EXHIBIT 13
CNB CORPORATION
ANNUAL REPORT
December 31, 2003, 2002 and 2001
CNB CORPORATION
ANNUAL REPORT
December 31, 2003, 2002 and 2001
CONTENTS
FINANCIAL HIGHLIGHTS ..................................................... 1
CONSOLIDATED BALANCE SHEETS .............................................. 2
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME................................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ............... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS .................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................... 6
INDEPENDENT AUDITOR'S REPORT.............................................. 27
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 28
OFFICERS, COMMUNITY ADVISORS AND STAFF.................................... 40
DIRECTORS AND DIRECTORS EMERITI........................................... 41
CNB CORPORATION
FINANCIAL HIGHLIGHTS
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands, except per share data)
OPERATING STATISTICS
Interest income $ 13,282 $ 14,820 $ 15,788 $ 15,685 $ 14,296
Interest expense 3,380 5,300 6,900 6,820 6,077
Net interest income 9,902 9,520 8,888 8,865 8,219
Income before income taxes 5,385 5,703 4,910 4,882 4,459
Net income 3,885 4,094 3,501 3,386 3,145
Basic earnings per share (1) 3.12 3.27 2.80 2.70 2.51
Diluted earnings per share (1) 3.11 3.26 2.78 2.68 2.49
Return on average assets (ROA) 1.53% 1.71% 1.56% 1.60% 1.54%
Return on average
shareholders' equity (ROE) 15.14% 16.65% 15.24% 16.25% 15.63%
BALANCE SHEET STATISTICS
Securities $ 86,921 $ 69,400 $ 73,096 $ 60,504 $ 65,321
Total loans 143,500 146,328 134,803 127,742 119,349
Deposits 224,914 216,444 204,589 193,091 182,584
Total assets 254,406 244,439 231,031 217,725 205,265
CAPITAL STATISTICS
Shareholders' equity $ 25,138 $ 24,737 $ 23,377 $ 21,615 $ 19,918
Book value per share (1) 20.21 19.83 18.66 18.13 16.70
Cash dividend per share (1) 2.10 2.04 1.88 1.79 1.69
Dividend payout ratio 67.16% 62.25% 67.15% 66.39% 67.00%
Average equity to average
total assets 10.13% 10.25% 10.23% 9.84% 9.86%
CREDIT STATISTICS
Net charge-offs to total loans .07% .00% .05% .03% .03%
Nonperforming loans
to total loans .28% .08% .48% .21% .20%
Allowance for loan losses
to total loans 1.10% 1.14% 1.24% 1.29% 1.33%
Allowance for loan losses
to nonperforming loans 3.86x 14.64x 2.58x 6.31x 6.60x
PRICE RANGE FOR COMMON STOCK
The following table shows the high and low selling prices of known transactions
in common stock of the Company for each quarter of 2003 and 2002. The Company
had 907 shareholders as of December 31, 2003. The prices and dividends per share
have been restated to reflect the 5% stock dividends declared in 2003 and 2001.
2 0 0 3 2 0 0 2
------- -------
Cash Cash
Market Price Dividends Market Price Dividends
Quarter High Low Declared High Low Declared
------- ---- --- -------- ---- --- --------
1st $ 47.62 $ 45.71 $ .38 $ 53.33 $ 47.62 $ .36
2nd 49.52 47.14 .38 52.38 47.62 .36
3rd 52.38 47.62 .38 51.43 47.62 .36
4th 49.52 47.62 .95 49.52 45.71 .95
(1) All share and per share data have been restated to reflect the 5% stock
dividends declared in 2003 and 2001.
See accompanying notes to consolidated financial statements.
1.
CNB CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 6,308 $ 7,026
Interest-bearing deposits with other financial institutions 2,057 8,007
Federal funds sold 8,700 7,700
------------ ------------
Total cash and cash equivalents 17,065 22,733
Securities available for sale 75,717 57,533
Securities held to maturity (market value of
$5,009 in 2003 and $5,755 in 2002) 4,892 5,615
Other securities 6,312 6,252
Loans, net of allowance for loan losses of $1,575
in 2003 and $1,669 in 2002 141,910 144,637
Premises and equipment, net 4,084 3,442
Other assets 4,426 4,227
------------ ------------
Total assets $ 254,406 $ 244,439
============ ============
LIABILITIES
Deposits
Noninterest-bearing $ 36,062 $ 32,281
Interest-bearing 188,852 184,163
------------ ------------
Total deposits 224,914 216,444
Other liabilities 4,354 3,258
------------ ------------
Total liabilities 229,268 219,702
------------ ------------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares authorized; 1,243,939 and
1,188,372 shares issued
and outstanding in 2003 and 2002 3,110 2,971
Additional paid-in capital 20,932 18,240
Retained earnings 783 2,529
Accumulated other comprehensive income, net of tax 313 997
------------ ------------
Total shareholders' equity 25,138 24,737
------------ ------------
Total liabilities and shareholders' equity $ 254,406 $ 244,439
============ ============
See accompanying notes to consolidated financial statements.
2.
CNB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
(In thousands, except per share data)
INTEREST INCOME
Loans, including fees $ 10,483 $ 11,385 $ 11,446
Securities
Taxable 1,734 2,321 2,895
Tax-exempt 862 922 834
Other interest income 203 192 613
------------ ------------ ------------
Total interest income 13,282 14,820 15,788
INTEREST EXPENSE ON DEPOSITS 3,380 5,300 6,900
------------ ------------ ------------
NET INTEREST INCOME 9,902 9,520 8,888
Provision for loan losses - - 83
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,902 9,520 8,805
------------ ------------ ------------
NONINTEREST INCOME
Service charges and fees 947 1,004 1,024
Net realized gains from sale of loans 777 651 357
Loan servicing fees, net of amortization (43) (20) 45
Other income 297 201 244
------------ ------------ ------------
Total noninterest income 1,978 1,836 1,670
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 3,944 3,608 3,333
Deferred compensation 436 208 197
Occupancy 762 774 673
Supplies 170 150 156
Other expenses 1,183 913 1,206
------------ ------------ ------------
Total noninterest expenses 6,495 5,653 5,565
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,385 5,703 4,910
Income tax expense 1,500 1,609 1,409
------------ ------------ ------------
NET INCOME 3,885 4,094 3,501
Other comprehensive income
Net change in unrealized gains on
securities available for sale (547) 147 960
Minimum pension liability (489) - -
Tax effects 352 (51) (327)
------------ ------------ ------------
Total other comprehensive income (loss) (684) 96 633
------------- ------------ ------------
COMPREHENSIVE INCOME $ 3,201 $ 4,190 $ 4,134
============ ============ ============
Basic earnings per share $ 3.12 $ 3.27 $ 2.80
Diluted earnings per share 3.11 3.26 2.78
See accompanying notes to consolidated financial statements.
3.
CNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
Accumulated
Other
Additional Comprehensive Total
Outstanding Common Paid-In Retained Income (Loss), Shareholders'
Shares Stock Capital Earnings Net of Tax Equity
------ ----- ------- -------- ---------- ------
(Dollars in thousands, except per share data)
Balance - January 1, 2001 1,135,461 $ 2,839 $ 15,549 $ 2,959 $ 268 $ 21,615
Net income 3,501 3,501
Cash dividends - $1.88 per share (2,351) (2,351)
5% stock dividend 56,461 141 2,964 (3,126) (21)
Shares issued under stock option plan, net 2,799 7 71 78
Purchase and retirement of common stock (1,306) (3) (75) (78)
Net change in accumulated other comprehensive income 633 633
--------- ------- -------- ------- ------ --------
Balance - December 31, 2001 1,193,415 2,984 18,509 983 901 23,377
Net income 4,094 4,094
Cash dividends - $2.04 per share (2,548) (2,548)
Shares issued under stock option plan, net 1,274 3 29 32
Purchase and retirement of common stock (6,317) (16) (298) (314)
Net change in accumulated other comprehensive income 96 96
--------- ------- -------- ------- ------ --------
Balance - December 31, 2002 1,188,372 2,971 18,240 2,529 997 24,737
Net income 3,885 3,885
Cash dividends - $2.10 per share (2,609) (2,609)
5% stock dividend 58,852 147 2,854 (3,022) (21)
Shares issued under stock option plan, net 264 1 7 8
Purchase and retirement of common stock (3,549) (9) (169) (178)
Net change in accumulated other comprehensive income (684) (684)
--------- ------- -------- ------- ------ --------
Balance - December 31, 2003 1,243,939 $ 3,110 $ 20,932 $ 783 $ 313 $ 25,138
========= ======= ======== ======= ====== ========
See accompanying notes to consolidated financial statements.
