124.1 million in 1995, $135.4 million in 1994 and $136.4
million in 1993, respectively. The overall reduction for these two deposit
products in the intervening period of 1993 through 1995 was $24.2 million.
Depositors shifted some of these funds to time deposits that offered higher
interest rates.
The average balance for time deposits was $197.6 million in 1995 compared
to $166.3 million in 1994 and $174.3 million in 1993, an overall increase of
$23.3 million. During 1995, the Corporation aggressively competed for time
deposits to fund loan demand with interest rates lower than for Federal Funds
purchased.
The maturity schedule for time deposits of $100,000 or more outstanding at
December 31, 1995 is reported in Table 15. Additional information relative to
the effect that changes in volume and rates had on the interest expense for the
various deposit categories is presented in Table 3.
TABLE 15. MATURITIES OF CONSOLIDATED TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1995
Total
----------------------------------------------------
Amount Maturing In: (In Thousands)
Three months or less $16,689
Three to six months 8,482
Six to twelve months 4,099
Over twelve months 7,324
----------------------------------------------------
Total $36,594
====================================================
SHORT-TERM LIABILITIES
Short-term interest-bearing liabilities consists of Federal Funds
Purchased and Demand Notes Issued to the U.S. Treasury. The average balance
for these short-term interest-bearing liabilities was $7.0 million in 1995
compared to $4.4 million in 1994 and $8.5 million in 1993. Tables 2 and 4
provide information relative to the average balance and effective interest rate
for these short-term liabilities. Table 3 reports the effect that changes in
volume and rates had on the interest expense for these short-term liabilities.
NOTE PAYABLE AND CAPITAL LEASE
The Corporation has a five year fixed rate note of 6.25% which matures on
January 15, 1998. The amount outstanding as of December 31, 1995 was
$4,275,000 and requires quarterly principal payments of $475,000. The average
balance for this note amounted to $5.1 million in 1995, $7.0 million in 1994
and $8.5 million in 1993. City Bank has a capital lease for one of its
financial centers with a balance of $336,000 at December 31, 1995 which expires
in 2006. Additional information relative to the capital lease is presented in
Note 9 of the Notes to Consolidated Financial Statements.
RATE SENSITIVITY ANALYSIS
The relationship between earning assets and liabilities considered to be
interest-sensitive within given maturity ranges is called the asset or
liability funding gap depending on whether such interest-sensitive assets
exceed or are exceeded by interest-sensitive liabilities. The magnitude of the
funding gap in the various calendar periods provides a general indication of
the extent to which future earnings, primarily net interest income, may be
effected by interest rate changes. At December 31, 1995, total earning assets
exceeded interest-bearing liabilities by $126.9 million. These assets were
funded by non-interest-bearing demand deposit accounts and equity capital.
Table 16 summarizes the Rate Sensitivity Analysis of earning assets and
interest-bearing liabilities.
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 16. RATE SENSITIVITY ANALYSIS
As of December 31, 1995
1-90 91-180 181-365 1- 5 Over 5
(In Thousands) Days Days Days Years Years Total
- --------------------------------------------------------------------------------------------
Consumer Loans $ 19,660 $ 1,021 $ 2,565 $ 77,867 $ 9,516 $ 110,629
Commercial Loans 77,121 3,822 9,749 20,457 2,459 113,608
Commercial Real Estate Loans 27,044 1,249 3,704 22,233 10,083 64,313
Mortgage Loans 15,666 6,922 14,676 43,032 70,037 150,333
- --------------------------------------------------------------------------------------------
Total Loans 139,491 13,014 30,694 163,589 92,095 438,883
- --------------------------------------------------------------------------------------------
Securities Available For Sale 5,080 6,442 18,859 166,921 11,946 209,248
- --------------------------------------------------------------------------------------------
Money Market Assets 1,790 -- -- -- -- 1,790
- --------------------------------------------------------------------------------------------
Earning Assets 146,361 19,456 49,553 330,510 104,041 649,921
- --------------------------------------------------------------------------------------------
Interest-Bearing Demand Deposits 12,480 12,355 25,084 91,672 -- 141,591
Savings Deposit 6,513 6,448 13,090 104,203 -- 130,254
Time Deposits 48,139 47,984 44,438 97,197 2,247 240,005
Other Interest-Bearing Liabilities 6,994 479 959 2,475 219 11,126
- --------------------------------------------------------------------------------------------
Total Liabilities 74,126 67,266 83,571 295,547 2,466 522,976
- --------------------------------------------------------------------------------------------
Net Asset (Liability)
Funding Gap 72,235 (47,810) (34,018) 34,963 101,575 126,945
- --------------------------------------------------------------------------------------------
Cumulative Net Asset (Liability)
Funding Gap $ 72,235 $ 24,425 $ (9,593) $ 25,370 $126,945 $ --
============================================================================================
1. This table presents earning assets and interest-bearing liabilities by
maturity or the earliest repricing opportunity.
2. Visa Gold (credit card loans) balances were spread according to repayment
terms.
3. Student loans were spread with a maturity of 60 days prior to the
anticipated student graduation date.
4. Unrealized gains and losses have been excluded from this presentation.
5. Interest-bearing demand deposits and savings accounts were spread on the
basis of Interest Rate Risk (IRR) guidelines of the regulatory agencies which
allows a portion to be allocated to the 1-5 year maturity period and the
remaining amount allocated evenly to the 1-90 day, 91-180 day, 181-273 day, and
274-365 day periods. The amounts for the later two maturity periods were
combined into the 181-365 day maturity period for the presentation in the
table.
TABLE 17. FINANCIAL RATIOS
The following ratios are among those commonly used in analyzing bank
holding company financial statements:
As of December 31,
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------
Profitability Ratios:
Rate of Return on Average:
Earning Assets (1) .73% 1.09% 1.20% 1.54% 1.26%
Total Assets (1) .66 .98 1.08 1.42 1.17
Total Shareholders' Equity (1) 6.02 8.78 10.59 13.53 10.68
Liquidity and Capital Ratios:
Average Primary Capital to
Average Total Assets (2) 11.49 11.62 10.72 10.90 11.33
Average Total Shareholders' Equity to
Average Earning Assets 12.14 12.40 11.38 11.41 11.78
Average Total Shareholders' Equity to
Average Total Assets 10.99 11.16 10.23 10.48 10.95
Dividend Payout Ratio on Common
Stock (3) 72.82 50.97 45.04 36.65 48.79
(1) Based on net income.
(2) Primary capital is total shareholders' equity plus the reserve for possible
loan losses. Average assets have been increased by the average of the reserve
for possible loan losses.
(3) Cash dividends declared on common stock as a percentage of net income.
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 18. CONSOLIDATED AVERAGE BALANCE SHEET - FINANCIAL STATISTICS
As of December 31,
(Dollar Amounts in Thousands) 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------
ASSETS:
Securities Available for Sale:
U.S. Treasury $ 47,455 $ 67,418 $ -- $ -- $ -- $ --
U. S. Government Agencies 27,594 33,947 -- -- -- --
States and Political Subdivisions 385 -- -- -- -- --
Other 192 2,194 -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Total Securities Available for Sale 75,626 103,559 -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Securities Held to Maturity 141,236 148,908 258,857 253,882 255,387 236,521
- -----------------------------------------------------------------------------------------------------------
Consumer Loans 110,674 101,509 90,726 65,333 53,349 56,860
Commercial Loans 172,512 152,257 134,677 90,725 80,442 77,037
Tax Exempt Loans 13,168 10,404 9,429 12,514 12,361 14,008
Real Estate Mortgage Loans 108,025 80,782 98,850 127,125 94,515 94,352
- -----------------------------------------------------------------------------------------------------------
Subtotal Loans 404,379 344,952 333,682 295,697 240,667 242,257
Reserve for Possible Loan Losses (3,977) (3,540) (3,663) (2,881) (2,366) (2,380)
- -----------------------------------------------------------------------------------------------------------
Net Loans 400,402 341,412 330,019 292,816 238,301 239,877
- -----------------------------------------------------------------------------------------------------------
Money Market Assets 10,051 10,441 16,798 14,759 15,724 18,699
- -----------------------------------------------------------------------------------------------------------
Total Earning Assets 627,315 604,320 605,674 561,457 509,412 495,097
- -----------------------------------------------------------------------------------------------------------
Cash and Due from Banks 32,003 33,724 38,383 30,475 25,158 24,716
Goodwill and Premium on Core Deposits 11,220 8,377 7,754 2,879 -- --
Other Assets, Net 26,748 26,235 25,537 19,792 15,955 14,203
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $697,286 $672,656 $677,348 $614,603 $550,525 $534,016
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand and Other Non-Interest
Bearing Deposits $100,968 $101,605 $99,741 $82,724 $ 68,495 $ 70,579
Interest-Bearing Demand Deposits 151,943 159,858 163,794 143,904 137,991 135,390
Savings Deposits 124,132 135,360 136,436 116,786 84,738 82,748
Time Deposits 223,346 181,889 184,902 187,979 181,067 170,130
- -----------------------------------------------------------------------------------------------------------
Total Deposits 600,389 578,712 584,873 531,393 472,291 458,847
- -----------------------------------------------------------------------------------------------------------
Short-Term Interest-Bearing Liabilities 7,009 4,362 8,454 14,164 13,799 12,235
Note Payable and Capital Leases 5,396 7,403 8,999 625 716 801
Other Liabilities 7,865 7,112 5,700 4,011 3,457 4,930
