Exhibit 13
CNB CORPORATION
ANNUAL REPORT
December 31, 2004, 2003 and 2002
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.
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CNB CORPORATION
ANNUAL REPORT
December 31, 2004, 2003 and 2002
CONTENTS
FINANCIAL HIGHLIGHTS ............................................................ 1
CONSOLIDATED BALANCE SHEETS ..................................................... 2
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME.......................................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ...................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS ........................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................................... 6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.......................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS............................................. 30
OFFICERS AND COMMUNITY ADVISORS.................................................. 42
STAFF............................................................................ 43
DIRECTORS AND DIRECTORS EMERITI.................................................. 44
CNB CORPORATION
FINANCIAL HIGHLIGHTS
2004 2003 2002 2001 2000
------------ ------------- ------------ ------------ -----------
(In thousands, except per share data)
OPERATING STATISTICS
Interest income $ 12,466 $ 13,282 $ 14,820 $ 15,788 $ 15,685
Interest expense 2,764 3,380 5,300 6,900 6,820
Net interest income 9,702 9,902 9,520 8,888 8,865
Income before income taxes 4,131 5,385 5,703 4,910 4,882
Net income 2,955 3,885 4,094 3,501 3,386
Basic earnings per share (1) 2.38 3.12 3.27 2.80 2.70
Diluted earnings per share (1) 2.37 3.11 3.26 2.78 2.68
Return on average assets (ROA) 1.14% 1.53% 1.71% 1.56% 1.60%
Return on average
shareholders' equity (ROE) 11.68% 15.14% 16.65% 15.24% 16.25%
BALANCE SHEET STATISTICS
Securities $ 88,951 $ 86,921 $ 69,400 $ 73,096 $ 60,504
Total loans 144,619 143,500 146,328 134,803 127,742
Deposits 225,411 224,914 216,444 204,589 193,091
Total assets 254,094 254,406 244,439 231,031 217,725
CAPITAL STATISTICS
Shareholders' equity $ 24,156 $ 25,138 $ 24,737 $ 23,377 $ 21,615
Book value per share (1) 19.51 20.21 19.83 18.66 18.13
Cash dividend per share (1) 2.20 2.10 2.04 1.88 1.79
Dividend payout ratio 92.32% 67.16% 62.25% 67.15% 66.39%
Average equity to average
total assets 9.79% 10.13% 10.25% 10.23% 9.84%
CREDIT STATISTICS
Net charge-offs to total loans .16% .07% .00% .05% .03%
Nonperforming loans
to total loans .47% .28% .08% .48% .21%
Allowance for loan losses
to total loans .93% 1.10% 1.14% 1.24% 1.29%
Allowance for loan losses
to nonperforming loans 2.00x 3.86x 14.64x 2.58x 6.31x
PRICE RANGE FOR COMMON STOCK
The following table shows the high and low selling prices of known transactions
in common stock of the Company for each quarter of 2004 and 2003. The Company
had 997 shareholders as of December 31, 2004. The prices and dividends per share
have been restated to reflect the 5% stock dividend declared in 2003.
2004 2003
-------------------------------- -------------------------------
Cash Cash
Market Price Dividends Market Price Dividends
Quarter High Low Declared High Low Declared
- ------- -------- ------- ---------- ------- ------- -----------
1st $ 52.00 $ 49.24 $ .40 $ 47.62 $45.71 $ .38
2nd 52.00 48.00 .40 49.52 47.14 .38
3rd 51.00 49.50 .40 52.38 47.62 .38
4th 51.00 48.00 1.00 49.52 47.62 .95
(1) All share and per share data have been restated to reflect the 5% stock
dividend declared in 2003.
See accompanying notes to consolidated financial statements.
1.
