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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 September 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 October 24, 2003 there were 1,185,192 shares of the issuer's common stock
outstanding.
1
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
September 30, December 31,
2003 2002
ASSETS (Unaudited)
Cash and due from banks $ 6,819 $ 7,026
Interest-bearing deposits with other
financial institutions 9,041 8,007
Federal funds sold 13,350 7,700
-------- --------
Total cash and cash equivalents 29,210 22,733
Securities available for sale 66,868 57,533
Securities held to maturity (market value of $5,312
in 2003 and $5,755 in 2002) 5,199 5,615
Other securities 6,302 6,252
Loans, net of allowance for loan losses of $1,615
in 2003 and $1,669 in 2002 143,976 144,637
Premises and equipment, net 3,835 3,442
Other assets 4,299 4,227
-------- --------
Total assets $259,689 $244,439
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 38,610 $ 32,281
Interest-bearing 191,860 184,163
-------- --------
Total deposits 230,470 216,444
Other liabilities 3,283 3,258
-------- --------
Total liabilities 233,753 219,702
-------- --------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 1,185,192 and 1,188,372 shares issued
and outstanding in 2003 and 2002 2,963 2,971
Additional paid-in capital 18,083 18,240
Retained earnings 4,170 2,529
Accumulated other comprehensive income, net of tax 720 997
-------- --------
Total shareholders' equity 25,936 24,737
-------- --------
Total liabilities and shareholders' equity $259,689 $244,439
======== ========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
(Unaudited)
INTEREST INCOME
Loans, including fees $ 2,596 $ 2,882 $ 8,028 $ 8,513
Securities
Taxable 400 554 1,313 1,798
Tax exempt 211 216 657 688
Interest on federal funds sold 69 74 164 142
-------- -------- -------- --------
Total interest income 3,276 3,726 10,162 11,141
INTEREST EXPENSE ON DEPOSITS 796 1,317 2,614 4,224
-------- -------- -------- --------
NET INTEREST INCOME 2,480 2,409 7,548 6,917
Provision for loan losses -- -- -- --
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,480 2,409 7,548 6,917
-------- -------- -------- --------
NONINTEREST INCOME
Service charges and fees 250 282 714 764
Net realized gains from sales of loans 232 217 709 408
Loan servicing fees, net of amortization (9) (21) (72) 19
Other income 176 67 255 262
-------- -------- -------- --------
Total noninterest income 649 545 1,606 1,453
NONINTEREST EXPENSES
Salaries and benefits 1,004 924 2,951 2,672
Occupancy 188 220 569 580
Supplies 36 43 125 116
Other expenses 412 327 1,263 902
-------- -------- -------- --------
Total noninterest expenses 1,640 1,514 4,908 4,270
INCOME BEFORE INCOME TAXES 1,489 1,440 4,246 4,100
Income tax expense 391 419 1,181 1,141
-------- -------- -------- --------
NET INCOME $ 1,098 $ 1,021 $ 3,065 $ 2,959
======== ======== ======== ========
TOTAL COMPREHENSIVE INCOME $ 836 $ 1,257 $ 2,788 $ 3,205
======== ======== ======== ========
Return on average assets (annualized) 1.67% 1.66% 1.62% 1.66%
Return on average equity (annualized) 17.02% 16.40% 16.00% 16.25%
Basic earnings per share $ .93 $ .86 $ 2.58 $ 2.48
Diluted earnings per share $ .92 $ .85 $ 2.58 $ 2.47
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Nine months ended September 30,
2003 2002
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,065 $ 2,959
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 729 481
Loans originated for sale (36,678) (21,830)
Proceeds from sales of loans originated for sale 37,112 22,074
Gain on sales of loans (709) (408)
Increase in other assets 72 (559)
Decrease in other liabilities 25 221
-------- --------
Total adjustments 551 (21)
-------- --------
Net cash from operating activities 3,616 2,938
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 24,227 15,246
Purchase of securities available for sale (34,415) (17,189)
Proceeds from maturities of securities held to maturity 1,879 2,151
Purchase of securities held to maturity (1,463) (699)
Proceeds from maturities of other securities 1,285 2,700
Purchase of other securities (1,335) (2,342)
Net change in portfolio loans 936 (9,306)
Premises and equipment expenditures (690) (100)
-------- --------