Shareholders' Equity 76,627 75,067 69,322 64,410 60,262 57,203
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $697,286 $672,656 $677,348 $614,603 $550,525 $534,016
===========================================================================================================
FINANCIAL RATIOS:
Dividend Payout Ratio 72.82% 50.97% 45.04% 36.65% 48.79% 44.52%
Return on Average Total Assets before
Cumulative Effect of Change in Accounting .66 .98 1.24 1.42 1.17 1.33
Return on Average Total Assets .66 .98 1.08 1.42 1.17 1.33
Return on Average Shareholders' Equity
before Cumulative Change in Accounting 6.02 8.78 12.14 13.53 10.68 12.45
Return on Average Shareholders' Equity 6.02 8.78 10.59 13.53 10.68 12.45
Tier I Capital to Risk-Adjusted Assets 15.66 15.63 18.40 19.91 25.88 24.77
Average Shareholders' Equity
to Average Total Assets 10.99 11.16 10.23 10.48 10.95 10.71
Average Primary Capital to Average Total Assets 11.49 11.62 10.72 10.90 11.33 11.11
Average Loans to Average Deposits 67.35 59.61 57.05 55.65 50.96 52.80
Net Charge-Offs to Average Net Loans .15 .17 .09 .05 0.12 0.10
Average Loans Times Average
Shareholders' Equity 5.28X 4.60X 4.81X 4.59X 3.99X 4.24X
- --------------------------------------------------------------------------------
28
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 19. CONSOLIDATED STATEMENT OF INCOME - FINANCIAL STATISTICS
(Dollar Amounts in Thousands As of December 31,
Except Per Share Data) 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME ON:
Consumer Loans $ 9,958 $ 8,947 $ 8,489 $ 6,763 $ 6,327 $ 7,077
Commercial Loans 16,179 12,338 10,138 7,064 7,733 8,273
Tax Exempt Loans 927 658 597 804 963 1,212
Real Estate Mortgage Loans 9,291 6,882 9,397 11,920 9,756 9,882
Securities Available for Sale:
U.S. Treasury 3,372 5,086 -- -- -- --
U.S. Government Agencies 2,065 2,629 -- -- -- --
States and Political Subdivisions 23 -- -- -- -- --
Other 5 79 -- -- -- --
Securities Held to Maturity 8,122 8,438 17,530 20,045 21,023 19,882
Money Market Assets 550 428 627 528 868 1,506
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Income 50,492 45,485 46,778 47,124 46,670 47,832
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON:
Demand Deposits 3,907 4,095 4,216 4,775 6,981 7,541
Savings Deposits 3,272 3,314 3,615 4,013 3,981 3,943
Time Deposits 11,994 7,725 7,889 9,830 12,397 13,215
Other Liabilities 811 745 749 376 655 899
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 19,984 15,879 16,469 18,994 24,014 25,598
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 30,508 29,606 30,309 28,130 22,656 22,234
Provision for Possible Loan Losses 672 534 392 595 315 210
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 29,836 29,072 29,917 27,535 22,341 22,024
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Security Gains 82 942 1,787 2,030 673 195
Trust Income 2,012 2,008 2,015 2,014 1,771 1,699
Other Income 4,221 4,081 4,111 2,845 2,393 1,937
- ------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 6,315 7,031 7,913 6,889 4,837 3,831
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and Employee Benefits 12,953 12,629 12,399 11,385 9,768 9,479
Occupancy and Furniture and
Equipment 5,028 4,682 4,216 3,299 2,853 2,512
Other Operating Expenses 11,402 9,211 9,150 7,367 5,710 4,116
- ------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 29,383 26,522 25,765 22,051 18,331 16,107
- ------------------------------------------------------------------------------------------------------------------------
Income before Provision for Federal
Income Tax 6,768 9,581 12,065 12,373 8,847 9,748
Provision for Federal Income Tax 2,152 2,987 3,646 3,661 2,409 2,625
- ------------------------------------------------------------------------------------------------------------------------
Net Income before Cumulative
Effect of Change in Accounting 4,616 6,594 8,419 8,712 6,438 7,123
Change in Accounting, Net of Tax
Effect of $557 -- -- 1,081 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,616 $ 6,594 $ 7,338 $ 8,712 $ 6,438 $ 7,123
========================================================================================================================
PER SHARE DATA:
Net Income before Cumulative
Effect of Change in Accounting $ 1.65 $ 2.35 $ 3.00 $ 3.11 $ 2.29 $ 2.52
Net Income 1.65 2.35 2.62 3.11 2.29 2.52
Cash Dividends Declared 1.20 1.20 1.18 1.14 1.12 1.12
Book Value at Year End 27.65 26.42 25.46 24.02 22.05 20.87
Market Price at Year End (Average
Bid/Ask) 33.88 29.50 34.00 28.50 21.00 20.00
MISCELLANEOUS DATA:
Average Shares Outstanding 2,803,437 2,803,158 2,803,300 2,801,053 2,805,857 2,832,139
Actual Shares Outstanding at
Year End 2,801,053 2,801,053 2,801,053 2,801,053 2,801,053 2,815,677
Number of Shareholders 2,094 2,157 2,137 2,124 2,097 2,070
- --------------------------------------------------------------------------------
29
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY
The Corporation manages liquidity at two levels, the parent organization
and its subsidiaries. The Corporation's primary source of funds are dividends
received from its subsidiary banks. The Corporation manages its liquidity
position to provide the cash necessary to pay dividends to shareholders and
satisfy other operating requirements. The amount of dividends paid to the
Corporation by the subsidiary banks was $6,763,000 in 1995, $8,759,000 in 1994
and $3,850,000 in 1993. The amount of dividends eligible for distribution from
subsidiary banks to the Corporation as of December 31, 1995 without regulatory
approval, is approximately $16,300,000. Additional information relative to the
restriction of dividends is presented in Note 16 of the Notes to Consolidated
Financial Statements.
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits and
take advantage of interest rate market opportunities. Bank liquidity is
considered in terms of the nature and mix of the bank's sources and uses of
funds. For the Corporation, the major sources of liquidity are money market
assets, loan repayments (including demand loans) and investments. The average
balance for money market assets amounted to $10.1 million in 1995, $10.4
million in 1994, and $16.8 million in 1993. At December 31, 1995, 1994 and
1993, these assets were $1.8 million, $14.8 million and $13.6 million,
respectively. Securities Available for Sale totaled $211.7 million as of
December 31, 1995.
Large deposits of $100,000 or more generally are more volatile and,
therefore, are closely monitored for volume and interest rate. The Corporation
is not dependent upon large deposits for liquidity. These deposits had
balances of $36.7 million, $27.7 million and $20.5 million at December 31,
1995, 1994 and 1993, respectively. The level of commitments for loans and
letters of credit issued by the Corporation remains well within its capacity to
fund them from available resources, including a viable customer base served by
the subsidiary banks.
The management of interest rates on earning assets and interest-bearing
liabilities is critical to the preservation of the Corporation's stability
during periods of fluctuating interest rates. Emphasis is placed on
maintaining a controlled rate sensitivity position to avoid wide swings in
spreads and minimize risk due to changing interest rates. A maturity schedule
of the Securities Available for Sale as of December 31, 1995, presented in Note
4 of the Notes to Consolidated Financial Statements, will assist in analyzing
the Corporation's liquidity position which management believes to be excellent.
CAPITAL
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of customers, shareholders and bank
regulators. A strong capital position should help the Corporation withstand
adverse economic developments and take advantage of profitable business
opportunities when they arise. Capital provides the foundation for growth and
expansion.
The Corporation's shareholders' equity totaled $77,458,000 as of December
31, 1995. Shareholders' equity increased $3,449,000 in 1995 compared to
$2,686,000 in 1994 and $4,032,000 in 1993, an aggregate increase of $10,167,000
or 10.0% from the $67,291,000 as of January 1, 1993.
The adequacy of capital can best be evaluated by comparing it to the
guidelines established by banking regulatory authorities. Those guidelines are
described under the caption "Supervision and Regulation, 1. Bank Holding
Companies" included in "Item 1. Business" of the Form 10-K portion of this
Report.
The Corporation does not have any outstanding preferred stock or unsecured
long-term debt. The subsidiary banks do not have any convertible debt
instruments or subordinated notes. Therefore, the Corporation's primary
capital and total capital consists of shareholders' equity and the reserve for
possible loan losses. For the three years ended December 31, 1995, the
Corporation's average primary capital, as a percentage of average assets, was
11.49%, 11.62%, and 10.72%. These ratios exceed the minimum standards
established by the regulatory authorities. The Corporation's total risk-based
capital approximated 16.59% in 1995, 16.60% in 1994 and 19.46% in 1993, which
greatly exceeds the guidelines established by the regulatory authorities. The
Corporation's Tier 1 Capital Leverage Ratio (Tier 1 capital to adjusted average
total assets) was 9.44%, 9.38%, and 9.33% as of December 31, 1995, 1994 and
1993, compared to minimum regulatory requirement of 3.0 - 5.0%.
The Corporation's strong capital base makes it mathematically difficult to
generate a high rate of return on shareholders' equity. The return on average
shareholders' equity was 6.02% for 1995, 8.78% for 1994 and 10.59% for 1993.
Dividends declared by the Corporation totaled $3,361,000 in 1995 and in 1994
compared to $3,306,000 in 1993. The dividend payout ratio, which is dividends
declared divided by net income, was 72.82%, 50.97%, and 45.04% for 1995, 1994
and 1993, respectively. The annual cash dividends per share were $1.20 in 1995
and 1994 and $1.18 in 1993.
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Since the dividend declared and cash dividends per share remained the
same in 1995 and 1994, the lower net income in 1995 resulted in an abnormally
high dividend payout ratio in 1995. Management attempts to maintain a
consistent dividend payment per share to enhance the marketability of the
Corporation's common stock.
