-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R2BI6BmQSu9GFUyPNLsUUN54XbqegDY0KQeY+RvJJM1urSrJpVaZ1OxfZ/qchqW+ psTHC8qyYxSpz+qVaWHHWg== 0000950124-04-001332.txt : 20040330 0000950124-04-001332.hdr.sgml : 20040330 20040330122355 ACCESSION NUMBER: 0000950124-04-001332 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB CORP /MI/ CENTRAL INDEX KEY: 0000779125 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 362662386 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-00737 FILM NUMBER: 04699132 BUSINESS ADDRESS: STREET 1: PO BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 BUSINESS PHONE: 6166277111 MAIL ADDRESS: STREET 1: P O BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 10-K 1 k82473e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED 12/31/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 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) Registrant's telephone number (231) 627-7111 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $ 2.50 PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark if registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes_________ No____X_____ Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 was $ 53,894,800. As of March 17, 2004 there were outstanding 1,243,652 shares of the registrant's common stock, $ 2.50 par value. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the registrant's annual report to security holders for fiscal year ended December 31, 2003 are incorporated by reference in Part I and Part II of this report, and specified portions of the registrant's proxy statement for its annual meeting of shareholders to be held May 18, 2004 are incorporated by reference in Part III of this report. Page 1 PART I 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 phrases, "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 to 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. ITEM 1 - BUSINESS CNB Corporation (the Company) was incorporated in June, 1985 as a business corporation under the Michigan Business Corporation Act, pursuant to the authorization and direction of the Board of Directors of the Citizens National Bank of Cheboygan (the Bank). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act with the Bank as its only wholly-owned subsidiary. The Bank was acquired by the Company effective December 31, 1985. The Company has corporate power to engage in such activities as permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve Board. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or such other activities which are closely related to the business of banking. During 2001, the Company, through its subsidiary, the Bank, formed the CNB Mortgage Corporation. Residential mortgages were transferred to the new subsidiary in October, 2001. The change had no impact on our customers who will continue to have their loans serviced locally by our Bank. The Bank offers a full range of banking services to individuals, partnerships, corporations, and other entities. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. The Bank's lending function provides a full range of loan products. These include real estate mortgages, secured and unsecured commercial and consumer loans, check credit loans, lines of credit, home equity loans and construction financing. The Bank also participates in specialty loan programs through the Michigan State Housing Development Authority, Small Business Administration, Federal Home Loan Mortgage Corporation, Farm Service Agency and Mortgage Guaranty Insurance Corporation. Through correspondent relationships, the Bank also makes available credit cards and student loans. The Bank's loan portfolio is over 62% residential real estate mortgages on both primary and secondary homes. The borrower base is very diverse and loan to value ratios are generally 80% or less. The commercial loan portfolio accounts for approximately 6% of total loans. Agricultural lending is minimal and secured by real estate. Construction lending is predominately residential, with only an occasional "spec" home or commercial building. Unsecured lending is very limited and personal guarantees are required on most commercial loans. The Bank makes first and second mortgage loans to its customers for the purchase of residential and commercial properties. Historically, the