4.
CNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,885 $ 4,094 $ 3,501
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 1,022 700 364
Provision for loan losses - - 83
Loans originated for sale (40,356) (35,554) (21,750)
Proceeds from sales of loans originated for sale 40,830 36,277 21,940
Gain on sales of loans (777) (651) (357)
(Increase)decrease in other assets 456 (961) (89)
Increase in other liabilities 589 1,156 23
---------- ---------- ----------
Total adjustments 1,764 967 214
---------- ---------- ----------
Net cash from operating activities 5,649 5,061 3,715
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
available for sale 29,587 23,211 29,323
Purchase of securities available for sale (48,944) (19,770) (41,519)
Proceeds from maturities of securities held
to maturity 2,186 2,252 4,445
Purchase of securities held to maturity (1,463) (699) (3,731)
Proceeds from other securities 1,285 2,700 1,000
Purchase of other securities (1,345) (4,142) (1,157)
Net (increase) decrease in portfolio loans 2,727 (11,603) (6,973)
Premises and equipment expenditures (1,038) (259) (715)
----------- ---------- -----------
Net cash from investing activities (17,005) (8,310) (19,327)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,470 11,855 11,498
Dividends paid (2,612) (2,438) (2,349)
Proceeds from exercise of stock options 8 32 78
Purchases of common stock (178) (314) (78)
----------- ---------- ----------
Net cash from financing activities 5,688 9,135 9,149
---------- ---------- ----------
Net change in cash and cash equivalents (5,668) (5,886) (6,463)
Cash and cash equivalents at beginning of year 22,733 16,847 23,310
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,065 $ 22,733 $ 16,847
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 3,399 $ 5,382 $ 6,949
Income taxes 1,442 1,624 1,423
See accompanying notes to consolidated financial statements.
5.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include CNB
Corporation (the Company) and its wholly-owned subsidiary, Citizens National
Bank of Cheboygan and the Bank's wholly-owned subsidiary CNB Mortgage
Corporation (collectively referred to as the Bank). All significant intercompany
accounts and transactions are eliminated in consolidation.
Nature of Operations and Concentrations of Credit Risk: The Company is a
one-bank holding company which conducts no direct business activities. All
business activities are performed by the Bank.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to individuals
for home mortgages, automobiles, personal expenditures and loans to business
enterprises for current operations and expansion. The Bank offers a variety of
deposit accounts, including checking, savings, money market, individual
retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the Michigan
communities in which the Bank is located and the area immediately surrounding
these communities. The Bank serves these markets through eight offices located
in Cheboygan, Presque Isle and Emmet Counties in northern lower Michigan.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, value of mortgage servicing rights, and fair values of financial
instruments are particularly subject to change in the near term.
Cash Flow Reporting: Cash and cash equivalents include cash and due from banks
and federal funds sold. Net cash flows are reported for customer loan and
deposit transactions.
Securities: Securities classified as held to maturity are carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in shareholders' equity, net
of tax. Realized gains and losses are based on specific identification of
amortized cost. Securities are written down to fair value when a decline in fair
value is not temporary. Interest income includes amortization of purchase
premium and discount.
(Continued)
6.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other securities, which include Federal Reserve Bank stock, Federal Home Loan
Bank stock and other taxable securities that are not readily marketable, are
carried at cost.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
Loan Income: Interest income is earned on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days (180 days for residential
mortgages).
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the assets useful lives. These assets are reviewed for
impairment when events indicate the carrying amount may not be recoverable.
Maintenance and repairs are charged to expense and improvements are capitalized.
(Continued)
7.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate Owned: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at the lower of the loan carrying amount
and fair value at acquisition. Any reduction to fair value from the carrying
value of the related loan is accounted for as a loan loss. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in other
expenses.
Servicing Rights: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and then, secondarily, as to geographic
and prepayment characteristics. Any impairment of a grouping is reported as a
valuation allowance.
Company Owned Life Insurance: The Company has purchased life insurance policies
on certain key executives and directors. Company owned life insurance is
recorded at its cash surrender value, or the amount that can be realized.
Employee Benefits: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Contributions to the plan are based on the maximum amount deductible
for income tax purposes. A 401(k) savings and retirement plan has also been
established and covers substantially all employees. Contributions to the 401(k)
plan are made and expensed annually.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. Options granted vest over one year
and have a maximum term of ten years. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The effect on net income and earnings per share if expense was measured
using the fair value recognition provisions of FASB Statement No. 123, was less
than $.01 per share for 2003, 2002 and 2001.
The weighted average fair value of options granted during 2003 was $5.45. There
were no stock options granted during 2002 and 2001.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
(Continued)
8.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Basic earnings per share is based on the net income divided
by the weighted average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional potential shares
issuable under stock options.
Stock Splits and Stock Dividends: Dividends issued in stock are reported by
transferring the market value of the stock issued from retained earnings to
common stock and additional paid-in capital. Stock splits are recorded by
adjusting par value. Fractional shares are paid in cash for all stock splits and
dividends. Basic earnings per share, diluted earnings per share and dividends
per share have been restated for all stock splits and stock dividends, including
the five percent stock dividends declared in 2003 and 2001.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to extend credit which are not reflected
in the consolidated financial statements. A summary of these commitments is
disclosed in Note 12.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in
unrealized gains (losses) on securities available for sale, net of tax, and the
change in the Company's minimum pension liability, net of tax, which are also
recognized as a separate component of shareholders' equity.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates. The fair value
estimates of existing on- and off-balance-sheet financial instruments do not
include the value of anticipated future business or the values of assets and
liabilities not considered financial instruments.
Reclassification: Some items in prior financial statements have been
reclassified to conform with the current presentation.
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, FASB Statement 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equities, FASB Statement 132
(revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, and FASB Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
Newly Issued But Not Yet Effective Accounting Policies: No new accounting
standards have been issued that are not yet effective that would have a material
impact on the Company's financial condition or results of operations.
(Continued)
9.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 2 - SECURITIES
The year end fair values and related gross unrealized gains and losses for
securities available for sale, were as follows:
Gross Gross
Fair Unrealized Unrealized
Available for sale Value Gains Losses
----- ----- ------
(In thousands)
2003
U.S. Government and agency $ 48,802 $ 363 $ (28)
State and municipal 26,915 638 (8)
------------ ------------ -------------
$ 75,717 $ 1,001 $ (36)
============ ============ =============
2002
U.S. Government and agency $ 26,989 $ 687 $ -
State and municipal 30,544 866 (41)
------------ ------------ ------------
$ 57,533 $ 1,553 $ (41)
============ ============ =============
The year end carrying amount, unrecognized gains and losses, and fair value of
securities held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
(In thousands)
Held to maturity
2003
State and municipal $ 4,892 $ 117 $ - $ 5,009
============ ============= ============ ============
2002
State and municipal $ 5,615 $ 140 $ - $ 5,755
============ ============= ============ ============
There were no sales of securities during 2003, 2002 and 2001.
(Continued)
10.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 2 - SECURITIES (Continued)
Securities with unrealized losses at year end 2003 not recognized in income are
as follows (in thousands):
Less Than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ---- ----- ---- ----- ----
U.S. Government
and agency $ 3,789 $ 28 $ - $ - $ 3,789 $ 28
State and municipal 1,794 8 - - 1,794 8
------------ ------------ ------------ ------------ ------------ -----------
Total temporarily
impaired $ 5,583 $ 36 $ - $ - $ 5,583 $ 36
============ ============ ============ ============ ============ ===========
The fair value is expected to recover as the bonds approach their maturity date.
Contractual maturities of debt securities at year end 2003 were as follows.