TABLE 20. QUARTERLY DATA
1995
Fourth Third Second First
(In Thousands) Total Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
Interest Income $ 50,492 $ 13,078 $ 12,567 $ 12,460 $ 12,387
Interest Expense 19,984 5,309 5,070 4,894 4,711
- ------------------------------------------------------------------------------------------------------
Net Interest Income 30,508 7,769 7,497 7,566 7,676
Provision for Possible Loan Losses 672 164 165 164 179
Security Gains 82 52 1 17 12
Total Other Non-Interest Income 6,233 1,582 1,675 1,578 1,398
Total Non-Interest Expenses 29,383 7,971 7,587 6,842 6,983
- ------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 6,768 1,268 1,421 2,155 1,924
Provision for Federal Income Tax 2,152 495 410 671 576
- ------------------------------------------------------------------------------------------------------
Net Income $ 4,616 $ 773 $ 1,011 $ 1,484 $ 1,348
======================================================================================================
Per Share Data:
Net Income $ 1.65 $ .28 $ .36 $ .53 $ .48
Average Number of Common Shares Outstanding 2,803,437 2,804,711 2,804,671 2,802,970 2,802,854
1994
Fourth Third Second First
(In Thousands) Total Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
Interest Income $ 45,485 $ 11,529 $ 11,668 $ 11,312 $ 10,976
Interest Expense 15,879 4,292 3,957 3,831 3,799
- ------------------------------------------------------------------------------------------------------
Net Interest Income 29,606 7,237 7,711 7,481 7,177
Provision for Possible Loan Losses 534 139 140 139 116
Security Gains 942 602 183 24 133
Total Other Non-Interest Income 6,089 1,382 1,505 1,413 1,789
Total Non-Interest Expenses 26,522 6,396 6,841 6,719 6,566
- ------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 9,581 2,686 2,418 2,060 2,417
Provision for Federal Income Tax 2,987 859 706 641 781
- ------------------------------------------------------------------------------------------------------
Net Income $ 6,594 $ 1,827 $ 1,712 $ 1,419 $ 1,636
======================================================================================================
Per Share Data:
Net Income $ 2.35 $ .65 $ .61 $ .51 $ .58
Average Number of Common Shares Outstanding 2,803,158 2,802,841 2,803,493 2,803,806 2,803,687
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. The following audited consolidated financial statements and report of
Independent Public Accountants are set forth in this Annual Report and Form
10-K on the pages indicated:
Page Numbers
------------
Consolidated Balance Sheet 38
Consolidated Statement of Income 39
Consolidated Statement of Shareholders' Equity 40
Consolidated Statement of Cash Flows 41
Notes to Consolidated Financial Statements 42-50
Report of Independent Public Accountants 51
B. The following additional data is set forth in the following pages:
Report of Management 52
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
As of December 31
(In Thousands) 1995 1994
- ---------------------------------------------------------------------------------------------
ASSETS:
Cash and Cash Equivalents:
Cash and Due from Banks $ 37,068 $ 39,826
Money Market Assets 1,790 14,832
- ---------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 38,858 54,658
- ---------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury 161,390 59,645
U.S. Government Agencies 39,008 29,773
States and Political Subdivisions 11,186 --
Other 161 197
- ---------------------------------------------------------------------------------------------
Total Securities Available for Sale 211,745 89,615
- ---------------------------------------------------------------------------------------------
Securities Held to Maturity (Market value of $139,964) -- 147,986
- ---------------------------------------------------------------------------------------------
Loans:
Consumer Loans 120,678 108,137
Commercial Loans 177,921 167,869
Tax Exempt Loans 14,263 14,674
Real Estate Mortgage Loans 126,021 102,439
- ---------------------------------------------------------------------------------------------
Subtotal Loans 438,883 393,119
Reserve for Possible Loan Losses (3,934) (3,865)
- ---------------------------------------------------------------------------------------------
Net Loans 434,949 389,254
- ---------------------------------------------------------------------------------------------
Premises and Equipment, Net 15,350 16,283
Other Real Estate Owned -- 324
Income Earned Not Received 6,996 7,281
Goodwill and Premium on Core Deposits, Net 9,937 11,914
Other Assets 2,048 2,949
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $719,883 $720,264
=============================================================================================
LIABILITIES:
Deposits:
Demand Deposits $110,459 $109,940
Interest-Bearing Demand Deposits 141,591 168,610
Savings Deposits 130,254 132,365
Time Deposits 240,156 209,734
- ---------------------------------------------------------------------------------------------
Total Deposits 622,460 620,649
- ---------------------------------------------------------------------------------------------
Short-Term Interest-Bearing Liabilities 6,515 12,500
Note Payable and Capital Leases 4,611 6,526
Accrued Expenses 3,868 3,730
Dividend Payable 840 840
Other Liabilities 4,131 2,010
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 642,425 646,255
- ---------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred Stock-no par value, 100,000 shares authorized,
none outstanding -- --
Common Stock-$7.50 par value, 5,000,000 shares authorized,
2,801,053 shares outstanding 21,008 21,008
Capital Surplus 8,073 8,073
Undivided Profits 46,730 45,475
Unrealized Gains (Losses) on Securities Available for Sale,
Net of Tax Effect 1,647 (547)
- ---------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 77,458 74,009
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $719,883 $720,264
=============================================================================================
The accompanying notes are an integral part of this statement.
- --------------------------------------------------------------------------------
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
For the Year Ended December 31,
(Dollar Amounts In Thousands Except Per Share Data) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and Fees on Loans:
Consumer Loans $ 9,958 $ 8,947 $ 8,489
Commercial Loans 16,179 12,338 10,138
Tax Exempt Loans 927 658 597
Real Estate Mortgage Loans 9,291 6,882 9,397
- -----------------------------------------------------------------------------------------------------------------------
Total Interest and Fees on Loans 36,355 28,825 28,621
- -----------------------------------------------------------------------------------------------------------------------
Interest on Securities Available for Sale:
U. S. Treasury 3,372 5,086 --
U. S. Government Agencies 2,065 2,629 --
States and Political Subdivisions 23 -- --
Other 5 79 --
- -----------------------------------------------------------------------------------------------------------------------
Total Interest on Securities Available for Sale 5,465 7,794 --
- -----------------------------------------------------------------------------------------------------------------------
Interest on Securities Held to Maturity 8,122 8,438 17,530
Interest on Money Market Assets 550 428 627
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Income 50,492 45,485 46,778
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Demand Deposits 3,907 4,095 4,216
Interest on Savings Deposits 3,272 3,314 3,615
Interest on Time Deposits 11,994 7,725 7,889
Interest on Other Liabilities 811 745 749
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Expense 19,984 15,879 16,469
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 30,508 29,606 30,309
Provision for Possible Loan Losses 672 534 392
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 29,836 29,072 29,917
- -----------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Trust Income 2,012 2,008 2,015
Service Charges on Deposit Accounts 2,704 2,276 2,400
Fees for Other Services to Customers 1,381 1,200 941
Security Gains 82 942 1,787
Other Income 136 605 770
- -----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 6,315 7,031 7,913
- -----------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and Wages 10,303 9,955 9,752
Employee Benefits 2,650 2,674 2,647
Occupancy Expenses 2,544 2,368 2,250
Furniture and Equipment Expenses 2,484 2,314 1,966
FDIC Insurance Premiums 685 1,266 1,305
Restructuring Charge 2,278 -- --
Other Operating Expenses 8,439 7,945 7,845
- -----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 29,383 26,522 25,765
- -----------------------------------------------------------------------------------------------------------------------
Income before Provision for Federal Income Tax 6,768 9,581 12,065
Provision for Federal Income Tax 2,152 2,987 3,646
- -----------------------------------------------------------------------------------------------------------------------
Net Income before Cumulative Effect of Change in Accounting 4,616 6,594 8,419
Change in Accounting, Net of Tax Effect of $557 -- -- 1,081
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,616 $ 6,594 $ 7,338
=======================================================================================================================
Per Share Data:
Net Income before Cumulative Effect of Change in Accounting $1.65 $2.35 $3.00
Net Income 1.65 2.35 2.62
Average Number of Common Shares Outstanding 2,803,437 2,803,158 2,803,300
The accompanying notes are an integral part of this statement.
- --------------------------------------------------------------------------------
33
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
For the Year Ended December 31,
(Dollar Amounts In Thousands Except Share Data) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
SHARES OF COMMON STOCK:
Shares Outstanding as of December 31 2,801,053 2,801,053 2,801,053
=========================================================================================================================
COMMON STOCK:
Balance at December 31 $21,008 $21,008 $21,008
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS:
Balance at December 31 8,073 8,073 8,073
- -------------------------------------------------------------------------------------------------------------------------
UNDIVIDED PROFITS:
Balance at January 1 45,475 42,242 38,210
Net Income 4,616 6,594 7,338
Cash Dividends Declared ($1.20, $1.20 and $1.18 per share, respectively) (3,361) (3,361) (3,306)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31 46,730 45,475 42,242
- -------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE:
Balance at January 1 (547) -- --
Change in Unrealized Gain (Loss) on Securities
Available for Sale, Net 2,194 (547) --
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31 1,647 (547) --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $77,458 $74,009 $71,323
=========================================================================================================================
The accomanying notes are an integral part of this statement.
