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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 25, 2004 there were 1,238,331 shares of the issuer's common stock
outstanding.
1
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, December 31,
2004 2003
(Unaudited)
ASSETS
Cash and due from banks $ 5,438 $ 6,308
Interest-bearing deposits with other financial institutions 5,584 2,057
Federal funds sold 3,850 8,700
---------- ----------
Total cash and cash equivalents 14,872 17,065
Securities available for sale 82,944 75,717
Securities held to maturity (market value of $4,958 in 2004 and $5,009 in 2003) 4,906 4,892
Other securities 6,271 6,312
Loans, held for sale 545 468
Loans, net of allowance for loan losses of $1,362 in 2004 and $1,575 in 2003 141,707 141,442
Premises and equipment, net 4,644 4,084
Other assets 4,848 4,426
---------- ----------
Total assets $ 260,737 $ 254,406
========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 40,775 $ 36,062
Interest-bearing 190,807 188,852
---------- ----------
Total deposits 231,582 224,914
Other liabilities 3,995 4,354
---------- ----------
Total liabilities 235,577 229,268
---------- ----------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares authorized; 1,238,311 and
1,243,939 shares issued and outstanding in 2004 and 2003 3,096 3,110
Additional paid-in capital 20,578 20,932
Retained earnings 1,529 783
Accumulated other comprehensive income(loss), net of tax (43) 313
---------- ----------
Total shareholders' equity 25,160 25,138
---------- ----------
Total liabilities and shareholders' equity $ 260,737 $ 254,406
========== ==========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
(Unaudited)
INTEREST INCOME
Loans, including fees $ 2,406 $ 2,596 $ 7,236 $ 8,028
Securities
Taxable 507 400 1,416 1,313
Tax exempt 173 211 528 657
Interest on federal funds sold 52 69 102 164
-------- -------- -------- --------
Total interest income 3,138 3,276 9,282 10,162
INTEREST EXPENSE ON DEPOSITS 683 796 2,153 2,614
-------- -------- -------- --------
NET INTEREST INCOME 2,455 2,480 7,129 7,548
Provision for loan losses - - - -
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,455 2,480 7,129 7,548
-------- -------- -------- --------
NONINTEREST INCOME
Service charges and fees 265 250 737 714
Net realized gains from sales of loans 61 232 248 709
Loan servicing fees, net of amortization 26 (9) 92 (72)
Other income 40 174 156 255
-------- -------- -------- --------
Total noninterest income 392 647 1,233 1,606
NONINTEREST EXPENSES
Salaries and benefits 1,050 1,006 3,188 2,955
Occupancy 203 188 598 569
Other expenses 441 444 1,319 1,384
-------- -------- -------- --------
Total noninterest expenses 1,694 1,638 5,105 4,908
INCOME BEFORE INCOME TAXES 1,153 1,489 3,257 4,246
Income tax expense 334 391 933 1,181
-------- -------- -------- --------
NET INCOME $ 819 $ 1,098 $ 2,324 $ 3,065
======== ======== ======== ========
TOTAL COMPREHENSIVE INCOME $ 1,259 $ 836 $ 1,968 $ 2,788
======== ======== ======== ========
Return on average assets (annualized) 1.23% 1.67% 1.20% 1.62%
Return on average equity (annualized) 13.16% 17.02% 12.26% 16.00%
Basic earnings per share $ .66 $ .88 $ 1.87 $ 2.46
Diluted earnings per share $ .66 $ .88 $ 1.86 $ 2.45
Dividends declared per share $ .40 $ .38 $ 1.20 $ 1.14
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Nine months ended September 30,
2004 2003
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,324 $ 3,065
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 860 729
Loans originated for sale (13,261) (36,678)
Proceeds from sales of loans originated for sale 13,432 37,112
Gain on sales of loans (248) (709)
(Increase) decrease in other assets (238) 72
Increase (decrease) in other liabilities (347) 25
-------- --------
Total adjustments 198 551
-------- --------
Net cash from operating activities 2,522 3,616
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 24,244 24,227
Purchase of securities available for sale (32,568) (34,415)
Proceeds from maturities of securities held to maturity 1,771 1,879
Purchase of securities held to maturity (1,785) (1,463)
Proceeds from maturities of other securities 370 1,285
