UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file # 0-28388
CNB CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 North Main Street, Cheboygan MI 49721
(Address of principal executive offices, including Zip Code)
(231) 627-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No (X)
As of April 15, 2003 there were 1,188,178 shares of the issuer's common stock
outstanding.
1
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
March 31, December 31,
2003 2002
ASSETS (Unaudited)
Cash and due from banks $ 6,237 $ 7,026
Interest-bearing deposits with other
financial institutions 5,013 8,007
Federal funds sold 5,400 7,700
-------- --------
Total cash and cash equivalents 16,650 22,733
Securities available for sale 63,764 57,533
Securities held to maturity (market value of $5,342
in 2003 and $5,755 in 2002) 5,205 5,615
Other securities 6,532 6,252
Loans, net of allowance for loan losses of $1,649
in 2003 and $1,669 in 2002 145,975 144,637
Premises and equipment, net 3,364 3,442
Other assets 4,561 5,300
-------- --------
Total assets $246,051 $245,512
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 28,600 $ 32,281
Interest-bearing 189,210 184,163
-------- --------
Total deposits 217,810 216,444
Other liabilities 3,085 4,331
-------- --------
Total liabilities 220,895 220,775
-------- --------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 1,188,238 and 1,188,372 shares issued
and outstanding in 2003 and 2002 2,971 2,971
Additional paid-in capital 18,233 18,240
Retained earnings 3,043 2,529
Accumulated other comprehensive income, net of tax 909 997
-------- --------
Total shareholders' equity 25,156 24,737
-------- --------
Total liabilities and shareholders' equity $246,051 $245,512
======== ========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended
March 31,
2003 2002
(Unaudited)
INTEREST INCOME
Loans, including fees $ 2,728 $ 2,801
Securities
Taxable 469 635
Tax exempt 230 238
Interest on federal funds sold 49 40
------- -------
Total interest income 3,476 3,714
INTEREST EXPENSE ON DEPOSITS 942 1,463
------- -------
NET INTEREST INCOME 2,534 2,251
Provision for loan losses -- --
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,534 2,251
------- -------
NONINTEREST INCOME
Service charges and fees 234 241
Net realized gains from sales of loans 203 116
Loan servicing fees, net of amortization (30) 16
Other income 40 38
------- -------
Total noninterest income 447 411
NONINTEREST EXPENSES
Salaries and benefits 975 877
Occupancy 196 180
Supplies 42 28
Other expenses 425 181
------- -------
Total noninterest expense 1,638 1,266
INCOME BEFORE INCOME TAXES 1,343 1,396
Income tax expense 354 366
------- -------
NET INCOME $ 989 $ 1,030
======= =======
TOTAL COMPREHENSIVE INCOME $ 901 $ 770
======= =======
Return on average assets (annualized) 1.58% 1.88%
Return on average equity (annualized) 15.70% 18.72%
Basic earnings per share $ 0.83 $ 0.86
Diluted earnings per share $ 0.83 $ 0.86
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Three months ended
March 31,
2003 2002
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 989 $ 1,030
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 211 152
Loans originated for sale (9,646) (6,120)
Proceeds from sales of loans originated for sale 9,777 6,190
Gain on sales of loans (203) (116)
Decrease in other assets 180 276
Decrease in other liabilities (641) (468)
-------- --------
Total adjustments (322) (86)
-------- --------
Net cash from operating activities 667 944
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 6,877 2,817
Purchase of securities available for sale (13,355) (6,595)
Proceeds from maturities of securities held to maturity 410 859
Purchase of securities held to maturity -- (40)
Proceeds from maturities of other securities 320 1,200
Purchase of other securities (600) --
Net change in portfolio loans (1,266) (8,247)
Premises and equipment expenditures (20) (4)
-------- --------
Net cash from investing activities (7,634) (10,010)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,366 2,219
Dividends paid (475) (474)
Proceeds from exercise of stock options 1 --
Purchases of common stock (8) (11)
-------- --------
Net cash from financing activities 884 1,734
Net change in cash and cash equivalents (6,083) (7,332)
Cash and cash equivalents at beginning of year 22,733 16,847
-------- --------
Cash and cash equivalents at end of period $ 16,650 $ 9,515
======== ========
Cash paid during the period for:
Interest $ 944 $ 1,451
Income taxes $ 405 $ 323
See accompanying notes to consolidated financial statements.
4
NOTES TO FINANCIAL STATEMENTS
Note 1-Basis of Presentation
The consolidated financial statements include the accounts of CNB Corporation
("Company") and its wholly owned subsidiary, Citizens National Bank of Cheboygan
("Bank") and the Bank's wholly owned subsidiary CNB Mortgage Corporation. All
significant intercompany accounts and transactions are eliminated in
consolidation. The statements have been prepared by management without an audit
by independent certified public accountants. However, these statements reflect
all adjustments (consisting of normal recurring accruals) and disclosures which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented and should be read in conjunction with
the notes to the financial statements included in the CNB Corporation's Form
10-K for the year ended December 31, 2002.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission.