Expected maturities may differ from contractual maturity because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Available For Sale Held to Maturity
Fair Carrying Fair
Value Amount Value
----- ------ -----
(In thousands)
Due in one year or less $ 10,377 $ 935 $ 943
Due from one to five years 61,073 2,137 2,217
Due from five to ten years 1,950 350 379
Due after ten years 2,317 1,470 1,470
---------- ------------ ------------
$ 75,717 $ 4,892 $ 5,009
========== ============ ============
Securities with a carrying value of $1,084,000 and $1,113,000 were pledged at
December 31, 2003 and 2002, to secure public deposits and for other purposes.
(Continued)
11.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 2 - SECURITIES (Continued)
The Company held securities exceeding 10% of shareholders' equity for the
following states (including its political subdivisions) at December 31:
2003 2002
---- ----
(In thousands)
Michigan $ 11,029 $ 12,385
Indiana - 2,944
Wisconsin - 2,538
NOTE 3 - LOANS
Year end loans were as follows:
2003 2002
---- ----
(In thousands)
Residential real estate $ 89,042 $ 92,653
Consumer 9,660 11,270
Commercial real estate 35,258 31,581
Commercial 9,540 10,284
------------- -----------
143,500 146,328
Deferred loan origination fees, net (15) (22)
Allowance for loan losses (1,575) (1,669)
-------------- -----------
$ 141,910 $ 144,637
============= ===========
Activity in the allowance for loan losses is summarized as follows:
2003 2002 2001
---- ---- ----
(In thousands)
Beginning balance $ 1,669 $ 1,667 $ 1,652
Provision for loan losses - - 83
Charge-offs (106) (50) (87)
Recoveries 12 52 19
------------ ------------ -----------
Ending balance $ 1,575 $ 1,669 $ 1,667
============ ============ ===========
The Company had no impaired loans during 2003 and 2002.
(Continued)
12.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 3 - LOANS (Continued)
Nonperforming loans were as follows:
2003 2002
---- ----
(In thousands)
Loans past due over 90 days still on accrual $ 408 $ 114
Nonaccrual loans - -
Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These loans
totaled $61,124,000 and $50,537,000 at year end 2003 and 2002. Related escrow
deposit balances were $73,000 and $52,000. Capitalized mortgage servicing rights
balances were $450,000 and $362,000 at year end 2003 and 2002. The related
additions recognized were $303,000, $267,000 and $163,000 and the amortization
was $215,000, $171,000 and $107,000 in 2003, 2002 and 2001.
NOTE 5 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
2003 2002
---- ----
(In thousands)
Real estate and buildings $ 4,777 $ 4,160
Furniture and fixtures 3,763 3,465
------------ ------------
8,540 7,625
Less accumulated depreciation (4,456) 4,183
------------- ------------
$ 4,084 $ 3,442
============ ============
Depreciation expense amounted to $396,000, $410,000 and $357,000 in 2003, 2002
and 2001.
(Continued)
13.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 6 - DEPOSITS
Time deposit accounts individually exceeding $100,000 total $15,553,000 and
$14,280,000 at year end 2003 and 2002.
At year end 2003, the scheduled maturities of time deposits are as follows:
(In thousands)
2004 $ 49,303
2005 12,381
2006 3,609
2007 2,801
2008 1,580
------------
$ 69,674
============
NOTE 7 - EMPLOYEE BENEFITS
Defined Benefit Retirement Plan: The Company has a defined benefit,
noncontributory pension plan which provides retirement benefits for essentially
all employees. The following sets forth the plan's funded status and amounts
recognized in the financial statements:
2003 2002
---- ----
(In thousands)
Change in benefit obligation:
Beginning benefit obligation $ (3,938) $ (3,481)
Service cost (207) (163)
Interest cost (297) (266)
Amendments - (69)
Actuarial loss (gain) (677) (40)
Benefits paid 84 81
------------ ------------
Ending benefit obligation (5,035) (3,938)
Change in plan assets, at fair value:
Beginning plan assets 2,857 2,973
Actual return 543 (301)
Employer contribution 322 266
Benefits paid (84) (81)
------------ ------------
Ending plan assets 3,638 2,857
(Continued)
14.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 7 - EMPLOYEE BENEFITS (Continued)
2003 2002
---- ----
(In thousands)
Funded status $ (1,397) $ (1,081)
Unrecognized net actuarial loss 1,845 1,585
Unrecognized transition amount (49) (59)
Unrecognized prior service amount 37 38
------------ ------------
Prepaid pension cost $ 436 $ 483
============ ============
Net pension expense and related year end assumptions consist of the following:
Amounts recognized in the balance sheet consist of:
2003 2002
---- ----
(In thousands)
Prepaid pension cost $ 436 $ 483
Accrued pension liability (514) -
Intangible assets 25 -
Accumulated other comprehensive income 489 -
------------ ------------
Net amount recognized $ 436 $ 483
============ ============
The accumulated benefit obligation for the defined benefit pension plan was
$3,716 and $2,901 at year end 2003 and 2002, respectively.
Components of net periodic benefit cost are as follows:
2003 2002 2001
---- ---- ----
(In thousands)
Service cost $ 207 $ 163 $ 144
Interest cost on benefit obligation 297 266 238
Expected return on plan assets (231) (234) (241)
Net amortization and deferral (9) (9) (13)
Recognized net actuarial loss 105 42 18
------------ ------------ ------------
Pension expense $ 369 $ 228 $ 146
============ ============ ============
(Continued)
15.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 7 - EMPLOYEE BENEFITS (Continued)
Additional information about the defined benefit pension plan:
2003 2002 2001
---- ---- ----
Increase in minimum liability included in
other comprehensive income $ 489 $ - $ -
The following weighted-average assumptions were used to determine benefit
obligations at year end and net cost:
2003 2002 2001
---- ---- ----
Weighted average discount rate 6.50% 7.50% 7.50%
Rate of increase in future compensation 4.00% 4.00% 5.00%
Expected long term return on plan assets 8.00% 8.00% 8.00%
The Company's pension plan asset allocation at year end 2003 and 2002, target
allocation for 2004, and expected long-term rate of return by asset category are
as follows:
Percentage of Plan Weighted-
Target Assets Average Expected
Allocation at Year end Long-Term Rate
Asset Category 2004 2003 2002 of Return - 2003
-------------- ---- ---- ---- ----------------
Equity securities 65.0% 61.6% 56.4% 9.66%
Fixed Income securities 35.0 31.5 34.7 6.00
Other - 6.9 8.9 2.35
-------- ------- -------- --------
Total 100.0% 100.0% 100.0% 8.00%
======== ======= ======== ========
Plan assets are administered by Huntington National Bank as trustee of the plan.
Plan assets are invested in diversified mutual funds.
The estimates of weighted average expected long-term rate of return is an
estimate based on past performance and actual returns in the future are likely
to vary over time.
The overall expected long-term rate of return and risk expectations of the
investments in the plan are based on Standard and Poor's 500 and 5 year Treasury
bonds from 1950-2001.
The asset mix of the portfolio will be maintained by periodically re-balancing
this account back to the stock and fixed income target allocations stated above.
(Continued)
16.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 7 - EMPLOYEE BENEFITS (Continued)
The investments in the plan are managed for the benefits of the participants.
They are structured to meet the cash flow necessary to pay retiring employees.
ERISA guidelines for diversification of the investments are followed.
Deferred Compensation Plan: The Company has a deferred compensation plan to
provide retirement benefits to certain Directors, at their option, in lieu of
annual directors' fees. The present value of future benefits are accrued
annually over the period of active service of each participant. The expense for
the plan was $408,000, $186,000 and $180,000 in 2003, 2002 and 2001. The expense
was increased during 2003 due to a change in the discount rate during 2002. The
effect of a discount rate is to spread the fixed total expense over the time
period involved. By lowering the discount rate by which we calculate the
allocation of the fixed total expense to each year, we do not change the total
expense but merely recognize more of it sooner, leaving less to recognize in
later years.
During the year ended December 31, 2002 management changed the discount rate
used to estimate the liability under the deferred compensation plan to a current
rate due to the low rate environment. As a result of this change, an additional
liability of approximately $512,000 was required to be recognized over the
remaining service periods of each individual in the plan. As of December 31,
2003, the additional liability remaining to be recorded totaled $403,000.