Purchase of other securities (329) (1,335)
Net change in portfolio loans (265) 936
Premises and equipment expenditures (875) (690)
-------- --------
Net cash from investing activities (9,437) (9,576)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 6,668 14,026
Dividends paid (1,490) (1,424)
Proceeds from exercise of stock options 47 8
Purchases of common stock (503) (173)
-------- --------
Net cash from financing activities 4,722 12,437
Net change in cash and cash equivalents (2,193) 6,477
Cash and cash equivalents at beginning of year 17,065 22,733
-------- --------
Cash and cash equivalents at end of period $ 14,872 $ 29,210
======== ========
Cash paid during the period for:
Interest $ 2,160 $ 2,622
Income taxes $ 920 $ 1,208
See accompanying notes to consolidated financial statements
4
NOTES TO FINANCIAL STATEMENTS
Note 1-Basis of Presentation
The consolidated financial statements include the accounts of CNB Corporation
("Company") and its wholly owned subsidiary, Citizens National Bank of Cheboygan
("Bank") and the Bank's wholly owned subsidiary CNB Mortgage Corporation. All
significant intercompany accounts and transactions are eliminated in
consolidation. The statements have been prepared by management without an audit
by independent certified public accountants. However, these statements reflect
all adjustments (consisting of normal recurring accruals) and disclosures which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented and should be read in conjunction with
the notes to the consolidated financial statements included in the CNB
Corporation's Form 10-K for the year ended December 31, 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 Based Compensation: The following proforma information presents net income
and basic and diluted earnings per share had the fair value method been used to
measure compensation for stock options granted. The exercise price of options
granted is equivalent to the market price of the underlying stock at the stock
grant date; therefore no compensation expense has been recorded for stock
options granted.
For the three months For the nine months
ending ending
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 819 $ 1,098 $ 2,324 $ 3,065
Less: Proforma expense 11 - 33 -
------ ------- ------- -------
Proforma net income 808 1,098 2,291 3,065
Basic earnings per share as reported $ .66 $ .88 $ 1.87 $ 2.46
Proforma basic earnings per share .65 .88 1.84 2.46
Diluted earnings per share as reported .66 .88 1.86 2.45
Proforma diluted earnings per share .65 .88 1.84 2.45
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 - (8,867) 31.42
Options granted - - -
----- ------
Balance at September 30, 2004 9,952 30,475 47.79
===== ======
At September 30, 2004 options outstanding had a weighted average remaining life
of approximately 5.5 years. There were 22,128 options exercisable at September
30, 2004 with a weighted-average exercise price of $ 47.50.
Note 2-Earnings Per Share
Basic earnings per share are calculated solely on weighted-average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. For the three and nine month
period ending September 30, 2004 the weighted average shares outstanding in
calculating basic earnings per share were 1,238,362 and 1,242,799 while the
weighted average number of shares for diluted earnings per share were 1,240,866
and 1,246,969. For the three and nine month period ending September 30, 2003 the
weighted average shares outstanding in calculating basic earnings per share were
1,244,529 and 1,246,070 while the weighted average number of shares for diluted
earnings per share were 1,248,039 and 1,249,406.
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 and nine month periods
ending September 30, 2004.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $2.2 million or
12.9% since December 31, 2003. During the period ending September 30, 2004, $2.5
million of cash was provided from operating activities. Investing activities
utilized $9.4 million in cash while financing activities provided $4.7 million
in cash due to an increase in deposits for the period ending September 30, 2004.