Net cash from investing activities (9,576) (9,539)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 14,026 13,580
Dividends paid (1,424) (1,381)
Proceeds from exercise of stock options 8 --
Purchases of common stock (173) (22)
-------- --------
Net cash from financing activities 12,437 12,177
Net change in cash and cash equivalents 6,477 5,576
Cash and cash equivalents at beginning of year 22,733 16,847
-------- --------
Cash and cash equivalents at end of period $ 29,210 $ 22,423
======== ========
Cash paid during the period for:
Interest $ 2,622 $ 4,289
Income taxes $ 1,208 $ 1,259
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 nine months
ending ending
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- ------
Net income as reported $ 1,098 $ 1,021 $ 3,065 $2,959
Proforma net income 1,098 1,021 3,065 2,959
Reported earnings per share
Basic $ .93 $ .86 $ 2.58 $ 2.48
Diluted .92 .85 2.58 2.47
Proforma earnings per share
Basic $ .93 $ .86 $ 2.58 $ 2.48
Diluted .92 .85 2.58 2.47
There were no stock options granted during the three or nine months ended
September 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 January 1, 2003 17,713 29,498 $ 44.83
Options exercised -- (264) 26.66
Options granted -- -- --
------ ------
Balance at September 30, 2003 17,713 29,234 44.99
====== ======
At September 30, 2003 options outstanding had a weighted average remaining life
of approximately 5.1 years. There were 29,234 options exercisable at September
30, 2003 with a weighted-average exercise price of $ 44.99.
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 nine month
period ending September 30, 2003 the weighted average shares outstanding in
calculating basic earnings per share were 1,185,266 and 1,186,733 while the
weighted average number of shares for diluted earnings per share were 1,188,609
and 1,189,910. For the three and nine month period ending September 30, 2002 the
weighted average shares outstanding in calculating basic earnings per share were
1,193,062 and 1,193,156 while the weighted average number of shares for diluted
earnings per share were 1,197,558 and 1,198,380.
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 nine month period ending
September 30, 2003.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents increased $6.5 million or
28.5%. During the nine months ending September 30, 2003, $3.6 million of cash
was provided from operating activities. Investing activities utilized $9.6
million while financing activities provided $12.4 million in cash due to an
increase in deposits for the period ending September 30, 2003.
SECURITIES
The securities portfolio increased $8.9 million or 14.1%, since December 31,
2002. Securities available for sale increased to 92.8% of total investments, up
from 91.1% at year-end.
The fair values and related unrealized gains and losses for securities available
for sale were as follows, in thousands of dollars:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------- ------- -------
Available for Sale
SEPTEMBER 30, 2003
U.S. Government agency $37,741 $ 398 $ (30)
State and municipal 29,127 731 (8)
------- ------- -------
$66,868 $ 1,129 $ (38)
======= ======= =======
DECEMBER 31, 2002
U.S. Government agency $26,989 $ 687 $ --
State and municipal 30,544 866 (41)
------- ------- -------
$57,533 $ 1,553 $ (41)
======= ======= =======
7
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows, in thousand of dollars:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gain Loss Value
SEPTEMBER 30, 2003
State and municipal $5,199 $ 114 $ (1) $5,312
DECEMBER 31, 2002
State and municipal $5,615 $ 140 $ -- $5,755
The carrying amount and fair value of securities by contractual maturity at
September 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 $ 10,963 $ 497 $ 506
Due from one to five years 50,661 2,488 2,544
Due from five to ten years 2,934 728 776
Due after ten years 2,310 1,486 1,486
--------- -------- --------
$ 66,868 $ 5,199 $ 5,312
========= ======== ========
LOANS
Loans at September 30, 2003 decreased $661,000 from December 31, 2002. The table
below shows total loans outstanding by type, in thousands of dollars, at
September 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
September 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
10.4% of total loans.