The Company has also purchased insurance on the lives of participating directors
with the Company as the owner and beneficiary of the policies. At December 31,
2003 and 2002, the cash surrender value of the underlying policies was
$1,275,000 and $1,387,000, which is included in other assets on the Balance
Sheet.
The Company also has a deferred compensation plan that allows executive officers
of the Bank, and certain Directors an opportunity to defer a portion of their
compensation. On a monthly basis, the account of each participant accrues
interest based on the interest rate determined for that year. The expense of the
plan was $28,000, $22,000 and $17,000 in 2003, 2002 and 2001.
401(k) Plan: The Company has a 401(k) savings and retirement plan covering
substantially all employees. Under the plan, employees may defer up to the
lesser of 20% of their eligible compensation or the limitations set by the IRS.
During 2003, 2002 and 2001, the Board of Directors elected to contribute a
matching contribution equal to 100% of the first 2% and 50% of the next 2% of
the employee's deferred compensation. Employee contributions and the Company's
matching percentages are vested immediately. The Company's matching percentages
are determined annually by the Board of Directors and resulted in total
contributions of $73,000, $71,000 and $67,000 in 2003, 2002 and 2001.
(Continued)
17.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 8 - STOCK OPTIONS
Stock Option Plan: The shareholders approved an incentive stock option plan in
May 1996 under which options may be issued at market prices to employees. The
right to exercise the options vests over a one year period. The exercise price
of options granted is equivalent to the market value of underlying stock at the
grant date.
Activity in the option plan for the years ended, and as restated for all stock
dividends, is summarized as follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
------- ----- ----- ---------
Balance at January 1, 2001 35,378 $ 23.92-57.01 $ 40.48
Exercised (3,084) 23.92-33.61 25.30
------------ ----------------- ------------
Balance at December 31, 2001 32,294 23.92-57.01 41.92
Exercised (1,337) 23.92 23.92
------------ ----------------- ------------
Balance at December 31, 2002 30,957 23.92-57.01 42.70
Granted 8,662 47.62-48.57 48.54 $ 5.45
Exercised (277) 23.92-33.61 25.39
------------- ----------------- ------------
Balance at December 31, 2003 39,342 $ 23.92-57.01 $ 44.10
============
Options outstanding at year-end 2003 were as follows.
---------------Outstanding---------------- --------Exercisable-------
----------- -----------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life (in years) Price Number Price
- ------ ------ --------------- ----- ------ -----
$20.00-$30.00 3,187 2.5 $ 23.92 3,187 $ 23.92
$30.00-$40.00 12,872 4.1 33.61 12,872 33.61
$40.00-$50.00 12,307 8.4 48.78 3,645 49.36
$50.00-$60.00 10,976 6.0 57.01 10,976 57.01
------------ ------------
Outstanding at year end 39,342 5.9 $ 44.10 30,680 $ 42.85
============ ============
There were 30,957 options exercisable at December 31, 2002 with a weighted
average exercise price of $42.70. There were 32,294 options exercisable at
December 31, 2001 with a weighted average exercise price of $41.92.
(Continued)
18.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 9 - INCOME TAXES
Income tax expense consists of:
2003 2002 2001
---- ---- ----
(In thousands)
Current $ 1,595 $ 1,591 $ 1,390
Deferred (95) 18 19
------------ ------------ ------------
$ 1,500 $ 1,609 $ 1,409
============ ============ ============
Year end deferred tax assets and liabilities consist of:
2003 2002
---- ----
(In thousands)
Deferred tax assets
Allowance for loan losses $ 405 $ 442
Deferred compensation 729 587
Minimum pension liability 166 -
Other 11 14
------------ ------------
Total deferred tax assets 1,311 1,043
------------ ------------
Deferred tax liabilities
Pension 155 172
Unrealized gains on securities available for sale 328 513
Fixed assets 129 96
Mortgage servicing rights 153 123
Accretion 21 94
Other 35 -
------------ ------------
Total deferred tax liabilities 821 998
------------ ------------
Net deferred tax asset $ 490 $ 45
============ ============
Income tax expense calculated at the statutory rate of 34% differs from actual
income tax expense as follows:
2003 2002 2001
---- ---- ----
(In thousands)
Statutory rate applied to income before taxes $ 1,831 $ 1,939 $ 1,669
Deduct
Tax-exempt interest income, net (269) (278) (243)
Other (62) (52) (17)
------------ ------------ ------------
$ 1,500 $ 1,609 $ 1,409
============ ============ ============
(Continued)
19.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations is presented below:
2003 2002 2001
---- ---- ----
Basic earnings per share
Net income available to common
shareholders (in thousands) $ 3,885 $ 4,094 $ 3,501
============ ============ ============
Weighted average shares outstanding 1,245,653 1,252,254 1,251,278
Basic earnings per share $ 3.12 $ 3.27 $ 2.80
============ ============ ============
Diluted earnings per share
Net income available to common
shareholders (in thousands) $ 3,885 $ 4,094 $ 3,501
============ ============ ============
Weighted average shares outstanding 1,245,653 1,252,254 1,251,278
Add dilutive effects of assumed exercises
of stock options 3,541 4,960 7,947
------------ ------------ ------------
Weighted average dilutive
potential shares outstanding 1,249,194 1,257,214 1,259,225
============ ============ ============
Diluted earnings per share $ 3.11 $ 3.26 $ 2.78
============ ============ ============
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank (including
family members, affiliates and companies in which they are principal owners) had
loans outstanding with the Bank in the ordinary course of business. A summary of
the aggregate loans outstanding which exceeded $60,000 to these individuals
follows:
2003 2002
---- ----
(In thousands)
Balance outstanding, January 1 $ 2,456 $ 2,397
New loans and rewrites 1,474 1,717
Payments and payoffs (1,908) (1,658)
------------ ------------
Balance outstanding, December 31 $ 2,022 $ 2,456
============ ============
Related party deposits totaled $1,553,000 and $1,712,000 at year end 2003 and
2002.
(Continued)
20.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or result of operations.
At year end 2003 and 2002, reserves of $1,778,000 and $1,592,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit and standby
letters of credit. These involve, to a varying degree, credit and interest-rate
risk in excess of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. The same credit policies are used for commitments and conditional
obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
to guarantee a customer's performance to a third party.
These instruments are carried at fair value. A summary of the notional or
contractual amounts of financial instruments with off-balance-sheet risk at year
end were as follows:
2003 2002
---- ----
(In thousands)
Commitments to extend credit $ 17,449 $ 21,053
Standby letters of credit 107 109
The fair values of these investments are not material. Substantially all of
these commitments are at variable or uncommitted rates.
(Continued)
21.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and variable rate loans or deposits that reprice frequently and fully.
Securities fair values are based on quoted market prices or, if no quotes are
available, on the rate and term of the security and on information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, the fair value is estimated by
discounted cash flow analysis or underlying collateral values, where applicable.
The fair value of off-balance-sheet items approximates cost and is not
considered significant to this presentation.
The estimated year end values of financial instruments were:
2 0 0 3 2 0 0 2
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets (In thousands)
Cash and cash equivalents $ 17,065 $ 17,065 $ 22,733 $ 22,733
Securities available for sale 75,717 75,717 57,533 57,533
Securities held to maturity 4,892 5,009 5,615 5,755
Other securities 6,312 6,312 6,252 6,252
Loans, net 141,910 147,465 144,637 148,241
Liabilities
Deposits
Noninterest-bearing $ (36,062) $ (36,062) $ (32,281) $ (32,281)
Interest-bearing (188,852) (189,832) (184,163) (184,663)
NOTE 14 - REGULATORY CAPITAL
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors, and
the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
(Continued)
22.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 14 - REGULATORY CAPITAL (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk-
Weighted Assets Tier 1 Capital
Total Tier 1 To Average Assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
The Company and Bank were categorized as well capitalized at year end. Actual
capital levels (in millions) and minimum required levels were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2003
- ----
Total capital (to risk weighted assets)
Consolidated $ 26.1 18.5% $ 11.3 8.0% $ 14.1 10.0%
Bank 26.0 18.5 11.3 8.0 14.1 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 24.5 17.4 5.6 4.0 8.5 6.0
Bank 24.5 17.4 5.6 4.0 8.5 6.0
Tier 1 capital (to average assets)
Consolidated 24.5 9.6 10.2 4.0 12.7 5.0
Bank 24.5 9.6 10.2 4.0 12.7 5.0
2002
- ----
Total capital (to risk weighted assets)
Consolidated $ 25.4 17.9% $ 11.3 8.0% $ 14.1 10.0%
Bank 25.4 17.9 11.3 8.0 14.1 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 23.7 16.8 5.7 4.0 8.5 6.0
Bank 23.7 16.8 5.7 4.0 8.5 6.0
Tier 1 capital (to average assets)
Consolidated 23.7 9.7 9.8 4.0 12.2 5.0
Bank 23.7 9.7 9.8 4.0 12.2 5.0
(Continued)
23.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 14 - REGULATORY CAPITAL (Continued)
One of the principal sources of cash for the Company is dividends from the Bank.
