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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission file # 0-28388
CNB CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 North Main Street, Cheboygan MI 49721
(Address of principal executive offices, including Zip Code)
(231) 627-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No (X)
As of April 26, 2004 there were 1,247,282 shares of the issuer's common stock
outstanding.
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands,except per share data)
March 31, December 31,
2004 2003
ASSETS (Unaudited)
Cash and due from banks $ 5,435 $ 6,308
Interest-bearing deposits with other financial institutions 1,064 2,057
Federal funds sold 2,250 8,700
-------- --------
Total cash and cash equivalents 8,749 17,065
Securities available for sale 78,546 75,717
Securities held to maturity (market value of $4,737
in 2004 and $5,009 in 2003) 4,627 4,892
Other securities 6,382 6,312
Loans, held for sale 1,702 468
Loans, net of allowance for loan losses of $1,546
in 2004 and $1,575 in 2003 142,521 141,442
Premises and equipment, net 4,335 4,084
Other assets 4,577 4,426
-------- --------
Total assets $251,439 $254,406
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 31,708 $ 36,062
Interest-bearing 190,224 188,852
-------- --------
Total deposits 221,932 224,914
Other liabilities 3,930 4,354
-------- --------
Total liabilities 225,862 229,268
-------- --------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; and 1,247,282 and 1,243,939 shares issued
and outstanding in 2004 and 2003 3,118 3,110
Additional paid-in capital 21,021 20,932
Retained earnings 969 783
Accumulated other comprehensive income, net of tax 469 313
-------- --------
Total shareholders' equity 25,577 25,138
-------- --------
Total liabilities and shareholders' equity $251,439 $254,406
======== ========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended
March 31,
2004 2003
(Unaudited)
INTEREST INCOME
Loans, including fees $ 2,415 $ 2,728
Securities
Taxable 441 469
Tax exempt 187 230
Interest on federal funds sold 28 49
------- -------
Total interest income 3,071 3,476
INTEREST EXPENSE ON DEPOSITS 756 942
------- -------
NET INTEREST INCOME 2,315 2,534
Provision for loan losses -- --
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,315 2,534
------- -------
NONINTEREST INCOME
Service charges and fees 227 234
Net realized gains from sales of loans 62 203
Loan servicing fees, net of amortization 33 (30)
Other income 61 40
------- -------
Total noninterest income 383 447
NONINTEREST EXPENSES
Salaries and benefits 1,011 975
Occupancy 202 196
Other expenses 408 467
------- -------
Total noninterest expense 1,621 1,638
INCOME BEFORE INCOME TAXES 1,077 1,343
Income tax expense 304 354
------- -------
NET INCOME $ 773 $ 989
======= =======
TOTAL COMPREHENSIVE INCOME $ 929 $ 909
======= =======
Return on average assets (annualized) 1.22% 1.58%
Return on average equity (annualized) 12.12% 15.70%
Basic earnings per share $ .62 $ 0.79
Diluted earnings per share $ .62 $ 0.79
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Three months ended March 31,
2004 2003
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 773 $ 989
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 300 211
Loans originated for sale (4,195) (9,646)
Proceeds from sales of loans originated for sale 3,001 9,777
Gain on sales of loans (62) (203)
Decrease (increase)in other assets (208) 180
Decrease in other liabilities 263 72
-------- --------
Total adjustments (901) 391
-------- --------
Net cash from operating activities (128) 1,380
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 7,618 6,877
Purchase of securities available for sale (10,408) (13,355)
Proceeds from maturities of securities held to maturity 265 410
Purchase of securities held to maturity -- --
Proceeds from maturities of other securities 40 320
Purchase of other securities (110) (600)
Net change in portfolio loans (1,079) (1,266)
Premises and equipment expenditures (355) (20)
-------- --------
Net cash from investing activities (4,029) (7,634)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits (2,982) 1,366
Dividends paid (1,186) (1,188)
Net proceeds from exercise of stock options 24 1
Purchases of common stock (15) (8)
-------- --------
Net cash from financing activities (4,159) 171
Net change in cash and cash equivalents (8,316) (6,083)
Cash and cash equivalents at beginning of year 17,065 22,733
-------- --------
Cash and cash equivalents at end of period $ 8,749 $ 16,650
======== ========
Cash paid during the period for:
Interest $ 749 $ 1,451
Income taxes $ 382 $ 323
See accompanying notes to consolidated financial statements.
