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 June 30, 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 July 30, 2003 there were 1,185,243 shares of the issuer's common stock
outstanding.
1
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
ASSETS (Unaudited)
Cash and due from banks $ 10,007 $ 7,026
Interest-bearing deposits with other
financial institutions 10,016 8,007
Federal funds sold 14,250 7,700
------------------- --------------------
Total cash and cash equivalents 34,273 22,733
Securities available for sale 57,675 57,533
Securities held to maturity (market value of $6,664
in 2003 and $5,755 in 2002) 6,500 5,615
Other securities 6,457 6,252
Loans, net of allowance for loan losses of $1,620
in 2003 and $1,669 in 2002 143,213 144,637
Premises and equipment, net 3,300 3,442
Other assets 4,729 4,227
------------------ -------------------
Total assets $ 256,147 $ 244,439
================== ===================
LIABILITIES
Deposits
Noninterest-bearing $ 43,231 $ 32,281
Interest-bearing 184,265 184,163
------------------- --------------------
Total deposits 227,496 216,444
Other liabilities 3,069 3,258
------------------- --------------------
Total liabilities 230,565 219,702
------------------- --------------------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 1,185,243 and 1,188,372 shares issued
and outstanding in 2003 and 2002 2,963 2,971
Additional paid-in capital 18,091 18,240
Retained earnings 3,546 2,529
Accumulated other comprehensive income, net of tax 982 997
------------------- --------------------
Total shareholders' equity 25,582 24,737
------------------- --------------------
Total liabilities and shareholders' equity $ 256,147 $ 244,439
=================== ====================
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
(Unaudited)
INTEREST INCOME
Loans, including fees $ 2,704 $ 2,830 $ 5,432 $ 5,631
Securities
Taxable 444 609 913 1,244
Tax exempt 216 234 446 472
Interest on federal funds sold 46 28 95 68
------- ------- ------- -------
Total interest income 3,410 3,701 6,886 7,415
INTEREST EXPENSE ON DEPOSITS 876 1,444 1,818 2,907
------- ------- ------- -------
NET INTEREST INCOME 2,534 2,257 5,068 4,508
------- ------- ------- -------
Provision for loan losses - - - -
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,534 2,257 5,068 4,508
------- ------- ------- -------
NONINTEREST INCOME
Service charges and fees 230 241 464 482
Net realized gains from sales of loans 274 75 477 191
Loan servicing fees, net of amortization (33) 24 (63) 40
Other income 39 52 79 90
------- ------- ------- -------
Total noninterest income 510 392 957 803
NONINTEREST EXPENSES
Salaries and benefits 972 871 1,947 1,748
Occupancy 185 180 381 360
Supplies 47 45 89 73
Other expenses 426 289 851 470
------- ------- ------- -------
Total noninterest expenses 1,630 1,385 3,268 2,651
INCOME BEFORE INCOME TAXES 1,414 1,264 2,757 2,660
Income tax expense 436 356 790 722
------- ------- ------- -------
NET INCOME $ 978 $ 908 $ 1,967 $ 1,938
======= ======= ======= =======
TOTAL COMPREHENSIVE INCOME $ 1,051 $ 1,178 $ 1,952 $ 1,948
======= ======= ======= =======
Return on average assets (annualized) 1.57% 1.55% 1.58% 1.65%
Return on average equity (annualized) 15.40% 15.16% 15.49% 16.18%
Basic earnings per share $ .82 $ .76 $ 1.66 $ 1.62
Diluted earnings per share $ .82 $ .76 $ 1.65 $ 1.62
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
- --------------------------------------------------------------------------------
Six months ended June 30,
2003 2002
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,967 $ 1,938
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 455 305
Loans originated for sale (23,734) (10,409)
Proceeds from sales of loans originated for sale 24,033 10,600
Gain on sales of loans (477) (191)
Decrease in other assets (494) (560)
Decrease in other liabilities (189) (157)
-------- --------
Total adjustments (406) (412)
-------- --------
Net cash from operating activities 1,561 1,526
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 12,932 8,809
Purchase of securities available for sale (13,354) (6,595)
Proceeds from maturities of securities held to maturity 515 1,400
Purchase of securities held to maturity (1,400) (565)
Proceeds from maturities of other securities 220 2,700
Purchase of other securities (425) (1,042)
Net change in portfolio loans 1,602 (11,796)
Premises and equipment expenditures (56) (81)
-------- --------
Net cash from investing activities 34 (7,170)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,052 5,650
Dividends paid (950) (927)
Proceeds from exercise of stock options 2 -
Purchases of common stock (159) (18)
-------- --------
Net cash from financing activities 9,945 4,705
Net change in cash and cash equivalents 11,540 (939)
Cash and cash equivalents at beginning of year 22,733 16,847
-------- --------
Cash and cash equivalents at end of period $ 34,273 $ 15,908
======== ========
Cash paid during the period for:
Interest $ 1,826 $ 2,925
Income taxes $ 722 $ 742
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 consolidated 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.