Regulatory agencies can place dividend restrictions on the Bank based on their
evaluation of its financial condition. No restrictions are currently imposed by
regulatory agencies on the Bank other than the limitations found in the
regulations which govern the payment of dividends to the Company. Under the most
restrictive of these regulations, in 2004, the Bank is limited to paying
dividends of approximately $2,402,000 plus 2004 net income, without prior
regulatory approval.
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company financial statements:
CONDENSED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
---- ----
(In thousands)
ASSETS
Cash $ 7 $ 19
Investment in subsidiary 25,137 24,714
Dividends receivable 1,200 1,458
Other assets - 4
------------ ------------
Total Assets $ 26,344 $ 26,195
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 1,185 $ 1,188
Other liabilities 21 270
Shareholders' equity 25,138 24,737
------------ ------------
Total Liabilities and Shareholders' Equity $ 26,344 $ 26,195
============ ============
(Continued)
24.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
(In thousands)
Dividends from subsidiary $ 2,802 $ 2,826 $ 2,442
Operating expenses (36) (40) (44)
------------- ------------ ------------
Income before income tax and equity
in undistributed income of subsidiary 2,766 2,786 2,398
Income tax benefit 12 13 15
Equity in undistributed income of subsidiary 1,107 1,295 1,088
------------ ------------ ------------
NET INCOME $ 3,885 $ 4,094 $ 3,501
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,885 $ 4,094 $ 3,501
Equity in undistributed net income of subsidiary (1,107) (1,295) (1,088)
Change in dividends receivable 258 (402) -
Change in other assets 4 - (4)
Change in other liabilities (270) 270 -
------------ ------------ ------------
Net cash from operating activities 2,770 2,667 2,409
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (2,612) (2,438) (2,349)
Net shares purchased (170) (282) -
------------ ------------ ------------
Net cash from financing activities (2,782) (2,720) (2,349)
------------ ------------ ------------
Net change in cash and cash equivalents (12) (53) 60
Cash at beginning of year 19 72 12
------------ ------------ ------------
CASH AT END OF YEAR $ 7 $ 19 $ 72
============ ============ ============
(Continued)
25.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Earnings Per Share
Interest Interest Net ------------------
Income Income Income Basic Diluted
------ ------ ------ ----- -------
(In thousands, except per share data)
2003
First quarter $ 3,476 $ 2,534 $ 989 $ .79 $ .79
Second quarter 3,410 2,534 978 .78 .78
Third quarter 3,276 2,480 1,098 .89 .88
Fourth quarter 3,120 2,354 820 .66 .66
2002
First quarter $ 3,714 $ 2,251 $ 1,030 $ .82 $ .82
Second quarter 3,701 2,257 908 .72 .72
Third quarter 3,726 2,409 1,021 .82 .81
Fourth quarter 3,679 2,603 1,135 .90 .90
26.
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
CNB Corporation
Cheboygan, Michigan
We have audited the accompanying consolidated balance sheets of CNB Corporation
as of December 31, 2003 and 2002, and the related consolidated statements of
income and comprehensive income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Corporation as
of December 31, 2003 and 2002 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
Crowe Chizek and Company LLC
South Bend, Indiana
February 12, 2004
27.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation (the Company) and its wholly-owned
subsidiary, Citizens National Bank of Cheboygan and the Bank's wholly-owned
subsidiary CNB Mortgage Corporation (collectively referred to as the Bank). This
discussion should be read in conjunction with the consolidated financial
statements beginning on page 2 and the related footnotes.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The Company's balances of cash and cash equivalents decreased $5.7 million from
2002 to 2003. During the year, $5.7 million of cash was provided from financing
activities due primarily to increases in deposits, while $5.6 million of cash
was provided from operating activities. Investing activities utilized $17.0
million of cash during 2003. The balances maintained in cash and cash
equivalents vary based on daily fluctuations in loan and deposit balances.
Sufficient cash is maintained on a daily basis to meet the anticipated liquidity
needs of the Company for customer transactions and to clear checks drawn on
other financial institutions. The amount of clearings can vary by as much as
$3.0 million in one day, causing the Company's cash position to vary.
SECURITIES
The Company maintains securities portfolios that include obligations of federal
agencies and government sponsored entities as well as securities issued by
states and political subdivisions. Security balances increased $17.5 million
during 2003. Securities available for sale represent 87.1% of the portfolio.
Currently, the Company primarily maintains a short-term securities portfolio.
The average life of the security portfolio is being extended as securities of a
longer maturity are added to the portfolio when appropriate. As the amount of
securities maturing on a regular basis decreases, liquidity will be maintained
by adding to the available for sale portfolio. During 2003, the Company invested
in short-term U.S. Government and agency securities with the belief that during
2004 rates will start to rise, therefore these securities would be replaced with
higher yielding assets if interest rates rise.
The chart below shows the change in each of the categories of the portfolio.
2003 2002 2001
---- ---- ----
(In thousands)
U.S. Government and agency securities $ 21,813 $ (6,068) $ (4,056)
Tax exempt state and municipal (2,810) 501 13,709
Taxable state and municipal (1,542) 429 2,782
Other 60 1,442 157
----------- ----------- -----------
Total change in securities $ 17,521 $ (3,696) $ 12,592
=========== =========== ===========
28.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
Holdings in state and municipal securities decreased during the year primarily
due to lack of opportunity to invest in municipalities. Therefore the Company
chose to invest in U.S. Government and agency securities. The Company maintains
a short-term investment portfolio with maturities averaging less than two years.
The chart below shows the percentage composition of the portfolio as of December
31.
2003 2002
---- ----
U.S. Government and agency securities 56.14% 38.89%
Tax exempt state and municipal 26.80 37.61
Taxable state and municipal 9.80 14.49
Other 7.26 9.01
---------- ---------
100.00% 100.00%
========== =========
Securities available for sale are recorded at fair value and securities held to
maturity are recorded at amortized cost. The net unrealized gain on securities
available for sale at December 31, 2003 was $636,000, net of taxes. The
unrealized gains and losses are temporary, since they are a result of market
changes rather than a reflection of credit quality. Management has no specific
intent to sell these securities at the present time.
The Company maintains a conservative security portfolio with a majority of the
investments in U.S. Government and agency securities and issues of governmental
units in its service area. The maturities of the U.S. Government and agency
securities have typically been very short, two years or less, providing
liquidity in addition to quality.
During 2004, management feels that there will be sufficient liquidity to
increase maturity of the investment portfolio, which has the general impact of
increasing yields.
LOANS
Total loans decreased $2.8 million or 1.9% during 2003, with the primary reason
being an increased number of sales to the secondary market. Commercial real
estate loans grew from $31.6 million in 2002 to $35.3 million in 2003. As a full
service lender, the Company offers a variety of personal and commercial loans.
Home mortgages comprise the largest portion of the loan portfolio. The Company
generally retains the ownership of adjustable rate loans and short to
medium-term fixed-rate loans and originates and sells long-term single family
residential fixed-rate mortgage loans to the secondary market. This practice
allows the Company to meet the housing credit needs of its service area while
maintaining an appropriate interest rate sensitivity and liquidity position. Due
to the low rate environment consumer real estate mortgage refinancing was very
strong during 2003. The Company originated $40.4 million in loans for sale in
2003 and $35.6 million in 2002. We do not anticipate that mortgage refinancing
will be as strong in 2004. In addition to mortgage loans, the Company makes
loans for personal and business use, secured and unsecured, to customers in its
services area.