- --------------------------------------------------------------------------------
34
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Year Ended December 31,
(In Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash Flows from Operating Activities:
Interest and Fees Received $ 57,976 $ 52,890 $ 54,157
Interest Paid (19,129) (15,583) (16,566)
Cash Paid to Suppliers and Employees (23,731) (23,692) (22,560)
Income Taxes Paid (2,728) (3,229) (3,365)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 12,388 10,386 11,666
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from Sales of Securities Available for Sale 13,109 24,419 --
Proceeds from Sales of Securities Held to Maturity -- -- 82,224
Proceeds from Maturities/Calls of Securities Available for Sale 33,000 21,700 --
Proceeds from Maturities/Calls of Securities Held to Maturity 2,112 35,789 206,304
Purchase of Securities Available for Sale (19,953) (20,846) --
Purchase of Securities Held to Maturity -- (40,547) (290,542)
Net Increase in Loans (46,366) (29,244) (2,704)
Proceeds from Sales of Other Real Estate Owned 352 110 114
Purchase of Subsidiary Banks and Branches -- 13,608 (9,998)
Capital Expenditures (992) (2,466) (5,498)
Cash Acquired in Purchase of Subsidiary Banks and Branches -- 268 25,117
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (18,738) 2,791 5,017
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from Note Payable -- -- 9,500
Repayment of Note Payable (1,900) (1,900) (1,425)
Net Increase (Decrease) in Deposits and Short-Term Liabilities (4,174) 1,381 (36,114)
Cash Dividends Paid (3,361) (3,361) (3,278)
Payment of Capital Lease Obligations (15) (103) (103)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (9,450) (3,983) (31,420)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (15,800) 9,194 (14,737)
Cash and Cash Equivalents at Beginning of Year 54,658 45,464 60,201
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 38,858 $ 54,658 $ 45,464
===================================================================================================================================
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 4,616 $ 6,594 $ 7,338
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Depreciation and Amortization 1,890 1,870 1,554
Amortization (Accretion) of Net Premium (Discount)
on Purchased Subsidiaries 1,989 873 805
Amortization of Discount and Premiums on Investment Securities, Net 996 1,251 1,075
Provision for Possible Loan Losses 672 534 392
Security Gains (82) (942) (1,787)
(Increase) Decrease in Income Earned Not Received 285 (522) 207
Increase in Other Assets 368 819 880
Gain on Sale of Other Real Estate Owned (29) (1) (29)
Increase (Decrease) in Interest Payable 855 346 (199)
Increase (Decrease) in Income Taxes Payable (576) (241) 282
Increase (Decrease) in Accrued Expenses 1,404 (195) 1,148
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $12,388 $ 10,386 $ 11,666
===================================================================================================================================
The accompanying notes are an integral part of this statement.
- --------------------------------------------------------------------------------
35
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CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CB Financial Corporation and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles and reporting practices prescribed for the banking industry. Such
policies require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting policies are described in the
following paragraphs.
CONSOLIDATION
The consolidated financial statements of the Corporation include the
accounts of CB Financial Corporation (the parent company) and its wholly-owned
subsidiaries. The subsidiaries are City Bank and Trust Company (CB & T) located
in Jackson, Michigan, City Bank (CB) located in St. Johns, Michigan and CB
North (CBN) located in Charlevoix, Michigan. All material inter-company
accounts and transactions have been eliminated in the consolidated financial
statements. All such adjustments are of a normal recurring nature.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and money markets assets. Effective December 19, 1995,
a non-cash transfer of $145,074,000 attributable to reclassifying debt
securities from Held to Maturity to Available for Sale was made.
MONEY MARKET ASSETS
Federal Funds Sold, Certificates of Deposits held at other banks, and
short term interest bearing cash balances are classified as Money Market
Assets.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
CB Financial Corporation on December 19, 1995 reclassified all Held to
Maturity securities to Available for Sale. Previously these securities were
carried at historical cost, adjusted for amortization of premiums and accretion
of discounts. The decision to reclassify was made in conjunction with the
Financial Accounting Standards Board's issuance of an implementation guide
which allowed a one time opportunity to reassess and reclassify securities. In
connection with this reclassification unrealized gains of $1,170,000 were
recorded in Available for Sale securities and in Shareholders' Equity on a net
of tax basis.
In May, 1993, the Financial Accounting Standards Board issued Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This Statement, effective January 1, 1994, requires investments to be
categorized as follows: 1.) Held to Maturity securities which include debt
securities that the Corporation has the positive intent and ability to hold to
maturity and are reported at amortized cost, 2.) Trading securities which would
include debt and equity securities which are bought and held principally for
the purpose of selling them in the near term and are reported at fair value
with unrealized gains and losses included in earnings, and 3.) Available for
Sale securities which include debt and equity securities not classified in
either of the other two categories and are reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. The Corporation adopted this standard
effective January 1, 1994 by reclassifying $119,682,000 in securities as
Available for Sale and recording a net impact of adoption as an increase to
shareholders' equity of approximately $3,885,000 (net of tax of $2,001,000).
Gains realized on the sale of investment securities are determined on the
specific identification method and are reported in security gains.
Premiums are deducted and discounts are added to interest income on
investment securities using methods that approximate the level yield method.
LOANS
Loans are reported as the principal amount outstanding, net of unearned
income. Mortgage loans held for sale are carried at the lower of aggregate cost
or market. Interest income on loans is recorded on an accrual basis until an
interest or principal payment is more than 90 days past due and/or, in the
opinion of management, there is a question as to the ability of the debtor to
meet the terms of the contract. At the time a loan is placed in a non-accrual
status, unpaid interest is reversed against interest income of the current
period.
- --------------------------------------------------------------------------------
36
37
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Loans are returned to an accrual status when factors indicating doubtful
collectibility no longer exist.
In May 1995, Statement of Financial Accounting Standards (SFAS) No. 122
"Accounting for Mortgage Servicing Rights" was issued effective for fiscal
years beginning after December 15, 1995. The Statement requires capitalization
of servicing rights on mortgage loans, when the loans are to be sold and the
servicing retained. This Statement will be adopted by the Corporation in 1996
and will not have a material impact on the financial position or the results of
operations of the Corporation.
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses is maintained at a level considered
by management to be adequate to absorb reasonably foreseeable loan losses. In
estimating potential loan losses and determining the adequacy of the reserve,
management evaluates current economic conditions, individual loans, actual loan
loss experience, changes in the character and size of the loan portfolio and
other pertinent factors. Ultimate loan losses may vary from current estimates
and the amount of the provision, which is a current expense, may be greater
than or less than actual net charge-offs. Adjustments are recorded to the
reserve in the period in which they become known. Loans deemed uncollectible
are charged against the reserve. The provision and recoveries of loans
previously charged-off are added to the reserve.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) represents properties acquired through
foreclosure or deed in lieu of foreclosure and former banking property no
longer used in the Corporation's business. Real estate loans are transferred to
OREO upon obtaining equitable or legal title to the property. OREO is carried
at the lower of carrying value (loan balance plus prior periods' unpaid
interest) or fair market value at the date acquired. Any write-down of the
carrying value to the fair market value arising at the acquisition of the
property is charged to the reserve for possible loan losses. OREO property is
appraised annually, if applicable, according to regulatory guidelines.
Subsequent write-downs to fair market value, operating expenses and losses on
the sale of the property are charged to operating expenses. Any gain on the
sale of the property is credited to other income.
PREMISES AND EQUIPMENT
Premises and equipment, including property acquired through capital
leases, are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using straight-line and accelerated methods and is
charged to operations over the estimated useful lives of the assets. The
estimated useful lives are 19 to 40 years for buildings and 3 to 7 years for
equipment.
Amortization of leasehold improvements is computed based on the
estimated useful lives of the improvements. Amortization of property acquired
through capital leases is computed over the terms of the respective leases.
Maintenance and repairs are expensed as incurred.
GOODWILL AND PREMIUM ON CORE DEPOSITS
Goodwill consists of purchase price and related acquisition costs in
excess of the fair value of the identifiable net assets acquired. Premium on
Core Deposits consists of the premium paid on core deposits acquired. The
Corporation evaluates the carrying value of goodwill and premium on core
deposits for potential impairment on an ongoing basis. The unamortized balance
of goodwill and premium on core deposits is evaluated based on the results of
operations and changes in the deposit portfolio. The Corporation also
considers future anticipated operating results, trends and other circumstances
in making such evaluations.
In December 1995, the Corporation wrote off $674,000 pretax, of excess
purchase price over assets acquired relating to the earlier acquisitions.
FEDERAL INCOME TAX
CB Financial Corporation files a consolidated Federal income tax return.
The Corporation adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes," in January 1993 with no material effect upon the consolidated
financial position or results of operations. Deferred income taxes represent
the effect of cumulative temporary differences between income and expense items
reported for financial statement and tax purposes, and between the basis of
various assets and liabilities for financial statement and tax purposes.
Deferred tax assets are reduced by a valuation allowance if, based on the
weight of evidence, it is deemed more
- --------------------------------------------------------------------------------
37
38
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
likely than not that the asset will not be realized.
EARNINGS PER SHARE CALCULATION
The earnings per share calculation presented in the statement of income
reflects the effect of the number of shares that have been granted under the
Stock Plan and the Director Plan (discussed in greater detail in Note 17) based
upon the treasury stock method.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 consolidated financial statements
have been reclassified to conform with the presentation used in 1995.
2. ACQUISITIONS
On December 17, 1994 the Corporation acquired, through its subsidiary, CB
North, three banking offices of Republic Bank and the related loans and
deposits of approximately $22.9 million and $47.7 million, respectively, in
Bellaire, Central Lake and Traverse City, Michigan. The acquisition was
accounted for under the purchase method. The excess cost over market value of
net assets acquired consisted of $553,000 of goodwill and $3,548,000 of premium
on core deposits. The goodwill and premium on core deposits are being amortized
over fifteen and ten years, respectively. The operating results of these
branches are included in the Corporation's consolidated financial statements
since the date of the acquisition.
Effective with the opening of business on October 1, 1993, CB Financial
Corporation merged Charlevoix County State Bank and First State Bank of
Charlevoix into one bank, CB North.