4
NOTES TO FINANCIAL STATEMENTS
Note 1-Basis of Presentation
The consolidated financial statements include the accounts of CNB Corporation
("Company") and its wholly owned subsidiary, Citizens National Bank of Cheboygan
("Bank") and the Bank's wholly owned subsidiary CNB Mortgage Corporation. All
significant intercompany accounts and transactions are eliminated in
consolidation. The statements have been prepared by management without an audit
by independent certified public accountants. However, these statements reflect
all adjustments (consisting of normal recurring accruals) and disclosures which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented and should be read in conjunction with
the notes to the financial statements included in the CNB Corporation's Form
10-K for the year ended December 31, 2003.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission.
Because the results of operations are so closely related to and responsive to
changes in economic conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the entire year.
Stock Compensation: The following proforma information presents net income and
basic and diluted earnings per share had the fair value method been used to
measure compensation for stock options granted. The exercise price of options
granted is equivalent to the market price of the underlying stock at the stock
grant date; therefore no compensation expense has been recorded for stock
options granted.
2004 2003
---- ----
Net income as reported $ 773 $ 989
Deduct: Stock based compensation
expense determined under
fair value method (11) --
-------- --------
Proforma net income 762 989
Basic earnings per share as reported $ 0.62 $ 0.79
Proforma basic earnings per share 0.61 0.79
Diluted earnings per share as reported 0.62 0.79
Proforma diluted earnings per share 0.61 0.79
There were no stock options granted during the three months ended March 31, 2004
and 2003.
5
In future years, as additional options are granted, the proforma effect on net
income and earnings per share may increase. Stock options are used to reward
certain officers and provide them with an additional equity interest. Options
are issued for 10 year periods and have varying vesting schedules. Information
about options available for grant and options granted follows:
Weighted
Average
Available Options Exercise
For Grant Outstanding Price
Balance at December 31, 2003 9,952 39,342 $44.10
Options exercised -- (8,173) 31.24
Options issued -- -- --
----- ------
Balance at March 31, 2004 9,952 31,169 $47.48
===== ======
At March 31, 2004 options outstanding had a weighted average remaining life of
approximately 5.9 years. There were 22,507 options exercisable at March 31, 2004
with a weighted-average exercise price of $ 47.07.
There have been no significant changes in the Company's critical accounting
policies since December 31, 2003.
Note 2-Earnings Per Share
Basic earnings per share are calculated solely on weighted-average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. For the three month period
ending March 31, 2004 the weighted average shares outstanding in calculating
basic earnings per share were 1,244,405 while the weighted average number of
shares for diluted earnings per share were 1,250,706. As of March 31, 2004 there
were 10,976 shares not considered in the earnings per share calculation because
they were antidilutive. For the three month period ending March 31, 2003 the
weighted average shares outstanding in calculating basic earnings per share were
1,247,727 while the weighted average number of shares for diluted earnings per
share were 1,250,878.
6
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation ("Company") and its wholly owned
subsidiary, Citizens National Bank of Cheboygan ("Bank") and the Bank's wholly
owned subsidiary CNB Mortgage Corporation for the three month period ending
March 31, 2004.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $8.3 million or
48.7%. During the period ending March 31, 2004, $128,000 in cash was utilized by
operating activities. Investing activities utilized $ 4.0 million during the
three months ended March 31, 2004 and financing activities utilized $4.2 million
due to a decrease in deposits and payments of cash dividends.
SECURITIES
The securities portfolio increased $2.6 million or 3.0%, since December 31,
2003. The available for sale portfolio increased to 87.7% of the investment
portfolio up from 87.1% at year-end.