29.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
The Company maintains a conservative loan policy and strict credit underwriting
standards, which reflects highly in our credit quality with a small percent of
total loans as non-performing. All loans are domestic. An annual review of loan
concentrations at December 31, 2003 indicated the pattern of loans in the
portfolio has not changed. There is no individual industry with more than a 10%
concentration, except for all tourism related businesses, when combined,
represent 10.4% of total loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents that amount which management estimates
is adequate to provide for probable incurred losses in the loan portfolio.
Management determines the adequacy of the allowance for loan losses by reviewing
selected loans (including large loans, nonaccrual loans, problem loans and
delinquent loans) and establishes specific loss allowances on these loans.
Historical loss information, local economic conditions and other factors are
considered in establishing allowances on the remaining loan portfolio. The
allowance is increased by provisions charged to expense and reduced by
charge-offs, net of recoveries.
The quality of the Company's loan portfolio compares well with its peer group
with non-performing loans at .28% of total loans at December 31, 2003 and 0.08%
at December 31, 2002. Net loans charged off were .07% of total loans during 2003
and -0-% in 2002. There were no significant changes in the allowance for loan
losses in 2003 and 2002 due to stable loan quality and insignificant loss
potential identified for individual loans and groups of loans.
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively managing delinquencies, nonperforming assets and potential problem
loans. The Company performs an ongoing review of all large credits to watch for
any deterioration in quality. Nonperforming loans are comprised of: (1) loans
accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or
more as to interest or principal payments (but not included in the nonaccrual
loans in (1) above); and (3) other loans whose terms have been renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower (exclusive of loans in
(1) or (2) above). The aggregate amount of nonperforming loans is shown in the
table below.
2003 2002
---- ----
(Dollars in thousands)
Nonaccrual loans $ - $ -
Loans past due 90 days or more 408 114
Troubled debt restructurings - -
-------- ---------
Total nonperforming loans $ 408 $ 114
======== =========
Percent of total loans .28% .08%
======== =========
30.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
DEPOSITS
The Company offers competitive deposit products and has, therefore, shown steady
deposit growth as it increases its market share. Despite the low interest rate
environment, the Company experienced deposit growth during 2003. Deposits
increased $8.5 million or 3.9% during 2003. Insured money market account
balances increased $5.3 million or 7.6% during 2003 while noninterest bearing
demand deposits increased $3.8 million or 11.7%.
The majority of the Company's deposits are derived from core customers, as a
result of long-term personal, business and public relationships. Deposit rates
are monitored continually to assure that the Company pays a competitive rate.
As of December 31, 2003, the loan to deposit ratio was 63.8% compared to 67.6%
at December 31, 2002. This ratio declined due to the increase in the Company's
deposit portfolio while total loans decreased. Management continues to emphasize
loan growth with targeted loan to deposit ratio at a minimum of 65.0%. A change
in asset mix from securities to higher yielding loans would increase the net
interest margin.
As of December 31, 2003, the long-term debt obligations consist of the Company's
time deposits which are presented in Note 6.
EQUITY
Total equity for the Company at year end 2003 was $25.1 million compared to
$24.7 million in 2002. The Company realized $3.9 million in income and declared
$2.6 million in dividends during 2003. Accumulated other comprehensive income
decreased by $684,000 as the market value of the Company's available for sale
securities declined and the Company recorded a minimum pension liability.
LIQUIDITY AND FUNDS MANAGEMENT
Effective liquidity management ensures that the cash flow requirements of the
Bank's depositors and borrowers, as well as the operating cash needs of the
Company are met. The Company's primary source of funds is dividends from the
Bank. The Company manages its liquidity position to provide cash necessary to
pay dividends to shareholders and satisfy other operating requirements.
The Bank's most readily available sources of liquidity are federal funds sold,
securities classified as available for sale and securities classified as held to
maturity maturing within one year. These sources of liquidity are supplemented
by new deposits and by loan payments received from customers. As of December 31,
2003, the Company held $8.7 million in federal funds sold, $75.7 million in
securities available for sale, and $935,000 in held to maturity securities
maturing within one year. These short-term assets represents 37.9% of total
deposits as of December 31, 2003. Historically, the Company's security portfolio
has been short term in nature, with the average life of the portfolio
consistently being less than two years. The Company serves a market which is
highly tied to the tourist industry. Consequently, the Company experiences
seasonal swings in liquidity. Deposit growth occurs during July, August, and
September, then may decline through the fall and winter months. The Company does
not anticipate any significant change in its seasonal pattern.
31.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
INTEREST RATE SENSITIVITY
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates at December 31, 2003
and 2002. For loans receivable, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-average
interest rates by contractual maturities, as well as the Company's historical
experience relative to the impact of interest rate fluctuations on the
prepayment of loans. For core deposits (demand deposits, interest-bearing
checking, savings, and money market deposits) that have no contractual maturity,
the table presents principal cash flows and, as applicable, related
weighted-average interest rates based upon the Company's historical experience,
management's judgment, and statistical analysis concerning their most likely
withdrawal behaviors. The current historical interest rates for core deposits
are assumed to apply for future periods in this table as the actual interest
rates that will need to be paid to maintain these deposits are not currently
known. Weighted-average variable rates are based upon contractual rates existing
at the reporting date.
The primary source of market risk for the financial instruments presented is
interest rate risk, that is, the risk that a change in market rates could
adversely affect the market value of the instruments. Generally, the longer the
maturity, the greater 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 assuring sufficient capital and liquidity
in support of future balance sheet growth to reducing the exposure of the
Company's net interest margin from swings in interest rates. The Company manages
interest rate risk through the Asset/Liability Committee. The Asset/Liability
Committee is comprised of Bank officers from various disciplines. The Committee
establishes policies and rates which lead to the prudent investment of
resources, the effective management of risks associated with changing interest
rates, the maintenance of adequate liquidity and the earning of an adequate
return on shareholders' equity.
32.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
MARKET RISK DISCLOSURE AT DECEMBER 31, 2003
(Dollars in thousands)
Fair Value
2004 2005 2006 2007 2008 Thereafter Total 12/31/03
---- ---- ---- ---- ---- ---------- ----- --------
RATE-SENSITIVE ASSETS
Variable interest rate loans $ 9,471 $ 2,921 $ 1,264 $ 1,894 $ 2,526 $ 13,494 $ 31,570 $ 33,152
Average interest rate 5.45% 7.28% 7.31% 8.44% 7.60% 6.06% 6.31%
Fixed interest rate loans 18,469 13,002 12,133 10,552 8,798 48,976 111,930 115,903
Average interest rate 7.21% 7.17% 7.12% 7.02% 6.69% 6.48% 6.82%
Variable interest rate
securities - - - - - 7,648 7,648 7,648
Average interest rate -% -% -% -% -% 2.63% 2.63%
Fixed interest rate securities 11,312 19,001 27,748 14,570 1,891 4,751 79,273 79,390
Average interest rate 3.93% 3.01% 2.95% 2.75% 4.15% 3.77% 3.15%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing
deposits 36,062 - - - - - 36,062 36,062
Average interest rate -% -% -% -% -% -% -%
Fixed interest rate
savings and
interest-bearing deposits 119,178 - - - - - 119,178 119,178
Average interest rate .83% -% -% -% -% -% .83%
Fixed interest rate
time deposits 49,303 12,381 3,609 2,801 1,580 - 69,674 70,654
Average interest rate 2.99% 2.31% 3.78% 4.32% 3.34% -% 2.97%
MARKET RISK DISCLOSURE AT DECEMBER 31, 2002
(Dollars in thousands)
Fair Value
2003 2004 2005 2006 2007 Thereafter Total 12/31/02
---- ---- ---- ---- ---- ---------- ----- --------
RATE-SENSITIVE ASSETS
Variable interest rate loans $ 9,191 $ 2,102 $ 1,951 $ 1,899 $ 1,740 $ 13,694 $ 30,577 $ 31,163
Average interest rate 8.46% 7.32% 7.26% 7.45% 7.45% 7.51% 7.76%
Fixed interest rate loans 21,158 12,626 13,565 9,593 9,392 49,417 115,751 118,769
Average interest rate 7.72% 7.92% 7.50% 7.54% 7.24% 6.81% 7.27%
Variable interest rate
securities - - - - - 7,672 7,672 7,672
Average interest rate -% -% -% -% -% 2.51% 2.51%
Fixed interest rate securities 15,136 13,761 11,460 7,611 7,119 6,641 61,728 61,868
Average interest rate 5.98% 4.85% 4.63% 5.01% 4.45% 5.33% 5.11%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing deposits 32,281 - - - - - 32,281 32,281
Average interest rate -% -% -% -% -% -% -%
Fixed interest rate
savings and
interest-bearing deposits 114,157 - - - - - 114,157 114,157
Average interest rate 1.61% -% -% -% -% -% 1.61%
Fixed interest rate
time deposits 26,963 36,071 2,935 1,708 2,309 20 70,006 70,506
Average interest rate 3.55% 2.66% 4.69% 4.55% 4.58% 3.49% 3.20%
33.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. This strong capital position provides the Company with
the flexibility to take advantage of expansion opportunities and to continue
with a high dividend payout ratio which has averaged 65.5% over the past three
years. As earnings continue at current levels or better, the Company anticipates
continuing to pay dividends at this level.