CNB CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
------------ -----------
(In thousands)
ASSETS
Cash and due from banks $ 5,795 $ 6,308
Interest-bearing deposits with other financial institutions 2,000 2,057
Federal funds sold 4,900 8,700
------------ ------------
Total cash and cash equivalents 12,695 17,065
Securities available for sale 78,280 75,717
Securities held to maturity (fair value of
$4,663 in 2004 and $5,009 in 2003) 4,621 4,892
Other securities 6,050 6,312
Loans, net of allowance for loan losses of $1,350
in 2004 and $1,575 in 2003 143,258 141,910
Premises and equipment, net 4,600 4,084
Other assets 4,590 4,426
------------ ------------
Total assets $ 254,094 $ 254,406
============ ============
LIABILITIES
Deposits
Noninterest-bearing $ 37,289 $ 36,062
Interest-bearing 188,122 188,852
------------ ------------
Total deposits 225,411 224,914
Other liabilities 4,527 4,354
------------ ------------
Total liabilities 229,938 229,268
------------ ------------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares authorized; 1,237,994 and
1,243,939 shares issued
and outstanding in 2004 and 2003 3,095 3,110
Additional paid-in capital 20,475 20,932
Retained earnings 1,010 783
Accumulated other comprehensive income (loss), net of tax (424) 313
------------- ------------
Total shareholders' equity 24,156 25,138
------------ ------------
Total liabilities and shareholders' equity $ 254,094 $ 254,406
============ ============
See accompanying notes to consolidated financial statements.
2.
CNB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ -----------
(In thousands, except per share data)
INTEREST INCOME
Loans, including fees $ 9,705 $ 10,483 $ 11,385
Securities
Taxable 1,925 1,734 2,321
Tax-exempt 691 862 922
Other interest income 145 203 192
------------ ------------ ------------
Total interest income 12,466 13,282 14,820
INTEREST EXPENSE ON DEPOSITS 2,764 3,380 5,300
------------ ------------ ------------
NET INTEREST INCOME 9,702 9,902 9,520
Provision for loan losses - - -
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,702 9,902 9,520
------------ ------------ ------------
NONINTEREST INCOME
Service charges and fees 976 947 1,004
Net realized gains from sale of loans 342 777 651
Loan servicing fees, net of amortization 135 (43) (20)
Other income 165 297 201
------------ ------------ ------------
Total noninterest income 1,618 1,978 1,836
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 3,400 3,180 3,008
Deferred compensation 315 436 208
Pension 768 370 228
Hospitalization 490 394 372
Occupancy 814 762 774
Supplies 168 170 150
Legal and professional 312 222 200
Other expenses 922 961 713
------------ ------------ ------------
Total noninterest expenses 7,189 6,495 5,653
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,131 5,385 5,703
Income tax expense 1,176 1,500 1,609
------------ ------------ ------------
NET INCOME 2,955 3,885 4,094
Other comprehensive income
Net change in unrealized gains (losses) on
securities available for sale (1,130) (547) 147
Minimum pension liability 12 (489) -
Tax effects 381 352 (51)
------------ ------------ ------------
Total other comprehensive income (loss) (737) (684) 96
------------- ------------- ------------
COMPREHENSIVE INCOME $ 2,218 $ 3,201 $ 4,190
============ ============ ============
Basic earnings per share $ 2.38 $ 3.12 $ 3.27
Diluted earnings per share 2.37 3.11 3.26
See accompanying notes to consolidated financial statements.
3.
CNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
Accumulated
Other
Additional Comprehensive Total
Outstanding Common Paid-In Retained Income (Loss), Shareholders'
Shares Stock Capital Earnings Net of Tax Equity
----------- --------- ---------- ----------- --------------- -------------
(Dollars in thousands, except share and per share data)
Balance - January 1, 2002 1,193,415 $ 2,984 $ 18,509 $ 983 $ 901 $ 23,377
Net income 4,094 3,501
Cash dividends - $2.04 per share (2,548) (2,351)
Shares issued under stock option plan, net 1,274 3 29 32
Purchase and retirement of common stock (6,317) (16) (298) (314)
Net change in accumulated other
comprehensive income 96 96
----------- --------- --------- ----------- --------------- -------------
Balance - December 31, 2002 1,188,372 2,971 18,240 2,529 997 24,737
Net income 3,885 3,885
Cash dividends - $2.10 per share (2,609) (2,609)
5% stock dividend 58,852 147 2,854 (3,022) (21)
Shares issued under stock option plan, net 264 1 7 8
Purchase and retirement of common stock (3,549) (9) (169) (178)
Net change in accumulated other
comprehensive income (684) (684)
----------- --------- --------- ----------- --------------- -------------
Balance - December 31, 2003 1,243,939 3,110 20,932 783 313 25,138
Net income 2,955 2,955
Cash dividends - $2.20 per share (2,728) (2,728)
Shares issued under stock option plan,
net of 4,543 shares surrendered 4,324 11 37 48
Purchase and retirement of common stock (10,269) (26) (494) (520)
Net change in accumulated other
comprehensive income (737) (737)
----------- --------- --------- ----------- --------------- -------------
Balance - December 31, 2004 1,237,994 $ 3,095 $ 20,475 $ 1,010 $ (424) $ 24,156
=========== ========= ========= =========== =============== =============
See accompanying notes to consolidated financial statements.