Bank has sold its long term fixed rate residential mortgage loans qualifying for the secondary market to the Federal Home Loan Mortgage Corporation (FHLMC). The mortgage loan portfolio serviced by the Bank for the FHLMC totaled approximately $ 61 million at December 31, 2003. Page 2 Banking services are delivered through five full-service banking offices and three drive-in branches plus nine automated teller machines in Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the counties is primarily tourism with light manufacturing. The Bank maintains correspondent bank relationships with several larger banks, which involve check clearing operations, transfer of funds, loan participation, and the purchase and sale of federal funds and other similar services. Under various agency relationships, the Bank provides trust and discount brokerage services and mutual fund, annuity and life insurance products to its customers. In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac, Presque Isle and Montmorency Counties, the Bank is one of three principal banking institutions located within this market. One is a member of a multi-bank holding company with substantially more assets than the Company, while the other is an independent community bank. There are also two credit unions, one savings and loan association and a brokerage firm. As of December 31, 2003, the Bank employed 67 full-time and 17 part-time employees. This compares to 68 full-time and 15 part-time employees as of December 31, 2002. Neither the Company or CNB Mortgage Corporation have any full-time employees. Their operation and business are carried out by officers and employees of the Bank who are not compensated by the Company. Page 3 SECURITIES The year end fair values and related gross unrealized gains and losses for securities available for sale, were as follows:
AVAILABLE FOR SALE Gross Gross Fair Unrealized Unrealized 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) ======= ======= ======= 2001 U.S. government and agency $33,057 $ 986 $ - State and municipal 28,061 432 (53) ------- ------- ------- $61,118 $ 1,418 $ (53) ======= ======= =======
The year end carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
HELD TO MATURITY Gross Gross Carrying Unrecognized Unrecognized Fair Amount Gains Losses Value ------ ----- ------ ----- (In thousands) 2003 State and municipal $4,892 $ 117 $ - $5,009 ====== ====== ====== ====== 2002 State and municipal $5,615 $ 140 $ - $5,755 ====== ====== ====== ====== 2001 State and municipal $7,168 $ 132 $ (186) $7,114 ====== ====== ====== ======
Scheduled maturities of the fair value of securities available for sale and the carrying amount of held to maturity securities at December 31, 2003, were as follows:
Due in Due from Due from Due one year one to five to after ten or less five years ten years years Total ------- ---------- --------- ----- ----- (Dollars in thousands) U.S. Government and agencies $ 3,055 $ 45,747 $ - $ - $ 48,802 State and municipal 8,257 17,463 2,300 3,787 31,807 ----------- ------------ --------------- --------------- -------------- $ 11,312 $ 63,210 $ 2,300 $ 3,787 $ 80,609 =========== ============ =============== =============== ============== Yield 3.93% 2.96% 4.04% 3.27% 3.14%
Page 4 LOANS The following is a summary of loans at December 31:
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) Residential real estate $ 89,042 $ 92,653 $ 84,588 $ 77,823 $ 71,709 Consumer 9,660 11,270 11,767 12,155 10,891 Commercial real estate 35,258 31,581 26,536 26,571 24,810 Commercial 9,540 10,824 11,912 11,193 11,939 ------------- --------------- --------------- -------------- --------------- 143,500 146,328 134,803 127,742 119,349 Deferred loan origination fees, net (15) (22) (30) (41) (58) Allowance for loan losses (1,575) (1,669) (1,667) (1,652) (1,583) ------------- --------------- --------------- -------------- --------------- $141,910 $144,637 $ 133,106 $126,049 $ 117,708 ============= =============== =============== ============== ===============
Maturity and Rate Sensitivity of Selected Loans The following table presents the remaining maturity of total loans outstanding excluding residential real estate and consumer loans at December 31, 2003, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity of changes in interest rates.