On January 15, 1993, CB Financial Corporation acquired First of Charlevoix
Corporation, a one-bank holding company of the First State Bank of Charlevoix
(FSBC) located in Charlevoix, Michigan. The acquisition was accounted for under
the purchase method. The total purchase price of $9,998,000 included $9,537,000
in cash to acquire all the outstanding shares of common stock of First of
Charlevoix Corporation. The excess cost over market value of net assets
acquired consisted of $4,025,000 goodwill and $1,523,000 in premium on core
deposits. The goodwill and premium on core deposits are being amortized over
fifteen and seven years, respectively. The operating results of the First State
Bank of Charlevoix are included in the Corporation's consolidated financial
statements since the date of the acquisition.
A condensed (unaudited) balance sheet for FSBC is presented below:
(In Thousands) 1/15/93
- --------------------------------------------------------------------------------
Total Loans $22,842
Total Assets 55,562
Total Deposits 50,250
Total Shareholders' Equity 5,029
As of December 31, 1995 and 1994, the accumulated amortization on goodwill and
premium on core deposits is $3,261,000 and $1,980,000, respectively.
3. RESTRICTIONS ON CASH AND
DUE FROM BANKS
The Corporation is required by regulatory agencies to maintain legal
reserve requirements based on the level of balances in deposit categories. Cash
balances restricted from usage due to these requirements were $8,188,000 and
$6,328,000 at December 31, 1995 and 1994, respectively.
4. SECURITIES
In the opinion of management, there were no securities at December 31,
1995 or 1994 which would constitute a material credit risk for the Corporation.
The reconciliation of cost basis to estimated market values of securities
Available for Sale is as follows:
Gross Estimated
Cost Unrealized Market
(In Thousands) Basis Gain Loss Value
- -------------------------------------------------------------------------------
At December 31, 1995:
U. S. Treasury $159,784 $1,925 $319 $161,390
U.S. Government
Agencies 38,656 466 114 39,008
States and
Political Subdivisions 10,745 443 2 11,186
Other 62 99 -- 161
- -------------------------------------------------------------------------------
Total $209,247 $2,933 $435 $211,745
===============================================================================
Gross Estimated
Cost Unrealized Market
(In Thousands) Basis Gain Loss Value
- -------------------------------------------------------------------------------
At December 31, 1994:
U. S. Treasury $60,350 $192 $898 $59,644
U.S. Government
Agencies 30,026 134 387 29,773
Other 69 129 -- 198
- -------------------------------------------------------------------------------
Total $90,445 $455 $1,285 $89,615
===============================================================================
- --------------------------------------------------------------------------------
38
39
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The cost basis and estimated market value for securities Available for Sale by
maturity are as follows:
Estimated
Cost Market
(In Thousands) Basis Value
- ---------------------------------------------------------------------------------
At December 31, 1995:
Due in one year or less $ 30,380 $ 30,732
Due after one year
through five years 166,921 168,887
Due after five years
through ten years 11,650 11,832
Due after ten years 296 294
- ---------------------------------------------------------------------------------
Total $209,247 $211,745
=================================================================================
The reconciliation of carrying values to estimated market values of
securities Held to Maturity is as follows:
Gross Estimated
Carrying Unrealized Market
(In Thousands) Value Gain Loss Value
- -------------------------------------------------------------------------------
At December 31, 1994:
U. S. Treasury $132,316 $ 43 $8,155 $124,204
U.S. Government Agencies 3,511 14 200 3,325
States and Political
Subdivisions 12,159 287 11 12,435
- -------------------------------------------------------------------------------
Total $147,986 $344 $8,366 $139,964
===============================================================================
At December 31, 1993, $31,617,000 of securities were classified as Held
for Sale. These securities had a market value of $33,801,000.
Securities having a par value of $18,075,000 on December 31, 1995, were
pledged where required by law to secure certain liabilities and public deposits
totaling $4,425,000, including deposits of the Treasurer, State of Michigan of
$370,000.
Other than securities of the U.S. Government and its agencies and
corporations, there were no securities of any one issuer aggregating ten
percent of consolidated shareholders' equity at December 31, 1995.
5. LOANS
The Corporation grants commercial and consumer loans to customers
throughout the central and the northwest regions of Michigan's lower peninsula.
The Corporation has a diversified loan portfolio. A substantial portion of its
debtors' ability to honor their contracts is dependent upon the economic
conditions as well as manufacturing, retailing, agricultural and service
industries operating in these regions.
A schedule of non-performing assets consisting of non-accrual loans, OREO
and other assets acquired through repossession is presented in the following
chart.
December 31,
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------
Non-Accrual Loans $1,591 $1,063
Other Real Estate Owned -- 324
Assets Acquired
Through Repossession 106 13
- --------------------------------------------------------------------------------
Total $1,697 $1,400
================================================================================
6. LOANS TO RELATED PARTIES
Certain directors and executive officers of the Corporation and its
subsidiaries, including their families and companies in which they have
significant ownership, had loans outstanding with the subsidiaries aggregating
$28,653,000 and $26,465,000 at December 31, 1995 and 1994, respectively,
exclusive of consumer loans. In 1995, additions to these loans were $68,009,000
and reductions were $65,821,000. These loans were made in the ordinary course of
business on substantially the same terms as those prevailing at that time for
comparable transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features. As of
December 31, 1995, none of the related party loans were in a non-accrual status.
7. RESERVE FOR POSSIBLE LOAN LOSSES
An analysis of transactions in the reserve for possible loan losses is
summarized below.
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Balance at January 1 $3,865 $3,617 $3,273
- --------------------------------------------------------------------------------
Losses Charged to Reserve (803) (753) (411)
Recoveries Credited to Reserve 200 178 122
- --------------------------------------------------------------------------------
Net Losses Charged to Reserve (603) (575) (289)
- --------------------------------------------------------------------------------
Provision for Credit Losses 672 534 392
Addition Due to Acquisition -- 289 241
- --------------------------------------------------------------------------------
Net Change in Reserve 69 248 344
- --------------------------------------------------------------------------------
Balance at December 31 $3,934 $3,865 $3,617
================================================================================
As a percent of Total Loans .90% .98% 1.08%
================================================================================
Effective January 1, 1995, the Corporation adopted statement of
Financial Accounting Standards Board No. 114, "Accounting by Creditors for
Impairment of a Loan," and Statement No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." Statement No. 114
addresses the accounting for a loan when it is probable that all principal and
interest amounts due will not be
- --------------------------------------------------------------------------------
39
40
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
collected in accordance with its contractual terms. Certain loans, such as
loans carried at the lower-of-cost or market or small balance homogeneous loans
(e.g., credit card, retail credit), are exempt from reporting under the
Statement's provisions. The Corporation generally identifies non-performing
loans as "impaired loans."
On a quarterly basis, the Corporation identifies impaired loans and the
extent to which such loans are impaired. Impairment is recognized to the
extent the recorded investment of an impaired loan exceeds the calculated
present value or the observable market price. Collateral-dependent loans,
primarily real estate, are separately measured for impairment by determining
the fair value of the collateral less estimated costs to sell.
The allocated reserve associated with impaired loans is considered in
management's determination of the Corporation's allowance for credit losses.
The adoption of these accounting standards did not have a significant effect on
the Corporation's net income or its allowance for credit losses.
At December 31, 1995, the recorded investment in loans considered impaired
was $1,331,000. These loans have a carrying value equal to their fair value.
The average recorded investment in impaired loans was approximately $791,000
for the year ended December 31, 1995. The Corporation recognized interest
income associated with impaired loans of $7,000 during the year.
8. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain of the Corporation's assets and liabilities which are financial
instruments have fair values that differ from their carrying values in the
accompanying consolidated balance sheet. These fair values, along with the
methods and assumptions used to estimate such fair values, are discussed below.
The fair values of all financial instruments not discussed below are estimated
to be equal to their carrying values as of December 31, 1995 and December 31,
1994.
SECURITIES HELD TO MATURITY
Fair value for the Corporation's securities Held to Maturity were
determined using the market value as of December 31, 1994. These estimated
market values are disclosed in Note 4 of the Notes to Consolidated Financial
Statements.
LOANS
The fair value of all loans is estimated by discounting the future cash
flows associated with the loans, using current interest rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The estimated fair value of loans at December 31, 1995
was $432,324,000 compared to the carrying value of $434,949,000 net of the
reserve for possible loan losses. At December 31, 1994 the estimated fair
value of loans was $381,181,000 compared to the carrying value of $389,254,000
net of the reserve for possible loan losses.
TIME DEPOSITS
The fair value of time deposits, consisting of fixed maturity certificates
of deposit and individual retirement accounts, is estimated by discounting the
related cash flows using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of time deposits at December 31,
1995 was $241,787,000 compared to the carrying value of $240,156,000. At
December 31, 1994 the estimated fair value of time deposits was $209,087,000
compared to the carrying value of $209,734,000.
NOTE PAYABLE
The fair value of the note payable is estimated by discounting the future
cash payments using a rate currently offered for a note with a comparable
remaining maturity. The estimated fair value of the note payable at December
31, 1995 and 1994 was $4,272,000 and $5,920,000 compared to the respective
carrying values of $4,275,000 and $6,175,000.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit, standby letters of credit
and written financial guarantees are estimated using the fees currently charged
to enter into similar agreements. The fair value of these instruments is not
material.