SECURITIES
The securities portfolio increased $7.2 million or 8.3%, since December 31,
2003. Securities available for sale increased to 88.1% of total investments 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
SEPTEMBER 30, 2004
U.S. Government agency $ 60,769 $ 174 $ (126)
State and municipal 22,175 371 (6)
--------- -------- -------
$ 82,944 $ 545 $ (132)
========= ======== =======
DECEMBER 31, 2003
U.S. Government agency $ 48,802 $ 363 $ (28)
State and municipal 26,915 638 (8)
--------- -------- -------
$ 75,717 $ 1,001 $ (36)
========= ======== =======
The Company performed a review of the securities available for sale and it was
determined that the reason for the change in the total comprehensive
income(loss) as of September 30, 2004 resulted primarily from an increase in net
unrealized losses on investment securities held available for sale due to
changes in the interest rate environment.
7
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows, in thousand of dollars:
Gross Gross
Carrying Unrealized Unrealized Fair
Amount Gain Loss Value
Held to Maturity
SEPTEMBER 30, 2004
State and municipal $ 4,906 $ 66 $ (14) $ 4,958
DECEMBER 31, 2003
State and municipal $ 4,892 $ 117 $ - $ 5,009
The carrying amount and fair value of securities by contractual maturity at
September 30, 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 $ 15,564 $ 178 $ 181
Due from one to five years 60,236 2,729 2,776
Due from five to ten years 994 733 735
Due after ten years 6,150 1,266 1,266
------------- --------- -------
$ 82,944 $ 4,906 $ 4,958
============= ========= =======
LOANS
Loans at September 30, 2004 increased $265,000 from December 31, 2003. The table
below shows total loans outstanding by type, in thousands of dollars, at
September 30, 2004 and December 31, 2003 and their percentages of the total loan
portfolio. Residential real estate decreased by $2.8 million from December 31,
2003 which can be attributed to an increase in the number of loans sold to the
secondary market. All loans are domestic. A quarterly review of loan
concentrations at September 30, 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 11.0% of total loans.
8
September 30,2004 December 31, 2003
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate $ 85,740 59.92% $ 88,574 61.93%
Consumer 9,165 6.41% 9,660 6.75%
Commercial real estate 39,237 27.42% 35,258 24.65%
Commercial 8,940 6.25% 9,540 6.67%
--------- ----- --------- ------
143,082 100.00% 143,032 100.00%
Deferred loan origination fees, net (13) (15)
Allowance for loan losses (1,362) (1,575)
--------- ---------
Loans, net $ 141,707 $ 141,442
========= =========
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, follows:
2004 2003
------- -------
Beginning balance $ 1,575 $ 1,669
Provision for loan losses - -
Charge-offs (221) (65)
Recoveries 8 11
------- -------
Ending balance $ 1,362 $ 1,615
======= =======
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.
September 30, December 31,
2004 2003
(dollars in thousands)
Nonaccrual $ 50 $ -
Loans past due 90 days or more 810 408
Troubled debt restructurings - -
------- --------
Total nonperforming loans $ 860 $ 408
======= ========
Percent of total loans .60% 0.29%
9
DEPOSITS
Deposits at September 30, 2004 increased $6.7 million since December 31, 2003.
The growth can be attributed to seasonal activity which allowed an $4.7 million
increase in noninterest-bearing deposits. Money market and saving deposits
increased $4.9 and $2.3 million respectively or 6.6% and 8.6% since December 31,
2003.
LIQUIDITY AND FUNDS MANAGEMENT
As of September 30, 2004, the Company had $3.9 million in federal funds sold,
$5.6 million in short-term interst-bearing balances with other financial
institutions, $82.9 million in securities available for sale and $178,000 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 40.0% of total deposits as of September 30, 2004.
The Company is looking for alternative sources of quality investments to
supplement the balance sheet.
Total equity of the Company at September 30, 2004 was $25.2 million compared to
$25.1 million at December 31, 2003. The Company has a stock repurchase program
in place which has reduced total equity $502,000 for the nine months ending
September 30, 2004.
RESULTS OF OPERATIONS
CNB Corporation's 2004 net income for the first nine months was $2.3 million a
decrease of $741,000 compared to the same period in 2003. Basic earnings per
share was $1.87 compared to $2.46 for 2003. The return on average assets was
1.20% compared to 1.62% for 2003. The return on average equity was 12.26%
compared to 16.00% for 2003. These decreases are the result of the Company
experiencing a decrease in interest income which is due to the lower rate
environment and decreased gains on the sale of loans contributed to the decline.