A five percent stock dividend was declared to shareholders in 2003 and 2001. The
stock of the Company is generally traded locally. Additional information
concerning capital ratios and shareholder return is included in the Financial
Highlights schedule. The Company maintains a five-year plan and utilizes a
formal strategic planning process. Management and the Board continue to monitor
long-term goals, which include increasing market share and maintaining long-term
earnings sufficient to pay consistent dividends.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Interest income is the total amount earned on funds invested in federal funds
sold, securities and loans. Interest expense is the amount of interest paid on
interest-bearing checking, money market, savings and time deposits accounts. Net
interest income is the difference between interest income and interest expense.
The net margin is the net interest income as a percentage of average
interest-earning assets. Interest spread is the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities. In 2003, net interest income increased by $382,000, due primarily
to the greater increase in the volume of interest-earning assets over
interest-bearing liabilities.
The $632,000 increase in net interest income from 2002 to 2001 was also
primarily due to the increase in the volume of interest-earning assets over
interest-bearing liabilities. Increases in net interest income related to
overall growth in the Company's balance sheet was partially offset by decreases
in net interest income resulting from lower interest rates.
34.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
The following table shows the daily average consolidated balance sheets, revenue
on average interest-earning assets (on a pre-tax basis), expense on average
interest-bearing liabilities and the annualized effective yield or rate for the
periods ending:
Yield Analysis of Consolidated Average Assets and Liabilities
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
Average Yield/ Average Yield/ Average Yield/
Balance Int Rate Balance Int Rate Balance Int Rate
------- --- ---- ------- --- ---- ------- --- ----
Interest-earning assets:
Other interest-
earning assets $ 18,101 $ 203 1.12% $ 11,350 $ 192 1.69% $ 13,294 $ 613 4.60%
Total securities (1) 74,604 2,596 3.48 69,844 3,243 4.64 68,477 3,729 5.45
Loans 146,330 10,483 7.16 143,840 11,385 7.92 128,878 11,446 8.88
--------- --------- --------- --------- --------- ---------
Total
interest-earning
assets 239,035 13,282 5.56% 225,034 14,820 6.59% 210,649 15,788 7.49%
--------- --------- ---------
Cash and due from
banks 6,645 6,885 6,660
Premises and
equipment, net 3,407 3,475 3,161
Allowance for loan
losses (1,634) (1,692) (1,696)
Other assets 5,754 6,100 5,839
--------- --------- ---------
Total $ 253,207 $ 239,802 $ 224,613
========= ========= =========
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 16,899 $ 103 .61% $ 16,795 $ 231 1.38% $ 15,151 $ 267 1.76%
Savings deposits 100,979 1,159 1.15 88,662 1,689 1.90 73,316 2,233 3.05
Time deposits 69,851 2,118 3.03 73,197 3,380 4.62 78,842 4,400 5.58
--------- --------- --------- --------- --------- ---------
Total
interest-bearing
liabilities 187,729 3,380 1.80% 178,654 5,300 2.97% 167,309 6,900 4.12%
--------- --------- --------- ---------
Noninterest-bearing
deposits 36,867 33,780 31,962
Other liabilities 2,955 2,786 2,370
Shareholders' equity 25,656 24,582 22,972
--------- --------- ---------
Total $ 253,207 $ 239,802 $ 224,613
========= ========= =========
Net interest income $ 9,902 $ 9,520 $ 8,888
========= ========= =========
Net interest spread 3.76% 3.62% 3.37%
====== ======== =======
Net yield on
Interest-earning
assets 4.14% 4.23% 4.22%
====== ======== =======
Ratio of interest-
earning assets
to interest-bearing
liabilities 1.27x 1.26x 1.26x
======= ========== ==========
(1) Yield computed using the average amortized cost for securities available for
sale.
35.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
The table below shows the effect of volume and rate changes on net interest
income on a pre-tax basis.
a 2003 Compared to 2002 2002 Compared to 2001
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Other interest-earning assets $ 90 $ (79) $ 11 $ (79) $ (342) $ (421)
Total securities 209 (856) (647) 73 (559) (486)
Loans, net 194 (1,096) (902) 1,254 (1,315) (61)
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 493 (2,031) (1,538) 1,248 (2,216) (968)
Interest-bearing demand deposits 1 (129) (128) 27 (63) (36)
Savings deposits 210 (740) (530) 405 (949) (544)
Time deposits (148) (1,114) (1,262) (299) (721) (1,020)
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 63 (1,983) (1,920) 133 (1,733) (1,600)
--------- --------- --------- --------- --------- ---------
Net change in net interest income (a) $ 430 $ (48) $ 382 $ 1,115 $ (483) $ 632
========= ========= ========= ========= ========= =========
(a) The net change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
NONINTEREST INCOME
Noninterest income includes fees and service charges on deposit accounts and
gains on sales of loans. Noninterest income has increased during the past three
years, primarily due to a high volume of sales of residential real estate
mortgages to the secondary market which was a result of interest rates
decreasing during 2003, 2002 and 2001. The number of loans processed during 2003
increased over 2002. This volume is expected to decline during 2004 as the
Company expects interest rates to stabilize or increase. Service charges and
fees on deposit accounts have declined during the last three years despite the
increase in average deposit accounts for the Company. The decline in service
charge income was due to one large business customer that had left the Company
in early 2003.
36.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
NONINTEREST EXPENSE
Noninterest expense increased during 2003. During 2003 and 2002, the Company
lowered benefit plan discount rates due to the low rate environment, which
resulted in increased pension and deferred compensation expense. The expense
related to the defined benefit pension plan for 2003 was $369,000 while for 2002
the expense was $228,000. Deferred compensation plan expense was $436,000 for
2003 compared to 2002 expense of $208,000. The Company continues to fund 100% of
the employees' health insurance and to offer a defined benefit pension plan in
conjunction with a matching 401(k) plan. Expense increases related to these
benefit packages are expected to continue in the future. However, the increases
are not expected to be as large as 2003 increases.
Total noninterest expense for 2001 totaled $5.6 million with $3.3 million of
that being attributed to salaries and employee benefits.
FEDERAL INCOME TAXES
Income tax expense decreased during 2003 to $1.5 million compared to $1.6
million in 2002. Income before taxes declined from 2002 which resulted in the
decline in income tax expense.
The effective tax rates for 2003, 2002 and 2001 are shown in the table below:
2003 2002 2001
---- ---- ----
Income before tax (In thousands) $ 5,385 $ 5,703 $ 4,910
Income tax expense (In thousands) 1,500 1,609 1,409
Effective tax rate 27.9% 28.2% 28.7%
NET INCOME
Consolidated net income was $3.9 million for 2003, with the decrease from last
year attributed to a larger increase in noninterest expenses than the increase
to net interest income. The Company experienced a decline in interest expense on
deposits due to the declining interest rate environment during 2003. Also an
increase in the volume of loans sold to the secondary market allowed the Company
to experience an increase in noninterest income. Basic earnings per share for
2003 was $3.12 compared to $ 3.27 for 2002. Diluted earnings per share for 2003
was $3.11 compared to $3.26 for 2002.