Total ----- (In thousands) In one year or less $ 14,832 After one year but within five years Interest rates are floating or adjustable 4,248 Interest rates are fixed or predetermined 17,088 After five years Interest rates are floating or adjustable 2,953 Interest rates are fixed or predetermined 5,677 --------------- $ 44,798 ===============
Summary of loan loss experience is as follows: Additional information relative to the allowance for loan losses is presented in the following table. This table summarizes loan balances at the end of each period and daily average balances, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense. Page 5
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at the beginning of the period $ 1,669 $ 1,667 $ 1,652 $ 1,583 $ 1,518 Less Charge-offs: Residential real estate 8 - - - - Consumer 98 49 84 86 40 Commercial real estate - - - - - Commercial - 1 3 - 3 ------------- --------------- --------------- -------------- --------------- Total charge-offs 106 50 87 86 43 ------------- --------------- --------------- -------------- --------------- Recoveries: Residential real estate 1 - 3 14 1 Consumer 11 52 15 28 7 Commercial real estate - - - 2 - Commercial - - 1 1 - ------------- --------------- --------------- -------------- --------------- Total recoveries 12 52 19 45 8 ------------- --------------- --------------- -------------- --------------- Provision charged to expense - - 83 110 100 ------------- --------------- --------------- -------------- --------------- Allowance for loan losses, end of period $ 1,575 $ 1,669 $ 1,667 $ 1,652 $ 1,583 ============= =============== =============== ============== =============== Total loans outstanding at end of period $143,500 $146,328 $ 134,803 $127,742 $ 119,349 Average total loans outstanding for the year $146,330 $143,840 $ 128,913 $124,732 $ 114,042 Ratio of net charge-offs to daily average loans outstanding 0.06% 0.00% 0.05% 0.03% 0.03% Ratio of net charge-offs to total loans outstanding 0.07% 0.00% 0.05% 0.03% 0.03%
The allocation of the allowance for loan losses for the years ended December 31 is:
Residential Commercial Real Estate Consumer Real Estate Commercial Unallocated Total ----------- -------- ----------- ---------- ----------- ----- (Dollars in thousands) 2003 Allowance amount $258 $48 $88 $49 $1,132 $1,575 % of Total loans 62.1% 6.7% 24.6% 6.6% 100.0% 2002 Allowance amount $244 $32 $79 $45 $1,269 $1,669 % of Total loans 61.8% 7.7% 23.1% 7.4% 100.0% 2001 Allowance amount $219 $44 $65 $30 $1,309 $1,667 % of Total loans 62.8% 8.7% 19.7% 8.8% 100.0% 2000 Allowance amount $218 $79 $67 $64 $1,224 $1,652 % of Total loans 60.9% 9.5% 20.8% 8.8% 100.0% 1999 Allowance amount $224 $35 $77 $29 $1,218 $1,583 % of Total loans 60.1% 9.1% 20.8% 10.0% 100.0%
The review of the loan portfolio revealed no undue concentrations of credit, however, the portfolio continues to be concentrated in residential real estate mortgages and highly dependent upon the tourist industry for the source of repayment. Because the reliance on tourism is both primary, (i.e. loans to motels, hotels and restaurants, etc.) and secondary (i.e. loans to employees of tourist related businesses), it is difficult to assess a specific dollar amount of inherent loss potential. Likewise, the residential real estate market has been stable or increasing, so inherent loss potential in this concentration is also difficult to reasonably assess. Therefore, the tourism industry and residential real estate mortgage concentrations are considered in establishing the allowance for loan loss. Page 6 The following is a summary of nonaccrual, past due and restructured loans as of December 31:
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) Nonaccrual loans $ - $ - $ - $ 181 $ 181 Loans past due 90 days or more 408 114 647 81 59 Troubled debt restructurings - - - - - ------------- --------------- --------------- -------------- --------------- $ 408 $ 114 $ 647 $ 262 $ 240 ============= =============== =============== ============== ===============
DEPOSITS The following table presents the remaining maturity of time deposits individually exceeding $ 100,000 at December 31, 2003. Dollars are reported in thousands. Up to 3 Months $ 1,078 3 to 6 Months 2,619 7 to 12 Months 7,447 Over 12 Months 4,409 ------------ $15,553 ============
SUPERVISION AND REGULATION As a bank holding company within the meaning of the Bank Holding Company Act, the Company is required by said Act to file annual reports of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiary, to examination by the Federal Reserve Board. The Federal Reserve Board is the primary regulator of the Company. The Bank Holding Company Act requires every bank holding company to obtain prior approval of the Federal Reserve Board before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. However, holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be so closely related to banking or the management or control of banks as to be a proper incident thereto. Under current regulations of the Federal Reserve Board, a holding company and its nonbank subsidiaries are permitted, among other activities, to engage, subject to certain specified limitations, in such banking related business ventures as consumer finance, equipment leasing, computer service bureau and software operations, data processing, discount securities brokerage, mortgage banking and brokerage, sale and leaseback, and other forms of real estate banking. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. In addition, Federal legislation prohibits acquisition of "control" of a bank or bank holding company without prior notice to certain federal bank regulators. "Control" in certain cases may include the acquisition of as little as 10% of the outstanding shares of capital stock. Page 7 The Company's cash revenues are derived primarily from dividends paid by the Bank. National banking laws restrict the payment of cash dividends by a national bank by providing, subject to certain exceptions, that dividends may be paid only out of net profits then on hand after deducting therefrom its losses and bad debts, and no dividends may be paid unless the bank will have a surplus amounting to not less than one hundred percent (100%) of its common capital stock. The Bank is a national banking association and as such is subject to the regulations of, and supervision and regular examination by, the Office of the Comptroller of the Currency ("OCC"). Deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of the State of Michigan and Title 12 of the United States Code include the requirements that banks maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by a bank, and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits, and restrictions relating to investments and other activities of a bank. The Federal Reserve Board has established guidelines for risk based capital by bank holding companies. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance-sheet items in the calculation of capital requirements. An analysis of the Company's regulatory capital requirements at December 31, 2003 is presented on page 23 of the Registrant's 2003 Annual Report in Note 14 Regulatory Capital to the Company's consolidated financial statements, which is incorporated herein by reference. ITEM 2 - PROPERTIES. The Company and the Bank have their primary office at 303 North Main Street, Cheboygan, Michigan. In addition, the Bank owns and operates the following facilities: Onaway Office, 20581 W. State Street, Onaway; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw City; Pellston Office, 200 Stimpson, Pellston; Indian River Office, 3990 Straits Highway, Indian River; South Side drive-in, 991 1/2 South Main Street, Cheboygan; Downtown drive-in, 414 Division Street, Cheboygan; and East Side drive-in, 816 East State Street, Cheboygan. All properties are owned by the Bank free of any mortgages or encumbrances. ITEM 3- LEGAL PROCEEDINGS. Neither the Company nor the Bank are a party to any pending legal proceedings other than the routine litigation that is incidental to the business of lending. ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no matters submitted to a vote of security holders during the fourth quarter of 2003. Page 8 PART II ITEM 5-MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company has no public trading market. All trades are handled on a direct basis between buyer and seller. The Bank acts as the Company's transfer agent. The principal market for the Company's stock consists of existing shareholders, family members of existing shareholders and individuals in its service area. The information detailing the range of high and low bid information for the Company's common stock and cash dividends declared for each full quarterly period within the two most recent fiscal years can be found under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. The information which indicates the amount of common stock that is subject to outstanding options or warrants to purchase, or securities convertible into, common equity of the registrant can be found in Note 8 on page 18 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. There are no public offerings pending. There are approximately 907 shareholders of record of the common stock of the Company as of January 31, 2004. During 2003, the Company declared regular dividends of $ 1.53 per share plus a special dividend of $ .57 per share. In 2002, the Company declared regular dividends of $ 1.47 plus a special dividend of $ .57. These per share statistics have been restated to reflect the 5% stock dividend paid March 12, 2004. The information detailing the cash dividends declared within the two most recent fiscal years can be found under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. These have resulted in a dividend payout ratio averaging 65.5% for the past three years. The Federal Reserve Board's Policy on the Payment of Cash Dividends by Bank Holding Companies restricts the payment of cash dividends based on the following criteria: (1) The Company's net income from operations over the past year must be sufficient to fully fund the dividend and (2) the prospective rate of earnings retention must be consistent with the Company's capital needs, asset quality and overall financial condition. ITEM 6-SELECTED FINANCIAL DATA. The information required by this item is included on Page 1 under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information required by this item is included on pages 28 through 39 of the Company's Annual Page 9 Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included on pages 32 through 33 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This information is included on pages 2 through 26 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2003, which is hereby incorporated by reference. ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A-CONTROLS AND PROCEDURES. As of the end of the period covered by this report (the "Evaluation Date") an evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Treasurer who serves as our Chief Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Treasurer have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that material information relating to the Company known to others within the Company required to be disclosed by the Company 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. There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2003 that materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. Page 10 PART III ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The disclosure required by this item is included under Code of Ethics in the Company's proxy statement for the annual meeting of shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. Certain information required by this item is included under the caption "Information About Director Nominees" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. Information about the executive officers of the Corporation is set forth below.