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September 30, 2003 December 31, 2002
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate $ 90,404 62.09% $ 92,653 63.32%
Consumer 10,235 7.03% 11,270 7.70%
Commercial real estate 35,741 24.55% 31,581 21.58%
Commercial 9,226 6.33% 10,824 7.40%
----------------------- ------------------------
145,606 100.00% 146,328 100.00%
Deferred loan origination fees, net (15) (22)
Allowance for loan losses (1,615) (1,669)
--------- ---------
Loans, net $ 143,976 $ 144,637
========= =========
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, follows:
2003 2002
--------- --------
Beginning balance $ 1,669 $ 1,667
Provision for loan losses -- --
Charge-offs (65) (38)
Recoveries 11 52
--------- --------
Ending balance $ 1,615 $ 1,681
========= ========
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.
September 30, December 31,
2003 2002
(dollars in thousands)
Nonaccrual $ -- $ --
Loans past due 90 days or more 107 114
Troubled debt restructurings -- --
---------- --------
Total nonperforming loans $ 107 $ 114
========== ========
Percent of total loans 0.07% 0.08%
9
DEPOSITS
Deposits at September 30, 2003 increased $14.0 million since December 31, 2002.
The growth can be attributed to seasonal activity which allowed a $6.3 million
increase in noninterest bearing deposits and $7.7 million increase in interest
bearing deposits.
LIQUIDITY AND FUNDS MANAGEMENT
As of September 30, 2003, the Company had $13.4 million in federal funds sold,
$66.9 million in securities available for sale and $497,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 35.0% of total deposits as of September 30, 2003.
Total equity of the Company at September 30, 2003 was $25.9 million compared to
$24.7 million at December 31, 2002.
RESULTS OF OPERATIONS
CNB Corporation's 2003 net income for the first nine months was $3.1 million an
increase of $106,000 compared to the same period in 2002. Basic earnings per
share was $2.58 for the nine months ended 2003 and $2.48 for the same period in
2002. The return on average assets was 1.62% compared to 1.66% for 2002. The
return on average equity was 16.00% compared to 16.25% for 2002.
Net income for the three months ending September 30, 2003 was $1.1 million
compared to $1.0 million for the same period in 2002. This was an increase of
$77,000 or 7.5%. Basic earnings per share was $0.93 compared to $0.86 for 2002.
The return on average assets was 1.67% compared to 1.66% for 2002. The return on
average equity was 17.02% compared to 16.40% for 2002.
For the first nine months of 2003, net interest income was $7.5 million, an
increase of $631,000 or 9.1% 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 net interest margin of 4.22% for 2003
compared to 4.12% for 2002. Net interest income for the three month period
ending September 30, 2003 was $2.5 million compared to $2.4 million for 2002.
Again the decline in interest expense on deposits exceeded the decline in
overall interest income.
Noninterest income for the nine month period ending September 30, 2003 was $1.6
million, an increase of $153,000 or 10.5% over the same period last year. This
can be attributed to an increase in the net realized gain on the sale of loans
as a result of increasing sales of mortgages to the secondary market. With an
increase in mortgage rates this trend is not expected to continue throughout the
rest of 2003. Also, during 2003 the Company realized income from life insurance
proceeds amounting to $125,000 compared to $105,000 during 2002. Noninterest
income for the three month period ending September 30, 2003 was $649,000
compared to $545,000 for 2002. The increase is due to $125,000 in life insurance
proceeds that were recorded in the third quarter of 2003.
Noninterest expense for the nine month period ending September 30, 2003 was $4.9
million compared to $4.3 million for 2002. This is an increase of $638,000, or
14.9%. The increase can be attributed to the fact the Company continues to fund
100% of the employee's health insurance and to
10
offer a defined benefit pension plan; both of these expenses account for
$130,000 of the increase. In addition, there was an increase of $130,000 in
employee wages from 2002 to 2003. For 2003, the Company changed the discount
rate for calculation of the 1985 directors deferred compensation plan which
account for $217,000 of the annual increase to noninterest expense.
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
None
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: November 13, 2003 /s/ Robert E. Churchill
-------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
Date: November 13, 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