4.
CNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,955 $ 3,885 $ 4,094
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 1,138 1,022 700
Loans originated for sale (18,590) (40,356) (35,554)
Proceeds from sales of loans originated for sale 18,793 40,830 36,277
Gain on sales of loans (342) (777) (651)
(Increase) decrease in other assets 594 456 (961)
Increase in other liabilities 20 589 1,156
------------ ------------ ------------
Total adjustments 1,613 1,764 967
------------ ------------ ------------
Net cash from operating activities 4,568 5,649 5,061
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
available for sale 30,690 29,587 23,211
Purchase of securities available for sale (35,073) (48,944) (19,770)
Proceeds from maturities of securities held
to maturity 2,056 2,186 2,252
Purchase of securities held to maturity (1,785) (1,463) (699)
Proceeds from maturities of other securities 600 1,285 2,700
Purchase of other securities (338) (1,345) (4,142)
Net (increase) decrease in portfolio loans (1,474) 2,727 (11,603)
Premises and equipment expenditures (964) (1,038) (259)
------------ ------------ ------------
Net cash from investing activities (6,288) (17,005) (8,310)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 497 8,470 11,855
Dividends paid (2,675) (2,612) (2,438)
Proceeds from exercise of stock options, net 48 8 32
Purchases of common stock (520) (178) (314)
------------ ------------ ------------
Net cash from financing activities (2,650) 5,688 9,135
------------ ------------ ------------
Net change in cash and cash equivalents (4,370) (5,668) (5,886)
Cash and cash equivalents at beginning of year 17,065 22,733 16,847
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,695 $ 17,065 $ 22,733
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 2,784 $ 3,399 $ 5,382
Income taxes 1,364 1,442 1,624
Non-cash transactions:
Transfer from loans to other real estate owned 126 - -
See accompanying notes to consolidated financial statements.
5.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include CNB
Corporation (the Company) and its wholly-owned subsidiary, Citizens National
Bank of Cheboygan and the Bank's wholly-owned subsidiary CNB Mortgage
Corporation (the Bank and the Mortgage Corporation are hereafter collectively
referred to as the Bank). All significant intercompany accounts and transactions
are eliminated in consolidation.
Nature of Operations and Concentrations of Credit Risk: The Company is a
one-bank holding company which conducts no direct business activities. All
business activities are performed by the Bank.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to individuals
for home mortgages, automobiles, personal expenditures and loans to business
enterprises for current operations and expansion. The Bank offers a variety of
deposit accounts, including checking, savings, money market, individual
retirement accounts and certificates of deposit.
The principal markets for the Bank's financial services are the Michigan
communities in which the Bank is located and the area immediately surrounding
these communities. The Bank serves these markets through eight offices located
in Cheboygan, Presque Isle and Emmet Counties in northern lower Michigan.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, value of mortgage servicing rights, and fair values of financial
instruments are particularly subject to change in the near term.
Cash Flow Reporting: Cash and cash equivalents include cash and due from banks
and federal funds sold. Net cash flows are reported for customer loan and
deposit transactions.
Securities: Securities classified as held to maturity are carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in shareholders' equity, net
of tax. Securities are written down to fair value when a decline in fair value
is not temporary. Interest income includes amortization of purchase premium and
discount. Declines in the fair value of securities below their cost that are
other than temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: (1) the length of time and
extent that fair value has been less than cost, (2) the financial condition and
near term prospects of the issuer, and (3) the Company's ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value.
