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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, 2005
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 14, 2005 there were 1,237,894 shares of the issuer's common stock
outstanding.
1
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands,except per share data)
March 31, December 31,
2005 2004
(Unaudited)
ASSETS
Cash and due from banks $ 5,414 $ 5,795
Interest-bearing deposits with other financial institutions 4,014 2,000
Federal funds sold 1,217 4,900
-------------- -----------
Total cash and cash equivalents 10,645 12,695
Securities available for sale 79,181 78,280
Securities held to maturity (market value of $4,218 in 2005 and $4,663 in 2004) 4,208 4,621
Other securities 6,019 6,050
Loans, held for sale 600 -
Loans, net of allowance for loan losses of $1,384 in 2005 and $1,350 in 2004 143,942 143,258
Premises and equipment, net 4,594 4,600
Other assets 4,916 4,590
-------------- -----------
Total assets $ 254,105 $ 254,094
============== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 32,999 $ 37,289
Interest-bearing 192,937 188,122
-------------- -----------
Total deposits 225,936 225,411
Other liabilities 3,995 4,527
-------------- -----------
Total liabilities 229,931 229,938
-------------- -----------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares authorized; and 1,237,894 and
1,237,994 shares issued and outstanding in 2005 and 2004 3,095 3,095
Additional paid-in capital 20,469 20,475
Retained earnings 1,320 1,010
Accumulated other comprehensive income, net of tax (710) (424)
-------------- -----------
Total shareholders' equity 24,174 24,156
-------------- -----------
Total liabilities and shareholders' equity $ 254,105 $ 254,094
============== ===========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended
March 31,
2005 2004
(Unaudited)
INTEREST INCOME
Loans, including fees $ 2,449 $ 2,415
Securities
Taxable 508 441
Tax exempt 152 187
Interest on federal funds sold 52 28
--------- ---------
Total interest income 3,161 3,071
INTEREST EXPENSE ON DEPOSITS 653 756
--------- ---------
NET INTEREST INCOME 2,508 2,315
Provision for loan losses 30 -
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,478 2,315
--------- ---------
NONINTEREST INCOME
Service charges and fees 220 227
Net realized gains from sales of loans 52 62
Loan servicing fees, net of amortization 22 33
Other income 55 61
--------- ---------
Total noninterest income 349 383
NONINTEREST EXPENSES
Salaries and benefits 793 810
Deferred compensation 75 79
Pension 78 84
Hospitalization 129 117
Occupancy 212 202
Supplies 43 46
Legal and Professional 94 68
Other expenses 259 215
--------- ---------
Total noninterest expense 1,683 1,621
--------- ---------
INCOME BEFORE INCOME TAXES 1,144 1,077
Income tax expense 339 304
--------- ---------
NET INCOME $ 805 $ 773
========= =========
TOTAL COMPREHENSIVE INCOME $ 519 $ 929
========= =========
Return on average assets (annualized) 1.25% 1.22%
Return on average equity (annualized) 13.32% 12.12%
Basic earnings per share $ 0.65 $ 0.62
Diluted earnings per share $ 0.65 $ 0.62
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Three months ended March 31,
2005 2004
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 805 $ 773
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 226 300
Provision for loan losses 30 -
Loans originated for sale (2,809) (4,195)
Proceeds from sales of loans originated for sale 2,240 3,001
Gain on sales of loans (52) (62)
Increase in other assets (270) (208)
Increase (decrease) in other liabilities (193) 263
----------- -----------
Total adjustments (828) (901)
----------- -----------
Net cash used in operating activities (23) (128)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 4,513 7,618
Purchase of securities available for sale (6,186) (10,408)
Proceeds from maturities of securities held to maturity 413 265
Proceeds from maturities of other securities 40 40
Purchase of other securities (9) (110)
Net change in portfolio loans (714) (1,079)
Premises and equipment expenditures (108) (355)
----------- -----------
Net cash used in investing activities (2,051) (4,029)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits 525 (2,982)
Dividends paid (495) (1,186)
Net proceeds from exercise of stock options 4 24
Purchases of common stock (10) (15)
----------- -----------
Net cash provided by (used in) financing activities 24 (4,159)
----------- -----------
Net change in cash and cash equivalents (2,050) (8,316)
Cash and cash equivalents at beginning of year 12,695 17,065
----------- -----------
Cash and cash equivalents at end of period $ 10,645 $ 8,749
=========== ===========
Cash paid during the period for:
Interest $ 631 $ 749
Income taxes $ 24 $ 382
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, 2004.