For the three months For the six months
ending ending
June 30, June 30,
2003 2002 2003 2002
---- ---- ----- ----
Net income as reported $ 978 $ 908 $ 1,967 $ 1,938
Proforma net income 978 908 1,967 1,938
Reported earnings per common share
Basic $ .82 $ .76 $ 1.66 $ 1.62
Diluted .82 .76 1.65 1.62
Proforma earnings per common share
Basic .82 .76 1.66 1.62
Diluted .82 .76 1.65 1.62
There were no stock options granted during the three or six months ended June
30, 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 granted - - -
--------- -----------
Balance at June 30, 2003 17,713 29,458 44.84
========= ===========
At June 30, 2003 options outstanding had a weighted average remaining life of
approximately 5.3 years. There were 29,458 options exercisable at June 30, 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 and six month
period ending June 30, 2003 the weighted average shares outstanding in
calculating basic earnings per share were 1,186,655 and 1,187,479 while the
weighted average number of shares for diluted earnings per share were 1,188,999
and 1,190,573. For the three and six month period ending June 30, 2002 the
weighted average shares outstanding in calculating basic earnings per share were
1,193,163 and 1,193,203 while the weighted average number of shares for diluted
earnings per share were 1,198,622 and 1,198,662.
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 six month period ending June
30, 2003.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents increased $11.5 million or
50.8%. During the period ending June 30, 2003, $1.6 million of cash was provided
from operating activities. Financing activities provided $9.9 million in cash
due to an increase in deposits for the period ending June 30, 2003.
SECURITIES
The securities portfolio increased $1.0 million or 1.6%, since December 31,
2002. Securities available for sale decreased to 89.9% of total investments down
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
JUNE 30, 2003
U.S. Government agency $ 30,569 $ 517 $ -
State and municipal 27,106 971 -
------------- -------------- --------------
$ 57,675 $ 1,488 $ -
============= ============== ==============
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 Unrealized Unrealized Fair
Amount Gain Loss Value
JUNE 30, 2003
State and municipal $ 6,500 $ 164 $ - $ 6,664
DECEMBER 31, 2002
State and municipal $ 5,615 $ 140 $ - $ 5,755
The carrying amount and fair value of securities by contractual maturity at June
30, 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 $ 12,817 $ 1,331 $ 1,343
Due from one to five years 39,667 2,884 2,958
Due from five to ten years 2,611 759 837
Due after ten years 2,580 1,526 1,526
----------- --------- ----------
$ 57,675 $ 6,500 $ 6,664
=========== ========= ==========
LOANS
Loans at June 30, 2003 decreased $1.4 million from December 31, 2002. The table
below shows total loans outstanding by type, in thousands of dollars, at June
30, 2003 and December 31, 2002 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
June 30, 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
10.8% of total loans.
8
June 30,2003 December 31, 2002
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate 90,266 62.32% 92,653 63.32%
Consumer 10,558 7.29% 11,270 7.70%
Commercial real estate 34,637 23.91% 31,581 21.58%
Commercial 9,388 6.48% 10,824 7.40%
------- -------- ------- -------
144,849 100.00% 146,328 100.00%
Deferred loan origination fees, net (16) (22)
Allowance for loan losses (1,620) (1,669)
------- -------
Loans, net 143,213 144,637
======= =======
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
six months ended June 30, follows:
2003 2002
------- ---------
Beginning balance $ 1,669 $ 1,667
Provision for loan losses - -
Charge-offs (55) (30)
Recoveries 6 51
-------- --------
Ending balance $ 1,620 $ 1,688
======== ========
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.