(Continued)
6.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other securities, which include Federal Reserve Bank stock, Federal Home Loan
Bank stock and other taxable securities that are not readily marketable, are
carried at cost.
Interest income includes amortization of purchase premium or discount. Premiums
and discounts on securities are amortized on the level-yield method without
anticipating prepayments, except for mortgage-backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade
date and determined using the specific identification method.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
Loan Income: Interest income is earned on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days (180 days for residential
mortgages).
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
(Continued)
7.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the assets useful lives for furniture and fixtures
range from three to five years while the useful life for buildings is
thirty-nine years. These assets are reviewed for impairment when events indicate
the carrying amount may not be recoverable. Maintenance and repairs are charged
to expense and improvements are capitalized.
Other Real Estate Owned: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at the lower of the loan carrying amount
and fair value at acquisition. Any reduction to fair value from the carrying
value of the related loan is accounted for as a loan loss. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in other
expenses. As of December 31, 2004 other assets on the consolidated balance sheet
includes $126,000 of other real estate owned. There was no other real estate
owned at December 31, 2003.
Servicing Rights: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and then, secondarily, as to prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
Company Owned Life Insurance: The Company has purchased life insurance policies
on those directors who participate in the 1985 Directors Deferred Compensation
plan. Company owned life insurance is recorded at its cash surrender value, or
the amount that can be realized.
Employee Benefits: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Contributions to the plan are based on the maximum amount deductible
for income tax purposes. A 401(k) savings and retirement plan has also been
established and covers substantially all employees. Contributions to the 401(k)
plan are expensed as made.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. Options granted vest over one year
and have a maximum term of ten years. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant.
The following table illustrates the effect on 2004 net income and earnings per
share if expense were measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation. (Dollars in
thousands, except per share data)
(Continued)
8.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2004
-----------
Net income as reported $ 2,955
Deduct: Stock-based compensation expense
determined under fair value based method (44)
-----------
Pro forma net income $ 2,911
===========
Basic earnings per share as reported $ 2.38
Pro forma basic earnings per share 2.34
Diluted earnings per share as reported 2.37
Pro forma diluted earnings per share 2.34
The effect of net income and earnings per share if expense was measured using
the fair value recognition provisions of FASB Statement No. 123, was less than
$.01 per share for 2003 and 2002. The fair value of options granted during 2003
and pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003
---------
Risk-free interest rate 4.21%
Expected option life 10 years
Expected stock price volatility 13.36%
Dividend yield 4.15%
Weighted average fair value of
options granted during year $ 5.45
There were no stock options granted during 2004 and 2002.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Earnings Per Share: Basic earnings per share is based on net income divided by
the weighted average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional potential shares
issuable under stock options.
(Continued)
9.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Splits and Stock Dividends: Dividends issued in stock are reported by
transferring the market value of the stock issued from retained earnings to
common stock and additional paid-in capital. Stock splits are recorded by
adjusting par value. Fractional shares are paid in cash for all stock splits and
dividends. Basic earnings per share, diluted earnings per share and dividends
per share have been restated for all stock splits and stock dividends, including
the five percent stock dividend declared in 2003.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to extend credit which are not reflected
in the consolidated financial statements. A summary of these commitments is
disclosed in Note 12.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in
unrealized gains (losses) on securities available for sale, net of tax, and the
change in the Company's minimum pension liability, net of tax, which are also
recognized as a separate component of shareholders' equity.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates. The fair value
estimates of existing on- and off-balance-sheet financial instruments do not
include the value of anticipated future business or the values of assets and
liabilities not considered financial instruments.
Reclassification: Some items in prior financial statements have been
reclassified to conform with the current presentation.
Newly Issued But Not Yet Effective Accounting Policies: 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 historically has been expensed over the
vesting period of the options, which is 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. There will be no significant effect on
financial position as total equity will not change.
SOP 03-3 requires that a valuation allowance for loans acquired in a transfer,
including in a business combination, reflect only losses incurred after
acquisition and should not be recorded at acquisition. It applies to any loan
acquired in a transfer that showed evidence of credit quality deterioration
since it was made. The effect of these new standards on the Company's financial
position and results of operations is not expected to be material upon and after
adoption.