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. FAS123R requires all public companies to record compensation
for stock options provided to employees in return for employee service. The cost
is measured at the fair value of the options when granted, and this cost is
expensed over the employees service period, which is normally the vesting period
of the options. Options vest over one year. This will apply to awards granted or
modified after the first quarter or year beginning after June 15, 2005.
Compensation cost will also be recorded for prior option grants that vest after
the date of adoption. The effect on results of operations will depend on the
level of future option grants and the calculation of the fair value of the
options granted at such future date, as well as the vesting periods provided,
and so cannot currently be predicted.
2005 2004
---------- ----------
Net income as reported $ 805 $ 773
Deduct: Stock based compensation expense
determined under fair value method - (11)
---------- ----------
Proforma net income 805 762
Basic earnings per share as reported $ 0.65 $ 0.62
Proforma basic earnings per share 0.65 0.61
Diluted earnings per share as reported 0.65 0.62
Proforma diluted earnings per share 0.65 0.61
There were no stock options granted during the three months ended March 31, 2005
and 2004.
5
In future years, as additional options are granted, the effect on net income and
earnings per share may increase. Stock options are used to reward certain
officers and provide them with an additional equity interest. Options are issued
for 10 year periods and have varying vesting schedules. Information about
options available for grant and options granted follows:
Weighted
Average
Available Options Exercise
For Grant Outstanding Price
Balance at January 1, 2005 9,952 27,839 $ 46.92
Options exercised - (100) 48.66
Options forfeited (525) 48.66
Options issued - - -
----- ------
Balance at March 31, 2005 9,952 27,214 $ 46.88
===== ======
At March 31, 2005 options outstanding had a weighted average remaining life of
approximately 5.0 years. There were 27,214 options exercisable at March 31, 2005
with a weighted-average exercise price of $ 46.88.
There have been no significant changes in the Company's critical accounting
policies since December 31, 2004.
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, 2005 the weighted average shares outstanding in calculating
basic earnings per share were 1,237,854 while the weighted average number of
shares for diluted earnings per share were 1,240,702. As of March 31, 2005 there
were 8,340 shares not considered in the earnings per share calculation because
they were antidilutive. 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.
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, 2005.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $2.1 million or
16.1%. During the period ending March 31, 2005, $23,000 in cash was utilized by
operating activities. Investing activities utilized $2.1 million during the
three months ended March 31, 2005, primarily due to purchases of securities and
financing activities provided $24,000.
SECURITIES
The securities portfolio increased $457,000 since December 31, 2004. The
available for sale portfolio increased to 88.6% of the investment portfolio up
from 88.0% 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, 2005
U.S. Government agency $ 58,185 $ 1 $ (891)
Mortgage-backed 4,987 - (41)
State and municipal 16,009 136 (30)
---------- ---------- ----------
$ 79,181 $ 137 $ (962)
========== ========== ==========
DECEMBER 31, 2004
U.S. Government agency $ 56,786 $ 20 $ (431)
Mortgage-backed 3,149 8 -
State and municipal 18,345 255 (17
---------- ---------- ----------
$ 78,280 $ 283 $ (448)
========== ========== ==========
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, 2005
State and municipal $ 4,208 $ 31 $ (21) $ 4,218
========== ========== ========== ==========
DECEMBER 31, 2004
State and municipal $ 4,621 $ 55 $ (13) $ 4,663
========== ========== ========== ==========
The carrying amount and fair value of securities by contractual maturity at
March 31, 2005 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 $ 21,913 $ 470 $ 471
Due from one to five years 53,651 1,824 1,841
Due from five to ten years 973 693 685
Due after ten years 2,644 1,221 1,221
---------- ---------- ----------
$ 79,181 $ 4,208 $ 4,218
========== ========== ==========
LOANS
Loans at March 31, 2005 increased $684,000 from December 31, 2004 The table
below shows total loans outstanding by type, in thousands of dollars, at March
31, 2005 and December 31, 2004 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
March 31, 2005 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
13.3% of total loans.
March 31, 2005 December 31, 2004
Balance % of total Balance % of total
---------- ---------- ---------- ----------
Portfolio loans:
Residential real estate $ 81,202 55.87% $ 83,364 57.64%
Consumer 8,545 5.88% 8,699 6.02%
Commercial real estate 46,437 31.95% 43,336 29.97%
Commercial 9,151 6.30% 9,220 6.37%
---------- ------ ---------- ------
145,335 100.00% 144,619 100.00%
Deferred loan origination fees, net (9) (11)
Allowance for loan losses (1,384) (1,350)
---------- ----------
Loans, net $ 143,942 $ 143,258
========== ==========
8
ALLOWANCE AND PROVISION FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended March 31, follows:
2005 2004
---------- ----------
Beginning balance $ 1,350 $ 1,575
Provision for loan losses 30 -
Charge-offs (2) (30)
Recoveries 6 1
---------- ----------
Ending balance $ 1,384 $ 1,546
========== ==========
The Company had one impaired loan during 2004 with an average balance of
approximately $100,000. The balance of this loan was zero at December 31, 2004.