Because the results of operations are so closely related to and responsive to
changes in economic conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the entire year.
Stock Compensation: The following proforma information presents net income and
basic and diluted earnings per share had the fair value method been used to
measure compensation for stock options granted. The exercise price of options
granted is equivalent to the market price of the underlying stock at the stock
grant date; therefore no compensation expense has been recorded for stock
options granted.
2003 2002
---- ----
Net income as reported $ 989 $ 1,030
Proforma net income 989 1,030
Reported earnings per common share
Basic $ 0.83 $ 0.86
Diluted 0.83 0.86
Proforma earnings per common share
Basic 0.83 0.86
Diluted 0.83 0.86
There were no stock options granted during the three months ended March 31, 2003
and 2002.
5
In future years, as additional options are granted, the proforma effect on net
income and earnings per share may increase. Stock options are used to reward
certain officers and provide them with an additional equity interest. Options
are issued for 10 year periods and have varying vesting schedules. Information
about options available for grant and options granted follows:
Weighted
Average
Available Options Exercise
For Grant Outstanding Price
Balance at December 31, 2002 17,713 29,498 $ 44.83
Options exercised - (40) 35.31
Options issued - - -
------------- ----------------
Balance at March 31, 2003 17,713 29,458 44.84
============= ================
At March 31, 2003 options outstanding had a weighted average remaining life of
approximately 5.5 years. There were 29,458 options exercisable at March 31, 2003
with a weighted-average exercise price of $ 44.84.
Note 2-Earnings Per Share
Basic earnings per share are calculated solely on weighted-average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. For the three month period
ending March 31, 2003 the weighted average shares outstanding in calculating
basic earnings per share were 1,188,311 while the weighted average number of
shares for diluted earnings per share were 1,191,312. For the three month period
ending March 31, 2002 the weighted average shares outstanding in calculating
basic earnings per share were 1,193,244 while the weighted average number of
shares for diluted earnings per share were 1,199,050.
6
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation ("Company") and its wholly owned
subsidiary, Citizens National Bank of Cheboygan ("Bank") and the Bank's wholly
owned subsidiary CNB Mortgage Corporation for the three month period ending
March 31, 2003.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $6.1 million or
26.8%. During the period ending March 31, 2003, $667,000 in cash was provided
from operating activities. Investing activities utilized $ 7.6 million during
the three months ended March 31, 2003 and financing activities provided $884,000
due to an increase in deposits.
SECURITIES
The securities portfolio increased $5.8 million or 9.2%, since December 31,
2002. The available for sale portfolio increased to 92.5% of the investment
portfolio up from 91.1% at year-end.
The fair values and related unrealized gains and losses for securities available
for sale were as follows, in thousands of dollars:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
Available for Sale
MARCH 31, 2003
U.S. Government agency $34,604 $ 532 $ (42)
State and municipal 29,160 895 (55)
------- ------- -------
$63,764 $ 1,427 $ (97)
======= ======= =======
DECEMBER 31, 2002
U.S. Government agency $26,989 $ 687 $ --
State and municipal 30,544 866 (41)
------- ------- -------
$57,533 $ 1,553 $ (41)
======= ======= =======
7
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows, in thousand of dollars:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
Held to Maturity
MARCH 31, 2003
State and municipal $5,205 $ 137 $ -- $5,342
====== ====== ========= ======
DECEMBER 31, 2002
State and municipal $5,615 $ 140 $ -- $5,755
====== ====== ========= ======
The carrying amount and fair value of securities by contractual maturity at
March 31, 2003 are shown below, in thousands of dollars.
Available for sale Held to Maturity
Fair Carrying Fair
Value Amount Value
----- ------ -----
Due in one year or less $12,418 $ 530 $ 536
Due from one to five years 45,365 2,297 2,371
Due from five to ten years 2,670 2,235 2,292
Due after ten years 3,311 143 143
------- ------- -------
$63,764 $ 5,205 $ 5,342
======= ======= =======
LOANS
Loans at March 31, 2003 increased $ 1.3 million from December 31, 2002. The
table below shows total loans outstanding by type, in thousands of dollars, at
March 31, 2003 and December 31, 2002 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
March 31, 2003 indicates the pattern of loans in the portfolio has not changed
significantly. There is no individual industry with more than a 10%
concentration. However, all tourism related businesses, when combined, total
10.3% of total loans.
8
March 31, 2003 December 31, 2002
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate $ 93,385 63.25% $ 92,653 63.32%
Consumer 10,884 7.37% 11,270 7.70%
Commercial real estate 34,069 23.08% 31,581 21.58%
Commercial 9,305 6.30% 10,824 7.40%
--------- ----------- --------- -----------
147,643 100.00% 146,328 100.00%
Deferred loan origination fees, net (19) (22)
Allowance for loan losses (1,649) (1,669)
--------- ---------
Loans, net $ 145,975 $ 144,637
========= =========
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended March 31, follows:
2003 2002
------- -------
Beginning balance $ 1,669 $ 1,667
Provision for loan losses -- --
Charge-offs (22) (8)
Recoveries 2 46
------- -------
Ending balance $ 1,649 $ 1,705
======= =======
The Company has had no impaired loans during 2003 and 2002.