(Continued)
10.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 2 - SECURITIES
The year end fair values and related gross unrealized gains and losses for
securities available for sale, were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
(In thousands)
Available for sale
2004
U.S. Government and agency $ 56,786 $ 20 $ (431)
Mortgage-backed 3,149 8 -
State and municipal 18,345 255 (17)
------------ ------------ -------------
$ 78,280 $ 283 $ (448)
============ ============ =============
2003
U.S. Government and agency $ 48,802 $ 363 $ (28)
State and municipal 26,915 638 (8)
------------ ------------ ------------
$ 75,717 $ 1,001 $ (36)
============ ============ ============
The year end carrying amount, unrecognized gains and losses, and fair value of
securities held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------------ ------------- ------------ ------------
(In thousands)
Held to maturity
2004
State and municipal $ 4,621 $ 55 $ (13) $ 4,663
============ ============= ============ ============
2003
State and municipal $ 4,892 $ 117 $ - $ 5,009
============ ============= ============ ============
There were no sales of securities during 2004, 2003 and 2002.
Securities with unrealized losses at year end 2004 and 2003, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows (in thousands):
(Continued)
11.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 2 - SECURITIES (Continued)
Less Than 12 Months 12 Months or More Total
--------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
2004 Value Loss Value Loss Value Loss
- ------------------------ ------------ ------------ ------------ ------------ ------------ -----------
U.S. Government
and agency $ 48,780 $ (431) $ - $ - $ 48,780 $ (431)
State and municipal 4,849 (22) 492 (8) 5,341 (30)
------------ ------------ ------------ ------------ ------------ -----------
Total temporarily
impaired $ 53,629 $ (453) $ 492 $ (8) $ 54,121 $ (461)
============ ============ ============ ============ ============ ===========
Less Than 12 Months 12 Months or More Total
--------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
2003 Value Loss Value Loss Value Loss
- ------------------------ ------------ ------------ ------------ ------------ ------------ -----------
U.S. Government
and agency $ 3,789 $ (28) $ - $ - $ 3,789 $ (28)
State and municipal 1,794 (8) - - 1,794 (8)
------------ ------------ ------------ ------------ ------------ -----------
Total temporarily
impaired $ 5,583 $ (36) $ - $ - $ 5,583 $ (36)
============ ============ ============ ============ ============ ===========
Unrealized losses at year end 2004 and 2003 have not been recognized into income
because they are not considered to be other-than-temporary. Management considers
the unrealized losses to be a market driven, resulting from changes in interest
rates, and no loss will be realized unless the securities are sold.
Contractual maturities of debt securities at year end 2004 were as follows.
Expected maturities may differ from contractual maturity because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Available For Sale Held to Maturity
Fair Carrying Fair
Value Amount Value
------------------ ------------ ------------
(In thousands)
Due in one year or less $ 17,985 $ 776 $ 780
Due from one to five years 53,487 1,868 1,905
Due from five to ten years 992 733 734
Due after ten years 2,667 1,244 1,244
Mortgage-backed 3,149 - -
------------------ ------------ ------------
$ 78,280 $ 4,621 $ 4,663
================== ============ ============
(Continued)
12.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 2 - SECURITIES (Continued)
Securities with a carrying value of $1,031,000 and $1,084,000 were pledged at
December 31, 2004 and 2003, to secure public deposits and for other purposes.
The Company held securities exceeding 10% of shareholders' equity from the
following states (including its political subdivisions) at December 31:
2004 2003
--------- ---------
(In thousands)
Michigan $ 10,443 $ 11,029
NOTE 3 - LOANS
Year end loans were as follows:
2004 2003
------------- -----------
(In thousands)
Residential real estate $ 83,364 $ 89,042
Consumer 8,699 9,660
Commercial real estate 43,336 35,258
Commercial 9,220 9,540
------------- -----------
144,619 143,500
Deferred loan origination fees, net (11) (15)
Allowance for loan losses (1,350) (1,575)
------------- -----------
$ 143,258 $ 141,910
============= ===========
Activity in the allowance for loan losses is summarized as follows:
2004 2003 2002
------------- ----------- ----------
(In thousands)
Beginning balance $ 1,575 $ 1,669 $ 1,667
Provision for loan losses - - -
Charge-offs (242) (106) (50)
Recoveries 17 12 52
------------ ----------- ----------
Ending balance $ 1,350 $ 1,575 $ 1,669
============ =========== ==========
There was one impaired loan during 2004 with an average balance of approximately
$158,000. The balance of this loan was zero at year-end. Information relating to
income received on this
(Continued)
13.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 3 - LOANS (Continued)
loan during impairment is not considered material to this presentation. There
were no impaired loans during 2003.
