10-Q 1 k86702e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 06/30/04 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 June 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 July 27, 2004 there were 1,238,366 shares of the issuer's common stock outstanding. ITEM 1-FINANCIAL STATEMENTS (CONDENSED) CONSOLIDATED BALANCE SHEETS (dollars in thousands)
June 30, December 31, 2004 2003 (Unaudited) ASSETS Cash and due from banks $ 7,237 $ 6,308 Interest-bearing deposits with other financial institutions 5,567 2,057 Federal funds sold 4,900 8,700 ----------- ------------ Total cash and cash equivalents 17,704 17,065 Securities available for sale 79,731 75,717 Securities held to maturity (market value of $5,632 in 2004 and $5,009 in 2003) 5,613 4,892 Other securities 6,491 6,312 Loans, held for sale 483 468 Loans, net of allowance for loan losses of $1,473 in 2004 and $1,575 in 2003 139,764 141,442 Premises and equipment, net 4,571 4,084 Other assets 5,110 4,426 ----------- ------------ Total assets $ 259,467 $ 254,406 =========== ============ LIABILITIES Deposits Noninterest-bearing $ 40,056 $ 36,062 Interest-bearing 191,043 188,852 ----------- ------------ Total deposits 231,099 224,914 Other liabilities 3,882 4,354 ----------- ------------ Total liabilities 234,981 229,268 ----------- ------------ SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares authorized; 1,240,093 and 1,243,939 shares issued and outstanding in 2004 and 2003 3,100 3,110 Additional paid-in capital 20,663 20,932 Retained earnings 1,206 783 Accumulated other comprehensive income(loss), net of tax (483) 313 ----------- ------------ Total shareholders' equity 24,486 25,138 ----------- ------------ Total liabilities and shareholders' equity $ 259,467 $ 254,406 =========== ============
See accompanying notes to consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Six months ended June 30, June 30, 2004 2003 2004 2003 (Unaudited) INTEREST INCOME Loans, including fees $ 2,415 $ 2,704 $ 4,830 $ 5,432 Securities Taxable 468 444 909 913 Tax exempt 168 216 355 446 Interest on federal funds sold 22 46 50 95 --------- ---------- ------------ ------------- Total interest income 3,073 3,410 6,144 6,886 INTEREST EXPENSE ON DEPOSITS 714 876 1,470 1,818 --------- ---------- ------------ ------------- NET INTEREST INCOME 2,359 2,534 4,674 5,068 Provision for loan losses - - - - --------- ---------- ------------ ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,359 2,534 4,674 5,068 --------- ---------- ------------ ------------- NONINTEREST INCOME Service charges and fees 245 230 472 464 Net realized gains from sales of loans 125 274 187 477 Loan servicing fees, net of amortization 33 (33) 66 (63) Other income 55 39 116 79 --------- ---------- ------------ ------------- Total noninterest income 458 510 841 957 NONINTEREST EXPENSES Salaries and benefits 1,127 972 2,138 1,947 Occupancy 193 185 395 381 Other expenses 470 473 878 940 --------- ---------- ------------ ------------- Total noninterest expenses 1,790 1,630 3,411 3,268 INCOME BEFORE INCOME TAXES 1,027 1,414 2,104 2,757 Income tax expense 295 436 599 790 --------- ---------- ------------ ------------- NET INCOME $ 732 $ 978 $ 1,505 $ 1,967 ========= ========== ============ ============= TOTAL COMPREHENSIVE INCOME (LOSS) $ (220) $ 1,051 $ 709 $ 1,952 ========= ========== ============ ============= Return on average assets (annualized) 1.14% 1.57% 1.18% 1.58% Return on average equity (annualized) 11.51% 15.40% 11.81% 15.49% Basic earnings per share $ .59 $ .78 $ 1.21 $ 1.58 Diluted earnings per share $ .59 $ .78 $ 1.20 $ 1.57 Dividends declared per share $ .40 $ .38 $ .80 $ .76
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Six months ended June 30, 2004 2003 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,505 $ 1,967 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 600 455 Loans originated for sale (9,854) (23,734) Proceeds from sales of loans originated for sale 9,952 24,033 Gain on sales of loans (187) (477) Increase in other assets (200) (494) Decrease in other liabilities (472) (189) ---------------- ---------------- Total adjustments (161) (406) ---------------- ---------------- Net cash from operating activities 1,344 1,561 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 16,198 12,932 Purchase of securities available for sale (21,809) (13,354) Proceeds from maturities of securities held to maturity 1,064 515 Purchase of securities held to maturity (1,785) (1,400) Proceeds from maturities of other securities 140 220 Purchase of other securities (319) (425) Net change in portfolio loans 1,678 1,602 Premises and equipment expenditures (696) (56) ---------------- ---------------- Net cash from investing activities (5,529) 34 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 6,185 11,052 Dividends paid (994) (950) Proceeds from exercise of stock options 46 2 Purchases of common stock (413) (159) ---------------- ---------------- Net cash from financing activities 4,824 9,945 Net change in cash and cash equivalents 639 11,540 Cash and cash equivalents at beginning of year 17,065 22,733 ---------------- ---------------- Cash and cash equivalents at end of period $ 17,704 $ 34,273 ================ ================ Cash paid during the period for: Interest $ 1,468 $ 1,826 Income taxes $ 721 $ 722