Net income for 2001 was $3.5 million. This can be attributed to an increase in
interest income on tax-exempt investments with a corresponding decrease in
income tax expense.
37.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
CRITICAL ACCOUNTING POLICIES
Certain of the Company's accounting policies are important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in facts and
circumstances. Facts and circumstances which could effect these judgments
include, but without limitation, changes in interest rates, in the performance
of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan
losses and determining the fair value of securities.
The Company believes that the allowance for loan losses and related provision
expense are particularly susceptible to material change in the near term. As a
result of strong asset quality and low levels of charge-offs during the past
three years, the Company recorded no provision expense during 2003 and 2002, and
provision for loan losses was $83,000 for the year ending December 31, 2001. In
future periods the allowance for loan losses may be dramatically impacted due to
changes in the local economy and individual borrower situations. The Company
believes its significant concentration in residential mortgage loans and the
importance of the tourism industry to the local economy are particularly
important factors that could have a significant impact on the allowance for loan
losses and provision for loan losses if these factors significantly change from
current conditions. As of December 31, 2003, the Company held $44.8 million of
commercial and commercial real estate loans, and the ability of our borrowers to
repay such loans may be significantly impacted by changes in the economy or
individual borrower conditions. Management continues to take steps to help
ensure the asset quality of the loan portfolio; however, the allowance for loan
losses and related provision expense could increase significantly in future
periods depending on changes in the factors discussed above.
Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported separately in accumulated other comprehensive income,
net of tax. As a result of changes in the fair market value of the Company's
available for sale securities portfolio, total comprehensive income
increased/(decreased) by $(361,000), $96,000 and $633,000 for 2003, 2002 and
2001. Additionally, all investment securities are required to be written down to
fair value when a decline in fair value is not temporary; therefore, future
changes in the fair value of securities could have a significant impact on the
Company's operating results.
38.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2003, 2002 and 2001
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings involving the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area and competition, all or some of
which could cause actual results to differ materially from historical earnings
and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
39.
CNB CORPORATION
OFFICERS, COMMUNITY ADVISORS AND STAFF
OFFICERS AND COMMUNITY ADVISORS OF
CNB CORPORATION AND CITIZENS NATIONAL BANK
CNB CITIZENS NATIONAL STEPHEN J. CRUSOE INDIAN RIVER
CORPORATION BANK OFFICERS AND ASSISTANT VICE PRESIDENT
OFFICERS COMMUNITY ADVISORS MARIAN L. HARRISON BARBARA J. JOPPICH
ASSISTANT VICE PRESIDENT ASSISTANT VICE PRESIDENT &
ROBERT E. CHURCHILL ROBERT E. CHURCHILL SALLY J. LACROSS BRANCH MANAGER
CHAIRMAN & CHIEF CHAIRMAN & CHIEF ASSISTANT VICE PRESIDENT PAUL FISHER
EXECUTIVE OFFICER EXECUTIVE OFFICER CHRISTINA E. SWEET COMMUNITY ADVISOR
JAMES C. CONBOY, JR. JAMES C. CONBOY, JR. MANAGER INTERNAL AUDIT JOHN J. OLSZEWSKI
PRESIDENT & CHIEF PRESIDENT & CHIEF RANDY J. MALTBY COMMUNITY ADVISOR
OPERATING OFFICER OPERATING OFFICER TECHNOLOGY OFFICER JEFF SWADLING
SUSAN A. ENO SUSAN A. ENO SUSAN J. CLEARY COMMUNITY ADVISOR
EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT LOAN OFFICER
JOHN F. EKDAHL & CASHIER VICTORIA J. HAND MACKINAW CITY
SENIOR VICE PRESIDENT JOHN F. EKDAHL LOAN OFFICER
DOUGLAS W. DAMM SENIOR VICE PRESIDENT MICHELLE J. OSTWALD SUSAN M. BRANDT
SENIOR VICE PRESIDENT DOUGLAS W. DAMM LOAN OFFICER BANKING OFFICER &
JOHN P. WARD SENIOR VICE PRESIDENT & FLORENCE CASWELL BRANCH MANAGER
SECRETARY SENIOR LOAN OFFICER ASSISTANT LOAN
IRENE M. ENGLISH IRENE M. ENGLISH OPERATIONS OFFICER PELLSTON
TREASURER VICE PRESIDENT &
CONTROLLER ONAWAY BARBARA A. ANDERSON
KENNETH N. SHELDON BANKING OFFICER &
VICE PRESIDENT LAURA L. SHACK BRANCH MANAGER
EXAMINATION BANKING OFFICER & RICHARD CONRAD
RICHARD L. WINE BRANCH MANAGER COMMUNITY ADVISOR
VICE PRESIDENT
SUSAN L. CASWELL
ASSISTANT VICE PRESIDENT
STAFF OF CITIZENS NATIONAL BANK
MAIN OFFICE DOWNTOWN MACKINAW CITY INDIAN RIVER
DRIVE-IN
Eugene Andrzejewski Lynne J. Nissley CHEBOYGAN Susan M. Brandt Barbara J. Joppich
Kurt Blaskowski Kelli M. Reimann Deborah L. Closs Jody L. Jacobs
Susan D. Bliss Katherine H. Rhome Deanna Hudson Jennifer M. LaHaie Tammy Kirsch
Susan M. Bohn Ronald D. Rose Carla Jankoviak Amber LaPrairie
Kathleen A. Charboneau Carla Roznowski PELLSTON Michelle Miller
Joan T. Clarey Carolyn A. Scheele EAST SIDE LeRoy Ruotanen
Lora L. Clouser Nancy Scott DRIVE-IN Barbara A. Anderson Susan Sova
Patricia K. Comps Sandra L. Shawl CHEBOYGAN Sheri L. Kindell Helen K. Stumpf
Arlene Daniel Kim Sinclair
Trisha M. Dobias Sally A. Spray Sharon Coppernoll ONAWAY
Mary E. Greenwood Kelisue Stachon Lori Thornton
Debra Grice M. Teresa Sullivan Laura L. Shack
Helen R. Hart Kathy S. Swackhamer SOUTH BRANCH Rachel Bischoff-Peel
Miranda Lake Megan Tomaski DRIVE-IN Pamela A. Kolasa
Betty J. Lewis Rebecca Tomaski CHEBOYGAN Sara L. LaLonde
Steven R. Luttmann Darlene L. Vallance Lynn D. Porter
Loretta Merchant Wendelin K. Whippo Karen Barrette Kathleen T. Robbins
Kathryn Miller Nicole M. Wichlacz Diane S. Musnlock Kathleen S. Wilson
Adam Newman Sherry M. Wichlacz Diane S. Poirier
Penny L. Newman
40.
CNB CORPORATION
DIRECTORS AND DIRECTORS EMERITI
DIRECTORS OF CNB CORPORATION &
CITIZENS NATIONAL BANK
ROBERT E. CHURCHILL
Chairman & Chief Executive Officer, CNB Corporation
Chairman & Chief Executive Officer,
Citizens National Bank
STEVEN J. BAKER, D.V.M.
Indian River Veterinary Clinic
JAMES C. CONBOY, JR.
President & Chief Operating Officer, CNB Corporation
President & Chief Operating Officer, Citizens National Bank
KATHLEEN M. DARROW
President, Darrow Bros. Excavating, Inc.
Retired, formerly Group Sales & Special Events
Coordinator for the Mackinac State Historic Parks
THOMAS J. ELLENBERGER
Vice President & Secretary
Albert Ellenberger Lumber Company
VINCENT J. HILLESHEIM
President, Anchor In Marina
Co-Manager, Crusoe Enterprises, LLC
JOHN L. ORMSBEE
Owner, Jack's Sales
FRANCIS J. VANANTWERP, JR.
Vice President Durocher Marine Division
Kokosing Construction Company, Inc.
JOHN P. WARD
Retired, formerly Senior Vice President,
CNB Corporation and Citizens National Bank
Secretary, CNB Corporation
DIRECTORS EMERITI
LYLE MCKINLEY, THOMAS A. ELLENBERGER,
THOMAS J. FISHER
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K or the 2003
Annual Report Summary & Highlights by writing John P. Ward, Secretary,
CNB Corporation, P.O. Box 10,
Cheboygan, Michigan 49721.
41.