Nonperforming loans were as follows:
2004 2003
---------- ---------
(In thousands)
Loans past due over 90 days still on accrual $ 674 $ 408
Nonaccrual loans - -
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These loans
totaled $69,760,000 and $61,124,000 at year end 2004 and 2003. Related escrow
deposit balances were $71,000 and $73,000. Capitalized mortgage servicing rights
balances were $518,000 and $450,000 at year end 2004 and 2003. There was no
valuation allowance at year-end 2004 or 2003. The related additions recognized
were $139,000, $303,000 and $267,000 and the amortization was $71,000, $215,000
and $171,000 in 2004, 2003 and 2002.
NOTE 5 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
2004 2003
---------- ---------
(In thousands)
Real estate and buildings $ 5,312 $ 4,777
Furniture and fixtures 4,070 3,763
---------- ---------
9,382 8,540
Less accumulated depreciation (4,782) (4,456)
----------- ----------
$ 4,600 $ 4,084
========== =========
Depreciation expense amounted to $448,000, $396,000 and $410,000 in 2004, 2003
and 2002.
(Continued)
14.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 6 - DEPOSITS
Time deposit accounts individually exceeding $100,000 total $14,751,000 and
$15,553,000 at year end 2004 and 2003.
At year end 2004, the scheduled maturities of time deposits are as follows:
(In thousands)
2005 $ 41,596
2006 14,487
2007 3,694
2008 2,180
2009 1,510
------------
$ 63,467
============
NOTE 7 - EMPLOYEE BENEFITS
Defined Benefit Retirement Plan: The Company has a defined benefit,
noncontributory pension plan which provides retirement benefits for essentially
all employees. The Company uses a December 31 measurement date for its plan. The
following sets forth the plan's funded status and amounts recognized in the
financial statements:
2004 2003
------------ ------------
(In thousands)
Change in benefit obligation:
Beginning benefit obligation $ (5,035) $ (3,938)
Service cost (217) (207)
Interest cost (336) (297)
Amendments - -
Actuarial loss (gain) (174) (677)
Benefits paid 79 84
Plan settlement 1,093 -
------------ ------------
Ending benefit obligation (4,591) (5,035)
Change in plan assets, at fair value:
Beginning plan assets 3,638 2,857
Actual return 284 543
Employer contribution 362 322
Benefits paid (79) (84)
Plan settlement (1,221) -
------------ ------------
Ending plan assets 2,984 3,638
(Continued)
15.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 7 - EMPLOYEE BENEFITS (Continued)
2004 2003
------------ ------------
(In thousands)
Funded status $ (1,607) $ (1,397)
Unrecognized net actuarial loss 1,632 1,845
Unrecognized transition amount (32) (49)
Unrecognized prior service amount 36 37
------------ ------------
Prepaid pension cost $ 29 $ 436
============ ============
Amounts recognized in the balance sheet consist of:
2004 2003
------------ ------------
(In thousands)
Prepaid pension cost $ 29 $ 436
Accrued pension liability (513) (514)
Intangible assets 36 25
Accumulated other comprehensive income 477 489
------------ ------------
Net amount recognized $ 29 $ 436
============ ============
The accumulated benefit obligation for the defined benefit pension plan was
$3,242 and $3,716 at year end 2004 and 2003, respectively.