CREDIT QUALITY
The Company maintains a high level of asset quality as a result of actively
managing delinquencies, nonperforming assets and potential loan problems. The
Company performs an ongoing review of all large credits to watch for any
deterioration in quality. Nonperforming loans are comprised of: (1) loans
accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or
more as to interest or principal payments (but not included in nonaccrual loans
in (1) above); and (3) other loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower (exclusive of loans in (1) or (2) above).
The aggregate amount of nonperforming loans is shown in the table below.
March 31, December 31,
2003 2002
(dollars in thousands)
Nonaccrual $ -- $ --
Loans past due 90 days or more 244 114
Troubled debt restructurings -- --
----- -----
Total nonperforming loans $ 244 $ 114
===== =====
Percent of total loans 0.17% 0.08%
9
DEPOSITS
Deposits at March 31, 2003 increased $1.4 million since December 31, 2002.
Interest-bearing deposits increased $5.0 million for the three months ended
March 31, 2003, while noninterest -bearing deposits decreased $3.7 million or
11.4%.
LIQUIDITY AND FUNDS MANAGEMENT
As of March 31, 2003, the Company had $5.4 million in federal funds sold, $63.8
million in securities available for sale and $530,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 32.0% of total deposits as of March 31, 2003.
Total equity of the Company at March 31, 2003 was $25.2 million compared to
$24.7 million at December 31, 2002.
RESULTS OF OPERATIONS
CNB Corporation's 2003 net income for the first three months was $989,000 a
decrease of $41,000 compared to 2002 results. This decrease can be partially
attributed to life insurance proceeds, which amounted to $105,000 that was
received during the first quarter 2002. Income, not including life insurance
proceeds, for the first three months of 2002 was $925,000 compared to $989,000
for 2003, or a 6.9% increase. Basic earnings per share were $0.83 per share for
2003 compared to $0.86 for 2002. The return on assets was 1.58% for the first
three months of the year versus 1.88% for the same period in 2002. The return on
equity was 15.70% compared to 18.72% for the same period last year.
For the first three months of 2003, net interest income was $2.5 million
representing an increase of $283,000 over the same period in 2002. This increase
can be attributed to a larger decrease in interest expense compared to interest
income for the first three months of 2003. Net interest margin increased to
4.32% for the quarter ending March 31, 2003 compared to 4.10% for the period
ending March 31, 2002.
Noninterest income for the three months ending March 31, 2003 was $447,000 an
increase of $36,000 or 8.8% over the same period last year. This increase can be
attributed to an increase in the net realized gain on the sale of loans to the
secondary market during 2003. Noninterest expense for the first three months of
2003 was $1.6 million compared to $1.3 million for 2002. This increase can be
attributed in part to an increase in expense for directors deferred compensation
to reflect the change in calculating the discount rate on that plan. There was
no significant change in the income tax position for the Company during the
first three months of 2003.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary source of market risk for the financial instruments held by the
Company is interest rate risk. That is, the risks that an adverse change in
market rates will adversely affect the market value of the instruments.
Generally, the longer the maturity, the higher the interest rate risk exposure.
While maturity information does not necessarily present all aspects of exposure,
it may provide an indication of where risks are prevalent.
10
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the Company's
net interest margin to swings in interest rates, to assuring sufficient capital
and liquidity to support future balance sheet growth. The Company manages
interest rate risk through the Asset Liability Committee. The Asset Liability
Committee is comprised of bank officers from various disciplines. The Committee
establishes policies and rates which lead to prudent investment of resources,
the effective management of risks associated with changing interest rates, the
maintenance of adequate liquidity, and the earning of an adequate return of
shareholders' equity.
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2002 Management
Discussion and Analysis appearing in the December 31, 2002 10K.
ITEM 4-CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of CNB
Corporation's management, including our Chief Executive Officer and Treasurer
who serves as our Chief Financial Accounting Officer, of the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on
their evaluation, our Chief Executive Officer and Treasurer have concluded that
the Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by CNB
Corporation in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, our Chief Executive Officer and
Treasurer have concluded that there were no significant changes in CNB
Corporation's internal controls or in other factors that could significantly
affect its internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II-OTHER INFORMATION
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K
a.) None
b.) None
11
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
------------------------------------
(Registrant)
Date: May 8, 2003 /s/ Robert E. Churchill
------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
Date: May 8, 2003 /s/ James C. Conboy, Jr.
-------------------------------------
James C. Conboy, Jr.
President and Chief Operating Officer
12
I, Robert E. Churchill, Chairman and Chief Executive Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of CNB Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
/s/ Robert E. Churchill
- -----------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
13
I, Irene M. English, Treasurer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of CNB Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e) f)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
/s/ Irene M. English
- -----------------------
Irene M. English
Treasurer
14
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002