Also an increase to salaries and benefits due in part to a severance package
paid to former CEO, Mr. Churchill who retired due to health reasons.
Net income for the three months ending September 30, 2004 was $819,000 compared
to $1.1 million for 2003. This was a decrease of $279,000 or 25.4%. Basic
earnings per share was $0.66 compared to $0.88 for 2003. The return on average
assets was 1.23% compared to 1.67% for 2003. The return on average equity was
13.16% compared to 17.02% for 2003. These decreases were due to the same reasons
noted for the nine month period.
For the first nine months of 2004, net interest income was $7.1 million a
decrease of $419,000 or 5.6% compared to 2003 results. The Corporation
experienced a decline in both interest income and interest expenses compared to
2003 results which can be attributed to a continued low rate environment. The
decline in interest income on earning assets exceeded the decline in interest
expense on deposits which resulted in an overall decrease in the net interest
income. The Company reported a net interest margin of 3.89% for 2004 compared to
4.22% for 2003. The yield on interest earning assets was 5.06% a decrease from
the 5.68% that was reported for the nine months ended September 30, 2003, while
the cost of funds for the nine months ended September 30, 2004 was 1.50% while
for the nine months ended September 30, 2003 it was 1.85% which has contributed
to the overall decline in the net interest margin.
Noninterest income for the nine month period ending September 30, 2004 was $1.2
million a decrease of $373,000 or 23.2% over the same period last year. This can
be attributed to a decrease in gain from the sale of loans as a result of
declining sales of mortgages to the secondary market. Noninterest income for the
three month period ending September 30, 2004 was $392,000 compared to $647,000
for 2003. Again this was due to the decrease in sales of loans to the secondary
market. The Company expected a decline
10
in the number of loans sold to the secondary market during 2004 due to the
slight increase in the long term mortgage rate environment. Also, during the
three month period ending September 30, 2003, the Company realized income from
life insurance proceeds amounting to $125,000.
Noninterest expense for the nine month period ending September 30, 2004
increased $197,000, or 4.0%, compared to 2003. This can be attributed in part to
the severance package that was paid to former CEO, Mr. Churchill who retired for
health reasons.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary source of market risk for the financial instruments held by the
Company is interest rate risk. That is, the risks that an adverse change in
market rates will adversely affect the market value of the instruments.
Generally, the longer the maturity, the higher the interest rate risk exposure.
While maturity information does not necessarily present all aspects of exposure,
it may provide an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the Company's
net interest margin to swings in interest rates, to assuring sufficient capital
and liquidity to support future balance sheet growth. The Company manages
interest rate risk through the Asset Liability Committee. The Asset Liability
Committee is comprised of bank officers from various disciplines. The Committee
establishes policies and rates which lead to prudent investment of resources,
the effective management of risks associated with changing interest rates, the
maintenance of adequate liquidity, and the earning of an adequate return of
shareholders' equity.
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2003 Management
Discussion and Analysis appearing in the December 31, 2003 10-K.
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.
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.
11
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
July, 2004 1,727 $51.00 1,727 $96,905
August, 2004 None $96,905
September, 2004 None $96,905
Total 1,727 $51.00 1,727 $96,905
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
September 30, 2004, the Company has $96,905 remaining to purchase stock.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
12
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, 2004. Mr.
Churchill continues as chairman of the board of the bank and 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
13
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
--------------------------
(Registrant)
Date: November 11, 2004 /s/ James C. Conboy, Jr.
__________________________
James C. Conboy, Jr.
Chief Executive Officer
Date: November 11, 2004 /s/ Susan A. Eno
__________________________
Susan A. Eno
Executive Vice President
14
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31 Certification of Chief Executive Officer pursuant to Section 302.
EX-31.2 Certification of Treasurer pursuant to Section 302.
EX-32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15