9. PREMISES, EQUIPMENT AND LEASES
Premises and equipment are stated at cost less accumulated depreciation
and amortization. A summary of these accounts follows:
- --------------------------------------------------------------------------------
40
41
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accumulated Net
Original Depreciation or Book
(In Thousands) Cost Amortization Value
- --------------------------------------------------------------------------------
At December 31, 1995:
Land $ 1,880 $ -- $ 1,880
Premises 11,322 4,298 7,024
Leasehold Improvements 2,038 877 1,161
Capital Leases 443 177 266
Furniture and Equipment 15,675 10,656 5,019
- --------------------------------------------------------------------------------
Total $31,358 $16,008 $15,350
================================================================================
At December 31, 1994:
Land $ 1,721 $ -- $ 1,721
Premises 9,946 3,611 6,335
Leasehold Improvements 3,208 1,221 1,987
Capital Leases 443 164 279
Furniture and Equipment 15,363 9,402 5,961
- --------------------------------------------------------------------------------
Total $30,681 $14,398 $16,283
================================================================================
The charge for depreciation and amortization amounted to $1,877,000 in 1995,
$1,906,000 in 1994 and $1,528,000 in 1993.
LEASES
The Corporation has various operating leases for premises and equipment
under agreements expiring at various dates through 2006. These leases, in
general, provide for renewal options and options to purchase certain premises
at fair values and require the payment of property taxes, insurance premiums
and maintenance costs. Total rental expense for all operating leases was
$842,000 in 1995, $795,000 in 1994 and $697,000 in 1993.
The future minimum payments for all non-cancelable operating leases as of
December 31, 1995, are as follows:
(In Thousands) Total
- --------------------------------------------------------------------------------
1996 $902
1997 859
1998 701
1999 666
2000 610
2001 and thereafter 139
At December 31, 1995, the Corporation had a capital lease which was
reported in Note Payable and Capital Leases in the consolidated balance sheet
and interest on other liabilities in the consolidated statement of income. The
capital lease expires in 2006.
Minimum future capital lease payments, by year and in the aggregate after
the next five years, as of December 31, 1995, are as follows:
(In Thousands) Total
- --------------------------------------------------------------------------------
1996 $ 66
1997 66
1998 66
1999 66
2000 66
2001-2006 303
- --------------------------------------------------------------------------------
Total Minimum Lease Payments 633
Less: Amounts Representing Interest 297
- --------------------------------------------------------------------------------
Present Value of Net Minimum
Lease Payments $336
================================================================================
10. TIME DEPOSITS
The aggregate amount of time deposits of $100,000 or more totaled
$36,744,000 at December 31, 1995 and $27,710,000 at December 31, 1994. The
interest expense on time deposits over $100,000 was $1,744,000 in 1995,
$921,000 in 1994 and $651,000 in 1993.
11. NOTE PAYABLE
On January 15, 1993, CB Financial Corporation obtained a five year fixed
rate note for $9,500,000 with an interest rate of 6.25%. Terms of the note
require quarterly principal payments of $475,000 plus interest computed on the
outstanding balance. Proceeds of the note were used to fund the acquisition of
the First of Charlevoix Corporation.
Annual principal payments on the note payable as of December 31, 1995 are
as follows:
(In Thousands) Total
- --------------------------------------------------------------------------------
1996 $1,900
1997 1,900
1998 475
- --------------------------------------------------------------------------------
Total $4,275
12. EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Corporation adopted a defined contribution
retirement plan and a 401-K Plan to replace the profit sharing and pension
plans of the subsidiary banks. These plans cover substantially all full-time
employees. The defined contribution retirement plan and 401-K Plan require one
year of continuous service for eligibility. Under the defined contribution
retirement plan, the company contribution is 8% of the qualifying salary for
each eligible employee. The 401-K Plan features a company matching contribution
of 1.5% up to a maximum of 6% of qualifying salary contributed by each
employee. The consolidated contribu-
- --------------------------------------------------------------------------------
41
42
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
tion in 1995, 1994 and 1993 for the defined contribution retirement plan and
the 401-K Plan amounted to $773,000, $700,000 and $739,000, respectively.
Effective January 1, 1993, the Corporation changed its method of
accounting for post-retirement health care costs from a cash method to an
accrual method as required by Financial Accounting Standards Board Statement
No. 106, "Employers' Accounting for Post-Retirement Benefits Other than
Pensions", and recognized a one-time charge of $1,081,000, net of tax effect,
which is reported separately as "Change in Accounting, Net of Tax Effect" in
the consolidated statement of income. Effective April 1, 1993, any new
employees hired by the Corporation are not eligible for post-retirement
benefits.
The Corporation funds post retirement benefit costs as claims are
incurred. The accumulated post-retirement benefit obligation at December 31,
1995 and 1994 is as follows:
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------
Accumulated Post-Retirement Benefit Obligation:
Retirees $2,609 $1,362
Active Plan Participants 280 639
- --------------------------------------------------------------------------------
Accumulated Post-Retirement Benefit Obligation 2,889 2,001
Plan Assets at Fair Value -- --
- --------------------------------------------------------------------------------
Accumulated Post-Retirement Benefit Obligation
in Excess of Plan Assets $2,889 $2,001
- --------------------------------------------------------------------------------
Unrecognized Net Loss (297) (101)
Unrecognized Prior Service Cost (169) (186)
- --------------------------------------------------------------------------------
Accrued Post-Retirement Benefit Obligation $2,423 $1,714
================================================================================
For measurement purposes, a 10.6% annual rate of increase was assumed in
per capita cost of covered health care benefits for 1995. The rate was assumed
to grade down uniformly to 5% in the year 2004, and remain at that level
thereafter. The health care cost trend rate assumption has a significant impact
on the accumulated post-retirement benefit obligation and on future amounts
accrued. A one percentage point increase each year in the assumed health care
cost would increase the accumulated post-retirement benefit obligation at
December 31, 1995 by $91,000 and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for the year ended
December 31, 1995 by $7,200.
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.5% compounded annually in 1995 and 1993 and 8.5%
compounded annually in 1994.
Net periodic post-retirement benefit cost for 1995, 1994 and 1993 is as
follows:
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Service Cost $637 $ 39 $ 36
Interest Cost 212 154 120
Net Amortization and Deferral 17 24 --
- --------------------------------------------------------------------------------
Net Periodic Post-Retirement
Benefit Cost $866 $217 $156
================================================================================
13. RESTRUCTURING CHARGE
During the third and fourth quarters of 1995, the Corporation implemented
a restructuring program designed to enhance productivity and effectiveness.
The restructuring effort resulted in a pretax charge of $2,278,000 or
$1,634,000 after tax or $.58 per share. This charge consists of $1,604,000
which reflects the severance costs resulting from an early retirement package
offered to employees who met the minimum requirement based on age and years of
service, and $674,000 which reflects the excess of purchase price over assets
acquired relating to earlier acquisitions. The severance relates to 39
employees whose positions will be eliminated or redefined due to the
re-engineering of the Corporation. At December 31, 1995, a restructuring
liability of $470,000 was recorded which represents remaining amounts to be
paid in 1996 under the terms of the early retirement package.
14. FEDERAL INCOME TAX
The items comprising the provision for Federal income tax are as follows:
(In Thousands) 1995 1994 1993
- -------------------------------------------------------------------------------
Current Tax Provision $2,832 $3,023 $3,806
Deferred Tax Benefit (680) (36) (160)
- -------------------------------------------------------------------------------
Provision for Federal Income Tax $2,152 $2,987 $3,646
===============================================================================
The provision for Federal income tax differs from the amount computed by
applying the U.S. Federal income tax rate (34%) due principally to the
following:
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Provision for Federal Income
Tax at the Statutory Rate $2,301 $3,258 $4,102
Tax Exempt Interest (485) (422) (508)
Goodwill Amortization 301 126 156
Other, Net 35 25 (104)
- --------------------------------------------------------------------------------
Provision for Federal
Income Tax $2,152 $2,987 $3,646
================================================================================
- --------------------------------------------------------------------------------
42
43
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The components of the net deferred income tax asset at December 31,
1995 and 1994 are summarized as follows:
(In Thousands) 1995 1994
- -------------------------------------------------------------------------------
Deferred Income Tax Liabilities:
Depreciation and Basis Difference $ 528 $ 470
Net Accretion on Bond Discount 92 63
Deferred Loan Origination Costs, Net 135 178
Premium on Core Deposits and Goodwill 691 808
Unrealized Gains on Securities
Available for Sale 849 --
Other 31 10
- -------------------------------------------------------------------------------
Total Gross Deferred Tax Liabilities 2,326 1,529
- -------------------------------------------------------------------------------
Deferred Income Tax Assets:
Reserve for Possible Loan Losses (1,338) (1,268)
Deferred Directors Fees (386) (306)
Post-Retirement Benefits Other than Pensions (849) (600)
Unrealized Losses on Securities Available for Sale -- (283)
Other (127) --
- -------------------------------------------------------------------------------
Total Gross Deferred Tax Assets (2,700) (2,457)
- -------------------------------------------------------------------------------
Net Deferred Tax Asset $ (374) $ (928)
===============================================================================
There was no valuation allowance necessary during 1995 or 1994.
15. OFF-BALANCE SHEET TRANSACTIONS
In the normal course of business, there are various commitments
outstanding to meet the financial needs of the Corporation's customers, which
are not reflected in the financial statements. Loan commitments are made to
accommodate the financial needs of customers of the subsidiary banks.