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 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 six months ending ending June 30, June 30, 2004 2003 2004 2003 ------ ------ ------ ------ Net income as reported $ 732 $ 978 $1,505 $1,967 Less: Proforma expense 11 - 22 - ------ ------ ------ ------ Proforma net income 721 978 1,483 1,967 Basic earnings per share as reported $ .59 $ .78 $ 1.21 $ 1.58 Proforma basic earnings per share .58 .78 1.19 1.57 Diluted earnings per share as reported .59 .78 1.20 1.58 Proforma diluted earnings per share .58 .78 1.19 1.57
There were no stock options granted during the three or six months ended June 30, 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 - (8,867) 31.42 Options granted - - - --------- ----------- Balance at June 30, 2004 9,952 30,475 47.79 ========= ===========
At June 30, 2004 options outstanding had a weighted average remaining life of approximately 5.9 years. There were 21,813 options exercisable at June 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 six month period ending June 30, 2004 the weighted average shares outstanding in calculating basic earnings per share were 1,245,677 and 1,245,041 while the weighted average number of shares for diluted earnings per share were 1,248,925 and 1,249,848. For the three and six month period ending June 30, 2003 the weighted average shares outstanding in calculating basic earnings per share were 1,245,988 and 1,246,853 while the weighted average number of shares for diluted earnings per share were 1,248,449 and 1,250,102. 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 six month periods ending June 30, 2004. FINANCIAL CONDITION The Company's balances of cash and cash equivalents increased $639,000 or 3.7%. During the period ending June 30, 2004, $1.3 million of cash was provided from operating activities. Financing activities provided $4.8 million in cash due to an increase in deposits for the period ending June 30, 2004. SECURITIES The securities portfolio increased $4.9 million or 5.7%, since December 31, 2003. Securities available for sale decreased to 86.8% of total investments down 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 JUNE 30, 2004 U.S. Government agency $ 57,172 $ 70 $ (551) State and municipal 22,559 283 (44) --------- ---------- ---------- $ 79,731 $ 353 $ (595) ========= ========== ========== 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 June 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 JUNE 30, 2004 State and municipal $ 5,613 $ 57 $ (38) $ 5,632 DECEMBER 31, 2003 State and municipal $ 4,892 $ 117 $ - $ 5,009
The carrying amount and fair value of securities by contractual maturity at June 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 $ 13,480 $ 574 $ 577 Due from one to five years 62,245 2,995 3,031 Due from five to ten years 1,381 629 609 Due after ten years 2,625 1,415 1,415 ------------------ ----------- ------------ $ 79,731 $ 5,613 $ 5,632 ================== =========== ============
LOANS Loans at June 30, 2004 decreased $1.7 million from December 31, 2003. The table below shows total loans outstanding by type, in thousands of dollars, at June 30, 2004 and December 31, 2003 and their percentages of the total loan portfolio. Residential real estate decreased by $3.7 million from December 31, 2003 this 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 June 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 11.6% of total loans. 8
June 30,2004 December 31, 2003 Balance % of total Balance % of total --------- ---------- ---------- ---------- Portfolio loans: Residential real estate $ 84,860 60.08% $ 88,574 61.93% Consumer 9,100 6.44% 9,660 6.75% Commercial real estate 38,381 27.17% 35,258 24.65% Commercial 8,910 6.31% 9,540 6.67% --------- ---------- ---------- ---------- 141,251 100.00% 143,032 100.00% Deferred loan origination fees, net (14) (15) Allowance for loan losses (1,473) (1,575) --------- ---------- Loans, net $ 139,764 $ 141,442 ========= ==========
ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses, in thousands of dollars, for the six months ended June 30, follows:
2004 2003 --------- ---------- Beginning balance $ 1,575 $ 1,669 Provision for loan losses - - Charge-offs (108) (55) Recoveries 6 6 --------- ---------- Ending balance $ 1,473 $ 1,620 ========= ==========
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.