Name and Age Position - ------------ -------- Robert E. Churchill, 63 Chairman and Chief Executive Officer of the Corporation and Citizens National Bank of Cheboygan. Mr. Churchill has been an officer of the Corporation since its inception in 1985 and an employee of the Bank since 1975. He has been in his current position for more than 15 years. James C. Conboy, Jr., 56 President and Chief Operating Officer of the Corporation and Citizens National Bank of Cheboygan. Mr. Conboy joined the Corporation and the Bank during 1998. He has been in his current position for more than 5 years. Susan A. Eno, 49 Executive Vice President of the Corporation; Executive Vice President and Cashier of Citizens National Bank of Cheboygan. Ms. Eno has been an officer of the Corporation since 1996 and an employee of the Bank since 1971. She has been in her current position for more than 7 years. Douglas W. Damm, 50 Senior Vice President of the Corporation and Citizens National Bank of Cheboygan. Mr. Damm has been an officer of the Corporation since 2003 and an employee of the Bank since 1987. He has been in his current position for more than 16 years. John F. Ekdahl, 53 Senior Vice President of the Corporation and Citizens National Bank of Cheboygan. Mr. Ekdahl has been an officer of the Corporation since 1993 and an employee of the Bank since 1987. He has been in his current position for more than 10 years. John P. Ward, 67 Secretary of the Corporation. Mr. Ward retired from the Bank during 1998. Irene M. English, 44 Treasurer of the Corporation; Vice President and Controller of Citizens National Bank of Cheboygan. Ms. English was appointed an officer of the Corporation during 1998 and has been an employee of the Bank since 1985.
Page 11 ITEM 11-EXECUTIVE COMPENSATION. The information required by this item is included under the caption "Compensation of Executive Officers" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this item is included under the caption "Ownership of Common Stock" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. The information required by this item is included under the caption "Equity Compensation Plan Information" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is included under the caption "Certain Relationships and Related Transactions" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. ITEM 14-PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this item is included under the caption "Independent Auditors" of the Company's proxy statement for the Annual Meeting of Shareholders scheduled for May 18, 2004, which is hereby incorporated by reference. PART IV ITEM 15-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements. The following financial statements, notes to financial statements and independent auditor's report of CNB Corporation and its subsidiary are incorporated by reference in Item 8 of this report: Consolidated Balance Sheets-December 31, 2003 and 2002. Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001. Page 12 Notes to Consolidated Financial Statements. Independent Auditor's Report dated February 12, 2004. (2) Financial Statement Schedules. Not applicable (3) Exhibits. (3a) Articles of Incorporation. Previously filed as exhibit to the registrant's Form 10-KSB filed April 26, 1996. (3b) By-laws. Previously filed as exhibit to the registrant's Form 10-KSB filed April 26, 1996. (11) Statement regarding computation per share earnings. This information is disclosed in Note 10 to the Company's Financial Statements for the year ended December 31, 2003, which is hereby incorporated by reference. (13) Annual report to shareholders for the year ended December 31, 2003. (filed herewith). (21) Subsidiaries of the Company. (filed herewith). (23) Consent of Independent Auditors. (filed herewith). (31.1) Certification of Chief Executive Officer (31.2) Certification of Chief Financial Officer (32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last calendar quarter of the year covered by this report. (c) See Item 15(a) (3) (d) Financial Statement Schedules. Not applicable. Page 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNB CORPORATION (Registrant) Date March 25, 2004 /s/ Robert E. Churchill - --------------------------------------- Robert E. Churchill Chairman and Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 2003. /s/ Steven J. Baker /s/ Thomas J. Ellenberger /s/ John P. Ward - -------------------------------------- ---------------------------------- ---------------------------------- Steven J. Baker Thomas J. Ellenberger John P. Ward Director Director Director Secretary /s/ Robert E. Churchill /s/ Vincent J. Hillesheim /s/ Susan A. Eno - -------------------------------------- ---------------------------------- ---------------------------------- Robert E. Churchill Vincent J. Hillesheim Susan A. Eno Director Director Executive Vice President Chairman and Chief Executive Officer (Principal Executive Officer) /s/ James C. Conboy, Jr. /s/ John L. Ormsbee /s/ Douglas W. Damm - -------------------------------------- ---------------------------------- ---------------------------------- James C. Conboy, Jr. John L. Ormsbee Douglas W. Damm Director Director Senior Vice President President and Chief Operating Officer /s/ Kathleen M. Darrow /s/ Francis J. VanAntwerp, Jr. /s/ John F. Ekdahl - -------------------------------------- ---------------------------------- ---------------------------------- Kathleen M. Darrow Francis J. VanAntwerp, Jr. John F. Ekdahl Director Director Senior Vice President /s/ Irene M. English ---------------------------------- Irene M. English Treasurer (Principal Financial Officer and Principal Accounting Officer)
Page 14 EXHIBIT NO. DESCRIPTION - ----------- ----------- (13) Annual report to shareholders for the year ended December 31, 2003. (filed herewith). (21) Subsidiaries of the Company. (filed herewith). (23) Consent of Independent Auditors. (filed herewith). (31.1) Certification of Chief Executive Officer (31.2) Certification of Chief Financial Officer (32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-13 3 k82473exv13.txt ANNUAL REPORT TO SHAREHOLDERS 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. EX-21 4 k82473exv21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARY OF THE COMPANY: Citizens National Bank of Cheboygan is the sole subsidiary of the Company. EX-23 5 k82473exv23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference and use of our report, dated February 12, 2004, (which report is included in Item 13 of the Annual Report on Form 10-K of CNB Corporation for the year ended December 31, 2003) in CNB Corporation's Form S-8 (File No. 333-100250) for the 1996 Stock Option Plan. Crowe Chizek and Company LLC South Bend, Indiana March 24, 2004 EX-31.1 6 k82473exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Robert E. Churchill, Chairman and Chief Executive Officer of CNB Corporation (the "registrant") certify that: 1.) I have reviewed this annual report on Form 10-K of the registrant; 2.) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3.) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4.) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a.) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this annual report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c.) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, registrant's internal control over financial reporting; and 5.) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: March 25, 2004 /s/ Robert E. Churchill ---------------------------------------- Robert E. Churchill, Chairman & CEO EX-31.2 7 k82473exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Irene M. English, Treasurer of CNB Corporation (the "registrant") certify that: 1.) I have reviewed this annual report on Form 10-K of the registrant; 2.) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3.) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4.) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a.) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this annual report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c.) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, registrant's internal control over financial reporting; and 5.) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): a.) all significant deficiencies and material weaknessess in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 25, 2004 /s/ Irene M. English ------------------------------------- Irene M. English, Treasurer (Chief Financial Officer) EX-32.1 8 k82473exv32w1.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our respective knowledge and belief, that this Annual Report on Form 10-K for the period ended December 31, 2003 ("Report") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that information contained in this Report presents, in all material respects, the financial condition and results of operations of the registrant. Dated: March 25, 2004 /s/ Robert E. Churchill -------------------------------- Robert E. Churchill Chairman and Chief Executive Officer /s/ Irene M. English ----------------------------------- Irene M. English Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----