Historically, the majority of the commitments have not been drawn upon, and
therefore do not necessarily represent future cash requirements. Standby
letters of credit commit the Banks to make payments on behalf of customers when
certain specified future events occur. The Corporation does not expect, in the
normal course of business, to be required to fund these commitments. The
Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, and
to potential credit loss associated with letters of credit issue, is
represented by the contractual amount of those instruments. Both arrangements
have credit risk essentially the same as that involved in extending loans to
customers and are subject to normal credit policies. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income producing commercial properties. Outstanding commitments for unused
lines-of-credit and commercial letters of credit amounted to $90,268,000 and
$47,825,000 as of December 31, 1995 and 1994, respectively. At December 31,
1995 and 1994, the Corporation had standby letters of credit outstanding of
$1,506,000 and $1,502,000 respectively. The Corporation had outstanding
commitments for construction real estate mortgage loans of $19,138,000 and
$3,111,000 as of December 31, 1995 and 1994. Most of the loan commitments and
standby letters of credit at December 31, 1995 expire one year from their
contract date, none of which extend for more than five years. Overall,
concentrations of credit for loan commitments and standby letters of credit are
to customers located primarily in local areas served by the subsidiary banks,
all of which are in the central and northwest regions of Michigan's lower
peninsula.
16. RESTRICTIONS ON SUBSIDIARIES' DIVIDENDS AND LOANS OR ADVANCES
Michigan banking laws and regulations place restrictions on dividends paid
by the Corporation's subsidiary banks. In 1996, the subsidiary banks may
distribute dividends to the Corporation of approximately $16,300,000 plus their
1996 net income without prior approval of the regulatory agencies.
In addition, the ability of each subsidiary bank to pay dividends to the
Corporation can be further restricted as a result of regulatory policies and
guidelines relating to dividend payments and capital adequacy. The subsidiary
banks are also subject to restrictions as provided by State and Federal banking
laws that limit the transfer of funds to the Corporation in the form of loans or
extensions of credit.
17. EMPLOYEE STOCK OPTION PLAN AND NON-QUALIFIED STOCK OPTION PLAN FOR
INDEPENDENT DIRECTORS
In 1992, the shareholders of the Corporation approved an Employee Stock
Option Plan (the "Stock Plan") for key employees of the Corporation and its
subsidiary banks. The Stock Plan authorizes the granting of incentive and
non-qualified stock options up to an aggregate of 150,000 shares of common
stock to such officers and employees of the Corporation and its subsidiaries
as determined by a committee of the Board of Directors. The committee selects
the officers and employees to whom options are to be granted and the
- --------------------------------------------------------------------------------
43
44
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
number of shares and type of options to be granted. The options will have an
exercise price of not less than 100% of the fair market value of the
Corporation's common stock on the grant date and cannot be exercised more than
10 years from the date of the grant. All options under this plan become fully
vested after one year from the grant date provided the employee is still
employed by the Corporation or its subsidiaries. Once an option is vested, it
becomes exercisable at the rate of one-third per year. As of December 31, 1995,
8,800 options are exercisable.
A summary of the transactions of the Stock Plan for the years ended
December 31, 1995, 1994 and 1993 follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------
Number of shares under stock options:
Outstanding at
beginning of year 24,110 15,000 --
Granted 15,698 12,310 15,000
Exercised -- -- --
Canceled (8,326) (3,200) --
- ----------------------------------------------------------------------------------------------
Outstanding at end of year 31,482 24,110 15,000
==============================================================================================
Prices of shares under stock options
granted during year 2,500 at $30.50 12,310 at $34.00 15,000 at $33.25
13,198 at $31.125
- ----------------------------------------------------------------------------------------------
Exercised during year -- -- --
- ----------------------------------------------------------------------------------------------
Canceled during year 3,100 at $33.25 3,200 at $33.25 --
3,234 at $34.00 -- --
1,992 at $31.125 -- --
- ----------------------------------------------------------------------------------------------
Outstanding at 8,700 at $33.25 11,800 at $33.25 --
end of year 9,076 at $34.00 12,310 at $34.00 15,000 at $33.25
2,500 at $30.50 -- --
11,206 at $31.125 -- --
==============================================================================================
In addition, the shareholders of the Corporation approved a
Non-Qualified Stock Option and Deferred Compensation Plan for Independent
Directors (the "Director Plan"). An independent director is a person serving as
a director of the Corporation or one of its subsidiaries who is not otherwise
employed by the Corporation or one of its subsidiaries. Under the Director
Plan, 50,000 shares of common stock have been reserved for issuance by the
Corporation for non-qualified stock options granted to independent directors.
Each independent director of the Corporation or one of its subsidiaries who
elects to defer all or part of total compensation received as a director of
the Corporation and its subsidiaries under this plan will be granted stock
options equal to the amount of compensation deferred divided by the fair market
value of a share of common stock determined as of the grant date, rounded up to
the nearest whole share. All stock options granted under the Director Plan will
have an exercise price equal to 100% of the fair market value of the
Corporation's common stock on the grant date. All options are fully vested
when granted, but cannot be exercised until the director is no longer serving
as a director of the Corporation or its subsidiaries. As of December 31, 1995
and 1994, there are no options which are exercisable.
A summary of the transactions of the Director Plan for the years
ended December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
- ----------------------------------------------------------------------
Number of shares under stock options:
Outstanding at
beginning of year 11,039 6,023 --
Granted 5,256 5,402 6,023
Exercised -- -- --
Canceled (305) (386)
- ----------------------------------------------------------------------
Outstanding at
end of year 15,990 11,039 6,023
======================================================================
Prices of shares under stock options
granted during the year 5,256 at 5,402 at 6,023 at
$34.00 $33.25 $21.00
- ----------------------------------------------------------------------
Exercised during year -- -- --
- ----------------------------------------------------------------------
Canceled during year 100 at 231 at --
$21.00 $21.00 --
205 at 155 at --
$33.25 $33.25 --
- ----------------------------------------------------------------------
Outstanding at 5,692 at 5,792 at 6,023 at
end of year $21.00 $21.00 $21.00
5,042 at 5,247 at --
$33.25 $33.25 --
5,256 at -- --
$34.00 -- --
======================================================================
18. LITIGATION AND CONTINGENT LIABILITIES
The Corporation is party to routine litigation arising in the normal
course of business. In the opinion of management, the liabilities arising from
these proceedings, if any, will not be material to the Corporation's financial
position or results of operations.
19. PARENT COMPANY FINANCIAL STATEMENTS
The financial statements of the parent company, CB Financial Corporation,
are contained on pages 53 - 54 and are incorporated herein by reference. These
financial statements include the balance sheet, statement of income and
statement of cash flows.
- --------------------------------------------------------------------------------
44
45
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To CB Financial Corporation:
We have audited the accompanying consolidated balance sheet of CB
FINANCIAL CORPORATION (a Michigan corporation) and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statement of income, changes in
shareholders' equity and cash flows for the three years in the period ended
December 31, 1995. These financial statements are the responsibility of CB
Financial 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 of
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 financial statements referred to above present fairly,
in all material respects, the financial position of CB Financial Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 12 to the consolidated financial statements,
effective January 1, 1993 and January 1, 1994, CB Financial Corporation changed
its method of accounting for certain investments in debt and equity securities
and its method of accounting for post-retirement benefits other than pensions,
respectively.
Arthur Anderson LLP
Detroit, Michigan,
January 11, 1996.
- --------------------------------------------------------------------------------
45
46
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
Management is responsible for the accompanying financial statements and
all other financial information appearing in this Annual Report and Form 10-K.
In the opinion of management, the financial statements have been prepared in
conformity with generally accepted accounting principles and include amounts
which of necessity are based on management's best estimates and judgements with
due consideration for materiality. The other financial information herein is
consistent with that in the financial statements.
The Corporation maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded, that
transactions are processed in accordance with the Corporation's authorization
and policies, and that transactions are properly recorded to permit preparation
of financial statements that fairly present financial position and results of
operations in accordance with generally accepted accounting principles. The
concept of reasonable assurance is based on the recognition that the cost of
internal accounting control systems should not exceed the related benefits.
Management believes the Corporation's internal control system provides the
appropriate balance between costs of such controls and the related benefits. In
addition, the internal accounting controls are augmented by a written code of
conduct under which employees are to maintain high levels of ethical business
standards and an organizational structure providing for segregation of duties
and responsibilities.
In order to monitor compliance with this system of controls, the
Corporation maintains an extensive internal audit program. Internal audit
reports are issued to appropriate officers and significant audit exceptions, if
any, are reviewed with management and the Audit Committee of the Board of
Directors.
The Board of Directors, through the Audit Committee comprised solely of
outside directors, oversees management's discharge of its financial reporting
responsibility. The Audit Committee meets periodically with management as well
as internal and external independent auditors to assure that the Committee is
carrying out its responsibility to assess the scope of the annual audit plan,
to review the status and results of audits, to review the Annual Report to
Shareholders and Form 10-K including major changes in accounting policies and
reporting practices.
The financial statements in the Annual Report to Shareholders have been
audited by the Corporation's independent public accountants, Arthur Andersen
LLP, for the purpose of determining that the financial statements are presented
fairly. As part of their audit of the Corporation's financial statements,
Arthur Andersen LLP considered the Corporation's system of internal control to
the extent they deemed necessary to determine the nature, timing and extent of
their audit tests.