The Company had no impaired loans during the first three months of 2005.
Since December 31, 2004, total loans have increased only $200,000, but the loan
portfolio has undergone a shift in its composition over the past year. Since
March 31, 2004 commercial mortgages have increased almost $9 million while
consumer mortgages have decreased $6 million. This is primarily due to a slow
down in residential refinancing and a stronger emphasis on commercial lending.
There has been no change in the bank's lending policies. The lending staff
continues to be well-trained and experienced. The trend and volume of past due
loans continues to be well-controlled and in line with peer averages. In
response to the change in portfolio composition management recorded a provision
of $30,000 in the first quarter of 2005 compared to $0 for 2004.
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,
2005 2004
(dollars in thousands)
Nonaccrual $ - $ -
Loans past due 90 days or more 756 674
Troubled debt restructurings - -
------- -------
Total nonperforming loans $ 756 $ 674
======= =======
Percent of total loans 0.52% 0.47%
DEPOSITS
Deposits at March 31, 2005 increased $525,000 since December 31, 2004.
Interest-bearing deposits increased $4.8 million or 2.6% for the three months
ended March 31, 2005, while noninterest -bearing deposits decreased $4.3 million
or 11.5%.
9
LIQUIDITY AND FUNDS MANAGEMENT
As of March 31, 2005, the Company had $1.2 million in federal funds sold, $79.2
million in securities available for sale and $470,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 35.8% of total deposits as of March 31, 2005.
Total equity of the Company at March 31, 2005 was $24.2 million was unchanged
from December 31, 2004.
RESULTS OF OPERATIONS
CNB Corporation's 2005 net income for the first three months was $805,000 an
increase of $32,000 compared to 2004 results. This increase can be attributed to
an increase in net interest income resulting from the higher rate environment
compared to 2004. The Company also realized a decline in total noninterest
income compared to 2004 activity, this can be attributed to the fact that a
lesser amount of loans sold to the secondary market in 2005 than in 2004. Basic
earnings per share and diluted earnings per share were $0.65 per share for 2005
compared to $0.62 for 2004. The return on assets was 1.25% for the first three
months of the year versus 1.22% for the same period in 2004. The return on
equity was 13.32% compared to 12.12% for the same period last year.
For the first three months of 2005, net interest income was $2.5 million
representing an increase of 8.3% from the same period in 2004. This increase can
be attributed to an increase in interest income compared to the first three
months of 2004. Net interest margin increased to 4.25% for the quarter ending
March 31, 2005 compared to 3.84% for the period ending March 31, 2004. This
change can be attributable to an increase in overall interest rates from 2005 to
2004.
In response to the change in the loan portfolio composition management recorded
a provision expense of $30,000 in the first quarter 2005 compared to $0 for the
first quarter 2004.
Noninterest income for the three months ending March 31, 2005 was $349,000 a
decrease of $34,000 or 8.9% from the same period last year. This decrease can be
attributed to a decline in the gain from sale of loans to the secondary market
and a decline in loan servicing fees. Noninterest expense for the first three
months of 2005 was $1.7 million compared to $1.6 million for the same period in
2004. This increase can largely be attributed to a $44,000 increase in other
expenses due to marketing expense which increased $26,000 over the same period
last year. The increase in the income tax expense for the Company during the
first three months of 2005 compared to 2004 resulted from higher income before
tax and from a decline in tax-exempt interest income which increased the
effective tax rate by 1.4% compared to 2004.
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.
10
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2004 Management
Discussion and Analysis appearing in the December 31, 2004 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.
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, 2005 None
February, 2005 None
March, 2005 None
Total $86,905
11
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, 2005, the Company has $86,905 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
ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K
a.) None
b.) None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
---------------------------------
(Registrant)
Date: May 12, 2005 /s/ James C. Conboy, Jr.
-------------------------------------
James C. Conboy, Jr.
President and Chief Executive Officer
Date: May 12, 2005 /s/ Susan A. Eno
-------------------------------------
Susan A. Eno
Executive Vice President
12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302.
EX-31.2 Certification of Treasurer pursuant to Section 302.
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13