June 30, December 31,
2003 2002
(dollars in thousands)
Nonaccrual $ - $ -
Loans past due 90 days or more 75 114
Troubled debt restructurings - -
---------- ---------
Total nonperforming loans $ 75 $ 114
---------- ---------
Percent of total loans 0.05 % 0.08%
9
DEPOSITS
Deposits at June 30, 2003 increased $11.1 million since December 31, 2002. The
growth can be attributed to seasonal activity which allowed an $11.0 million
increase in noninterest bearing deposits.
LIQUIDITY AND FUNDS MANAGEMENT
As of June 30, 2003, the Company had $14.3 million in federal funds sold, $57.7
million in securities available for sale and $1.3 million 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 32.3% of total deposits as of June 30, 2003.
Total equity of the Company at June 30, 2003 was $25.6 million compared to $24.7
million at December 31, 2002.
RESULTS OF OPERATIONS
CNB Corporation's 2003 net income for the first six months was $2.0 million an
increase of $29,000 compared to the same period in 2002. Basic earnings per
share were $1.66 compared to $1.62 for 2002. The return on average assets was
1.58% compared to 1.65% for 2002. The return on average equity was 15.49%
compared to 16.18% for 2002.
Net income for the three months ending June 30, 2003 was $978,000 compared to
$908,000 for 2002. This was an increase of $ 70,000 or 7.7%. Basic earnings per
share were $0.82 compared to $0.76 for 2002. The return on average assets was
1.57% compared to 1.55% for 2002. The return on average equity was 15.40%
compared to 15.16% for 2002.
For the first six months of 2003, net interest income was $5.1 million an
increase of $560,000 or 12.4% compared to 2002 results. The Corporation
experienced a decline in both interest income and interest expenses compared to
2002 results which can be attributed to a continuing decline in the rate
environment. The decline in interest expense on deposits exceeded the decline in
overall interest income which resulted in an overall increase in the net
interest income. The Company reported a strong net interest margin of 4.32% for
2003 compared to 4.07% for 2002. Net interest income for the 3 month period
ending June 30, 2003 was $2.5 million compared to $2.3 million for 2002. Again
the decline in interest expense on deposits exceeded the decline in overall
interest income.
Noninterest income for the six month period ending June 30, 2003 was $957,000
an increase of $154,000 or 19.2% over the same period last year. This
can be attributed to an increase in the fee income as a result of increasing
sales of mortgages to the secondary market. Noninterest income for the three
month period ending June 30, 2003 was $510,000 compared to $392,000 for 2002.
Again the increase in sales to the secondary market was the reason for the
increase. The increase in the sales to the secondary market can be attributed to
increasing refinancing activity.
Noninterest expense for the six month period ending June 30, 2003 was $3.3
million compared to $2.7 million for 2002. This is an increase of $617,000, or
23.3%. Most of the increase can be attributed to a change in the discount rate
for the calculation of the annual expense for the 1985 directors deferred
compensation plan as well as the Company's pension plan. During 2002, the
Company received life insurance proceeds amounting to $105,000 which reduced
noninterest expense.
10
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.
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 10-K.
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.
11
PART II-OTHER INFORMATION
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of CNB Corporation was held on May 20, 2003.
Elected as Directors for one year term were Steven J. Baker; Robert E.
Churchill; James C. Conboy, Jr.; Kathleen M. Darrow; Thomas J. Ellenberger;
Vincent J. Hillesheim; John L. Ormsbee; Francis J. VanAntwerp, Jr.; and John P.
Ward.
Votes cast for: 907,942
Votes cast against: 10,055
Votes withheld: 2,511
Votes cast for were for all nine directors listed above. Votes cast against were
340 for Steven J. Baker, 340 for Kathleen M. Darrow, 340 for Thomas J.
Ellenberger, 340 for Vincent J. Hillesheim 8,355 for John L. Ormsbee and 340 for
Francis J. VanAntwerp, Jr. Votes withheld were for all nine directors listed
above.
ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K
a.) None
b.) None
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: August 14, 2003 /S/ Robert E. Churchill
-------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
Date: August 14, 2003 /S/ James C. Conboy, Jr.
-------------------------------------
James C. Conboy, Jr.
President and Chief Operating Officer
12
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31 Certification of Chief Executive Officer pursuant to Section 302.
EX-31.2 Certification of Treasurer pursuant to Section 302.
EX-32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13