- --------------------------------------------------------------------------------
46
47
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
BALANCE SHEET AND STATEMENT OF INCOME (PARENT COMPANY ONLY)
- --------------------------------------------------------------------------------
BALANCE SHEET
As of December 31,
(In Thousands) 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Money Market Assets $ 1,790 $ 2,982
Securities Available for Sale 144 154
Investment in Subsidiaries 80,952 78,466
Receivables from Subsidiaries 1,000 --
Other Assets 342 398
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $84,228 $82,000
==================================================================================================================================
LIABILITIES:
Note Payable $ 4,275 $ 6,175
Dividend Payable 840 840
Accrued Expenses and Other Liabilities 1,655 976
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,770 7,991
- ----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred Stock--no par value, 100,000 shares authorized, none outstanding -- --
Common Stock--$7.50 par value, 5,000,000 shares authorized, 2,801,053
shares outstanding 21,008 21,008
Capital Surplus 8,073 8,073
Undivided Profits 46,730 45,475
Unrealized Gains (Losses) on Securities Available for Sale, Net of Tax Effect 1,647 (547)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 77,458 74,009
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $84,228 $82,000
==================================================================================================================================
STATEMENT OF INCOME
For the Year Ended December 31,
(Dollar Amounts In Thousands Except Per Share Data) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Income on Money Market Assets $ 61 $ 10 $ --
Income on Securities Available for Sale 4 65 --
Income on Investment Securities Held to Maturity -- -- 57
Interest Expense 327 453 531
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense) (262) (378) (474)
- ----------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income 18 814 83
- ----------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expenses:
Salaries and Employee Benefits 2,788 2,542 --
Management Expenses Reimbursed to Subsidiaries, Net -- -- 187
Restructuring Charge 457 -- --
Other Operating Expenses 1,721 1,400 488
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 4,966 3,942 675
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Loss before Provision for Federal Income Tax (5,210) (3,506) (1,066)
Benefit from Federal Income Tax (1,776) (1,219) (517)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Loss before Earnings of Subsidiaries (3,434) (2,287) (549)
Equity in Earnings of Subsidiaries 8,050 8,881 8,095
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income before Cumulative Effect of Change in Accounting 4,616 6,594 7,546
Change in Accounting, Net of Tax Effect of $107 -- -- 208
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,616 $ 6,594 $ 7,338
==================================================================================================================================
Per Share Data:
Net Income before Cumulative Effect of Change in Accounting $ 1.65 $ 2.35 $ 2.69
Net Income $ 1.65 $ 2.35 $ 2.62
Average Number of Shares Outstanding 2,803,437 2,803,158 2,803,300
- --------------------------------------------------------------------------------
47
48
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS (PARENT COMPANY ONLY)
- --------------------------------------------------------------------------------
For the Year Ended December 31,
(In Thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH ON DEPOSIT WITH SUBSIDIARY BANK:
Cash Flows from Operating Activities:
Dividends Received from Subsidiaries $6,763 $8,759 $3,850
Cash Received from Subsidiaries for Income Taxes 4,538 4,316 4,497
Income Taxes Paid (2,728) (3,086) (4,150)
Cash Paid to Suppliers and Employees (4,238) (3,644) (386)
Income Received 64 157 57
Interest Paid (353) (470) (531)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,046 6,032 3,337
- -------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from Sales of Securities Available for Sale 23 6,173 --
Proceeds from Sales Securities Held to Maturity -- -- 2,514
Purchase of Securities Available for Sale -- (4,027) --
Purchase of Securities Held to Maturity -- -- (705)
Acquisition of Subsidiary Banks -- -- (9,998)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 23 2,146 (8,189)
- -------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Cash Dividends Paid (3,361) (3,361) (3,278)
Proceeds from Note Payable -- -- 9,500
Repayment of Note Payable (1,900) (1,900) (1,425)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (5,261) (5,261) 4,797
- -------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (1,192) 2,917 (55)
Cash and Cash Equivalents at Beginning of Year 2,982 65 120
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $1,790 $2,982 $65
=======================================================================================================
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $4,616 $6,594 $7,338
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Security Gains (18) (731) (83)
Increase in Investment in Subsidiaries (287) (1,772) (2,596)
(Increase) Decrease in Receivables from Subsidiaries (1,000) 1,657 (1,671)
Increase in Accrued Expenses and Other Liabilities 714 487 245
(Increase) Decrease in Other Assets 21 (203) 104
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $4,046 $6,032 $3,337
=======================================================================================================
- --------------------------------------------------------------------------------
48
49
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
10-K
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable
PART III
Except as set forth below, the information called for by the items within
this part is included in the Corporation's definitive Proxy Statement, dated
March 15, 1996 as filed with the Securities and Exchange Commission pursuant to
Regulation 14A ("Proxy Statement"), and is incorporated herein by reference, as
follows:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" and
"Other Matters and Shareholder Proposals" in the Proxy Statement is
incorporated herein by reference.
Reference is made to Part I of this Annual Report on Form 10-K for
information as to the executive officers of the Corporation.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation,"
except the "Compensation Committee Report on Executive Compensation" and the
"Performance Graph," and the second sentence of the fourth paragraph and the
fifth paragraph under the caption "Committees of the Board of Directors" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Securities Ownership of
Certain Beneficial Owners and Management" and "Election of Directors" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Related Transactions" in the
Proxy Statement is incorporated herein by reference.
- --------------------------------------------------------------------------------
49
50
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
10-K
- --------------------------------------------------------------------------------
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements:
The following consolidated financial statements of the Corporation and its
subsidiaries included in the Annual Report and Form 10-K to its shareholders
for the year ended December 31, 1995, are incorporated herein by reference in
Item 8:
Pages in 1995
Annual
Report
and Form 10-K
-------------
Consolidated Balance Sheet as of December 31, 1995 and 1994 38
Consolidated Statement of Income for the year ended
December 31, 1995, 1994 and 1993 39
Consolidated Statement of Changes in Shareholders' Equity
for the year ended December 31, 1995, 1994 and 1993 40
Consolidated Statement of Cash Flows for the year
ended December 31, 1995, 1994 and 1993 41
Notes to Consolidated Financial Statements 42-50
Report of Independent Public Accountants 51
Report of Management 52
The information required for related party loans is presented in Note 6 of the
Notes to Consolidated Financial Statements in the 1995 Annual Report and Form
10-K. The information required for Parent Company Only financial statements
is presented in Note 19 of the Consolidated Financial Statements of the 1995
Annual Report and Form 10-K. All other schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable,
and therefore have been omitted.
2. Schedules:
All schedules are omitted because they are inapplicable, not required or
the information is included in the financial statements or notes
thereto.
3. Exhibits:
The following exhibits to this report are required by Item 601 of
Regulation S-K:
(2) None
(3) Articles of Incorporation and Bylaws of the Corporation are
incorporated herein by reference to Exhibit 3(a) and (b) to the
Form 10-K Report of the Corporation for the year ended December
31, 1991 (file number 0-11011)
(4) None (other than Articles of Incorporation and Bylaws)
(9) None
(10)(a) The 1992 Employee Stock Option Plan, as restated July 19, 1994
is incorporated herein by reference to Exhibit (10)(a)
to the Form 10-K Report of the Corporation for the year ended
December 31, 1994.
(10)(b) The Non-Qualified Stock Option and Deferred Compensation Plan
for Independent Directors is incorporated
- --------------------------------------------------------------------------------
50
51
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
10-K
- --------------------------------------------------------------------------------
herein by reference to the exhibit to the Corporation's
Registration Statement on Form S-8, dated November 10, 1992
(Registration number 33-54618).
(10)(c) Supplemental Retirement Benefit Agreement between the Corporation
and Brian D. Bell and Trust under CB Financial Corporation
Non-Qualified Deferred Compensation Arrangement between the
Corporation and NBD, Bank N.A., as trustee, is incorporated herein
by reference to Exhibit (10)(c) to the Form 10-K Report of the
Corporation for the year ended December 31, 1994.
(11) The computation of per share earnings is presented in the
Consolidated Statement of Income on page 39 of this
integrated 1995 Annual Report and Form 10-K.
(12) Reference is made to the computation of financial ratios for
financial institutions presented in Part I of this 1995 Annual
Report and Form 10-K.
(13) Not Applicable.
(16) Not applicable.
(18) Not applicable.
(21) A list of current subsidiaries of the Corporation is filed herewith.
(22) Not applicable.
(23) The consent of independent public accountants, Arthur Anderson LLP,
is filed herewith.
(24) Not applicable.
(27) Financial data schedule is filed herewith.
(28) Not applicable.
(b) Reports on Form 8-K filed during the last quarter of 1995 covered by this
report:
No reports on Form 8-K were filed during the fourth quarter of 1995.
- --------------------------------------------------------------------------------
51
52
CB FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
10-K
- --------------------------------------------------------------------------------
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, in the City of
Jackson and State of Michigan on March 4, 1996.
CB FINANCIAL CORPORATION
By:/s/ Brian D. Bell
-----------------------------
Brian D. Bell, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons in the capacities
indicated on March 4, 1996.
/s/ Brian D. Bell Chairman and Chief Executive Officer
- -------------------------------------------- (principal executive and financial officer) and Director
Brian D. Bell
/s/ Steven W. Seely President and Chief Operating Officer and Director
- --------------------------------------------
Steven W. Seely
/s/ A. Wayne Klump Treasurer (principal accounting officer)
- --------------------------------------------
A. Wayne Klump
/s/ Harold P. Andrews Director
- --------------------------------------------
Harold P. Andrews
/s/ Douglas L. Burdick Director
- --------------------------------------------
Douglas L. Burdick
/s/ James N. Franklin Director
- --------------------------------------------
James N. Franklin
/s/ Sherwood M. Furman Director
- --------------------------------------------
Sherwood M. Furman
/s/ Alvin L. Glick Director
- --------------------------------------------
Alvin L. Glick
/s/ Stephen J. Lazaroff Director
- --------------------------------------------
Stephen J. Lazaroff
/s/ Philip G. Miller Director
- --------------------------------------------
Philip G. Miller
/s/ Monte R. Story Director
- --------------------------------------------
Monte R. Story
/s/ Brandon C. White, Jr. Director
- --------------------------------------------
Brandon C. White, Jr.
- --------------------------------------------------------------------------------
52
53
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
21 List of Subsidiaries of the Corporation
23 Consent of Independent Public Accountants
27 Financial Data Schedule