The fair values and related unrealized gains and losses for securities available
for sale were as follows, in thousands of dollars:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
Available for Sale
MARCH 31, 2004
U.S. Government agency $52,338 $ 594 $ --
State and municipal 26,208 607 (1)
------- ------- -------
$78,546 $ 1,201 $ (1)
======= ======= =======
DECEMBER 31, 2003
U.S. Government agency $48,802 $ 363 $ (28)
State and municipal 26,915 638 (8)
------- ------- -------
$75,717 $ 1,001 $ (36)
======= ======= =======
7
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows, in thousand of dollars:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
Held to Maturity
MARCH 31, 2004
State and municipal $4,627 $ 110 $ -- $4,737
====== ====== ====== ======
DECEMBER 31, 2003
State and municipal $4,892 $ 117 $ -- $5,009
====== ====== ====== ======
The carrying amount and fair value of securities by contractual maturity at
March 31, 2004 are shown below, in thousands of dollars.
Available for sale Held to Maturity
Fair Carrying Fair
Value Amount Value
----- ------ -----
Due in one year or less $14,286 $ 723 $ 727
Due from one to five years 60,501 2,113 2,193
Due from five to ten years 1,436 344 371
Due after ten years 2,323 1,447 1,446
------- ------- -------
$78,546 $ 4,627 $ 4,737
======= ======= =======
LOANS
Loans at March 31, 2004 increased $ 2.3 million from December 31, 2003. The
table below shows total loans outstanding by type, in thousands of dollars, at
March 31, 2004 and December 31, 2003 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
March 31, 2004 indicates the pattern of loans in the portfolio has not changed
significantly. There is no individual industry with more than a 10%
concentration. However, all tourism related businesses, when combined, total
11.2% of total loans.
March 31, 2004 December 31, 2003
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate $ 87,525 60.75% $ 88,574 61.93%
Consumer 9,284 6.44% 9,660 6.75%
Commercial real estate 37,718 26.18% 35,258 24.65%
Commercial 9,554 6.63% 9,540 6.67%
--------- ------ --------- ------
144,081 100.00% 143,032 100.00%
Deferred loan origination fees, net (14) (15)
Allowance for loan losses (1,546) (1,575)
--------- ---------
Loans, net $ 142,521 $ 141,442
========= =========
8
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended March 31, follows:
2004 2003
------- -------
Beginning balance $ 1,575 $ 1,669
Provision for loan losses -- --
Charge-offs (30) (22)
Recoveries 1 2
------- -------
Ending balance $ 1,546 $ 1,649
======= =======
The Company had no impaired loans during 2004 and 2003.
CREDIT QUALITY
The Company maintains a high level of asset quality as a result of actively
managing delinquencies, nonperforming assets and potential loan problems. The
Company performs an ongoing review of all large credits to watch for any
deterioration in quality. Nonperforming loans are comprised of: (1) loans
accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or
more as to interest or principal payments (but not included in nonaccrual loans
in (1) above); and (3) other loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower (exclusive of loans in (1) or (2) above).
The aggregate amount of nonperforming loans is shown in the table below.
March 31, December 31,
2004 2003
(dollars in thousands)
Nonaccrual $ 211 $ --
Loans past due 90 days or more 193 408
Troubled debt restructurings --
---- ----
Total nonperforming loans $404 $408
==== ====
Percent of total loans 0.28% 0.29%
DEPOSITS
Deposits at March 31, 2004 decreased $ 3.0 million or 1.3% since December 31,
2003. Interest-bearing deposits increased $ 1.4 million or .7% for the three
months ended March 31, 2004, while noninterest-bearing deposits decreased $ 4.4
million or 12.1%.
LIQUIDITY AND FUNDS MANAGEMENT
As of March 31, 2004, the Company had $ 2.3 million in federal funds sold, $
78.5 million in securities available for sale and $ 723,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 36.8% of total deposits as of March 31, 2004.
Total equity of the Company at March 31, 2004 was $ 25.6 million compared to
$25.1 million at December 31, 2003.
9
RESULTS OF OPERATIONS
CNB Corporation's 2004 net income for the first three months was $ 773,000 a
decrease of $ 216,000 compared to 2003 results. This decrease can be partially
attributed to a decline in interest income due to the low rate environment.
Also, the decrease can be attributed to the decline in refinance activity and
the resulting decline of gains on the sale of loans the Company experienced at
March 31, 2004 compared to March 31, 2003. Basic earnings per share and diluted
earnings per share were $0.62 per share for 2004 compared to $0.79 for 2003. The
return on assets was 1.22% for the first three months of the year versus 1.58%
for the same period in 2003. The return on equity was 12.12% compared to 15.70%
for the same period last year.