June 30, December 31, 2004 2003 (dollars in thousands) Nonaccrual $ 150 $ - Loans past due 90 days or more 401 408 Troubled debt restructurings - - -------- ------------ Total nonperforming loans $ 551 $ 408 ======== ============ Percent of total loans 0.39% 0.29%
9 DEPOSITS Deposits at June 30, 2004 increased $6.2 million since December 31, 2003. The growth can be attributed to seasonal activity which allowed an $4.0 million increase in noninterest-bearing deposits. Money market and saving deposits increased $4.4 and $2.0 million respectively or 5.9% and 7.7% since December 31, 2003. LIQUIDITY AND FUNDS MANAGEMENT As of June 30, 2004, the Company had $4.9 million in federal funds sold, $5.6 million in short-term interst-bearing balances with other financial institutions, $79.7 million in securities available for sale and $574,000 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 37.2% of total deposits as of June 30, 2004. The Company is looking for alternative sources of quality investments to supplement the balance sheet. Total equity of the Company at June 30, 2004 was $24.5 million compared to $25.1 million at December 31, 2003. The Company has a stock repurchase program in place which has reduced total equity $413,000 for the six months ending June 30, 2004. RESULTS OF OPERATIONS CNB Corporation's 2004 net income for the first six months was $1.5 million a decrease of $462,000 compared to the same period in 2003. Basic earnings per share was $1.21 compared to $1.58 for 2003. The return on average assets was 1.18% compared to 1.58% for 2003. The return on average equity was 11.81% compared to 15.49% 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 severance package paid to former CEO, Mr. Churchill who retired due to health reasons. Net income for the three months ending June 30, 2004 was $732,000 compared to $978,000 for 2003. This was a decrease of $246,000 or 25.2%. Basic earnings per share was $0.59 compared to $0.78 for 2003. The return on average assets was 1.14% compared to 1.57% for 2003. The return on average equity was 11.51% compared to 15.40% for 2003. These decreases were due to the same reasons noted for the six month period. For the first six months of 2004, net interest income was $4.7 million a decrease of $394,000 or 7.8% 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 3.87% for 2004 compared to 4.32% for 2003. The yield on interest earning assets was 5.09% a decrease from the 5.88% that was reported at June 30, 2003, while the cost of funds at June 30, 2004 was 1.54% while at June 30, 2003 it was 1.94% which has contributed to the overall decline in the net interest margin. Noninterest income for the six month period ending June 30, 2004 was $841,000 a decrease of $116,000 or 12.1% 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 June 30, 2004 was $458,000 compared to $510,000 for 10 2003. Again this was due to the decrease in sales of loans to the secondary market. The Company expected a decline in the number of loans sold to the secondary market during 2004 due to the slight increase in the long term mortgage rate environment. Noninterest expense for the six month period ending June 30, 2004 increased $143,000, or 4.4%, 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 April, 2004 None $ 577,042 May, 2004 None $ 577,042 June, 2004 7,750 $ 50.59 7,750 $ 184,982 Total 7,750 $ 50.59 7,750 $ 184,982
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 June 30, 2004, the Company has $184,982 remaining to purchase stock. ITEM 3-DEFAULTS UPON SENIOR SECURITIES None 12 ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of CNB Corporation was held on May 18, 2004. Elected as Directors for one year term were Steven J. Baker; Robert E. Churchill; James C. Conboy, Jr.; Kathleen M. Darrow; Thomas J. Ellenberger; Vincent J. Hillesheim; John L. Ormsbee; Francis J. VanAntwerp, Jr.; and John P. Ward. Votes cast for: 833,055 Votes cast against: 5,620 Votes withheld: 27 Votes cast for were for all nine directors listed above. Votes cast against were 357 for Steven J. Baker, 357 for Kathleen M. Darrow, 357 for Robert E. Churchill, 4,549 for John L. Ormsbee. Votes withheld were for all nine directors listed above. 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: August 12, 2004 /s/ James C. Conboy, Jr. ------------------------------------------ James C. Conboy, Jr. Chief Executive Officer Date: August 12, 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.