For the first three months of 2004, net interest income was $ 2.3 million
representing a decrease of 8.6% from the same period in 2003. This decrease can
be attributed to a greater decline in interest income compared to interest
expense for the first three months of 2004. Net interest margin decreased to
3.84% for the quarter ending March 31, 2004 compared to 4.32% for the period
ending March 31, 2003. This change can be attributable to a decline in overall
interest rates from 2003 to 2004.
Noninterest income for the three months ending March 31, 2004 was $ 383,000 a
decrease of $ 64,000 or 14.3% from the same period last year. This decrease can
be attributed to a decline in the number of loans sold to the secondary market
which in turn decreased the gain on sale of loans received. Noninterest expense
for the first three months of 2003 was $ 1.6 million, the same as 2003. The
decline in the income tax expense for the Company during the first three months
of 2004 compared to 2003 resulted from lower income before tax and from a
decline in tax exempt interest income which increased the effective tax rate by
2% compared to 2003.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary source of market risk for the financial instruments held by the
Company is interest rate risk. That is, the risk that a change in market rates
will adversely affect the market value of the instruments. Generally, the longer
the maturity, the higher the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the Company's
net interest margin to swings in interest rates, to assuring sufficient capital
and liquidity to support future balance sheet growth. The Company manages
interest rate risk through the Asset Liability Committee. The Asset Liability
Committee is comprised of bank officers from various disciplines. The Committee
reviews policies and establishes rates which lead to prudent investment of
resources, the effective management of risks associated with changing interest
rates, the maintenance of adequate liquidity, and the earning of an adequate
return of shareholders' equity.
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2003 Management
Discussion and Analysis appearing in the December 31, 2003 10K.
ITEM 4-CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These
rules refer to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed summarized and
reported within required time periods. Our Chief Executive Officer and
Treasurer, who serves as the Company's CFO have evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report (the "Evaluation Date"), and have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective in
providing them with material information relating to the Corporation which is
required to be included in our periodic reports filed under the Exchange Act.
10
There have been no changes in the Corporation's internal controls over financial
reporting that occurred during the Corporation's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1-LEGAL PROCEEDINGS
None
ITEM 2-CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
PERIOD
Total Approximate
number dollar value
of shares of shares
Total Average purchased that may
number of price as part of publicly be purchased
shares paid per announced under the plans
purchased share plans or programs or programs
January, 2004 None
February, 2004 187 $ 51.00 187 $572,707
March, 2004 100 $ 51.00 100 $567,607
Total 287 $ 51.00 287 $567,607
The Company adopted a Stock Redemption Program on November 14, 2002 with the
provision that it would remain in effect for six months or until $1 million had
been expended on the purchase of common stock, whichever shall occur first. The
Company extended the program in May 2003 until November 2003. The Company
reinstated the program on December 24, 2003 and it will remain in effect until
the $1 million originally allocated for common stock purchases is met. As of
March 31, 2004, the Company has $ 567,607 remaining to purchase stock.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5-OTHER INFORMATION
Robert E. Churchill retired as chief executive officer of Citizens National Bank
effective May 1, 2004. His retirement, which was for health reasons, was
regretfully acknowledged by the board of directors on April 8,
11
2004. Mr. Churchill continues as chairman of the board of the bank and chairman
and chief executive officer of CNB Corporation. James C. Conboy, Jr., president
of the bank was appointed the bank's chief executive officer effective May 1,
2004. Mr. Conboy joined Citizens National Bank in 1998 as president and chief
operating officer and executive vice president of CNB Corporation. Mr. Conboy
has been on the Company's board of directors since its inception in 1985 and on
the bank's board of directors since 1983. Prior to 1998, he practiced law with
the firm of Bodman, Longley and Dahling, LLP where his practice was concentrated
on the law of financial institutions.
ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K
a.) None
b.) None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
------------------------------
(Registrant)
/s/ Robert E. Churchill
Date: May 13, 2004
------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
/s/ James C. Conboy, Jr.
Date: May 13, 2004
------------------------------------
James C. Conboy, Jr.
President and Chief Operating Officer
12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of President and Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002