Components of net periodic benefit cost are as follows:
2004 2003 2002
------------ ------------ ------------
(In thousands)
Service cost $ 217 $ 207 $ 163
Interest cost on benefit obligation 336 297 266
Expected return on plan assets (288) (231) (234)
Net amortization and deferral (9) (9) (9)
Recognized net actuarial loss 86 105 42
Plan settlement 426 - -
------------ ------------ ------------
Pension expense $ 768 $ 369 $ 228
============ ============ ============
(Continued)
16.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 7 - EMPLOYEE BENEFITS (Continued)
Additional information about the defined benefit pension plan:
2004 2003 2002
--------- --------- --------
Increase (decrease) in minimum liability included in
other comprehensive income $ (12) $ 489 $ -
The following weighted-average assumptions were used to determine benefit
obligations at year end and net cost:
2004 2003 2002
--------- --------- --------
Weighted average discount rate 6.50% 6.50% 7.50%
Rate of increase in future compensation 4.00% 4.00% 4.00%
Expected long term return on plan assets 8.00% 8.00% 8.00%
The Company's pension plan asset allocation at year end 2004 and 2003, target
allocation for 2004, and expected long-term rate of return by asset category are
as follows:
Percentage of Plan Weighted-
Target Assets Average Expected
Allocation at Year end Long-Term Rate
Asset Category 2005 2004 2003 of Return - 2004
- -------------- ---------- ----- ----- ----------------
Equity securities 70.0% 69.5% 61.6% 9.25%
Fixed Income securities 30.0 27.3 31.5 5.50
Other - 3.2 6.9 2.35
----- ----- ----- ----
Total 100.0% 100.0% 100.0% 8.00%
===== ===== ===== ====
Plan assets are administered by Huntington National Bank as trustee of the plan.
Plan assets are invested in diversified mutual funds.
The estimates of weighted average expected long-term rate of return is an
estimate based on past performance and actual returns in the future are likely
to vary over time.
The overall expected long-term rate of return and risk expectations of the
investments in the plan are based on Standard and Poor's 500 and 5 year Treasury
bonds from 1950-2004.
The asset mix of the portfolio will be maintained by periodically re-balancing
this account back to the stock and fixed income target allocations stated above.
(Continued)
17.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 7 - EMPLOYEE BENEFITS (Continued)
The investments in the plan are managed for the benefits of the participants.
They are structured to meet the cash flow necessary to pay retiring employees.
ERISA guidelines for diversification of the investments are followed.
During 2004, the Company distributed a lump sum distribution to a highly
compensated employee which triggered a plan settlement in the amount of $426,000
in addition to the Company's expense of $342,000, bringing the total expense to
$768,000 for the year.
The Company expects to contribute approximately $373,000 to this pension plan in
2005.
Estimated Future Payments
The following benefit payments, which reflect expected future service, are
expected:
Year End Benefit Payments
- -------- ----------------
2005 $ 115,000
2006 119,000
2007 117,000
2008 114,000
2009 137,000
Years 2010-2014 1,205,000
Deferred Compensation Plan: The Company has a deferred compensation plan to
provide retirement benefits to certain Directors, at their option, in lieu of
annual directors' fees. The present value of future benefits are accrued
annually over the period of active service of each participant. The expense for
the plan was $280,000, $408,000 and $186,000 in 2004, 2003 and 2002. The expense
was higher in 2003 due to a change in the discount rate during 2002. The effect
of a discount rate is to spread the fixed total expense over the time period
involved. Also, as a result of this discount rate change, an additional
liability of approximately $512,000 was required to be recognized over the
remaining service periods of each individual in the plan. As of December 31,
2004, the additional liability remaining to be recorded totaled $354,000.
The Company has also purchased insurance on the lives of participating directors
with the Company as the owner and beneficiary of the policies. At December 31,
2004 and 2003, the cash surrender value of the underlying policies was
$1,340,000 and $1,275,000, which is included in other assets on the Balance
Sheet.
The Company also has a deferred compensation plan that allows executive officers
of the Bank, and certain Directors an opportunity to defer a portion of their
compensation. On a monthly basis, the account of each participant accrues
interest based on the interest rate determined for that year. The expense of the
plan was $35,000, $28,000 and $22,000 in 2004, 2003 and 2002.
(Continued)
18.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 7 - EMPLOYEE BENEFITS (Continued)
401(k) Plan: The Company has a 401(k) savings and retirement plan covering
substantially all employees. Under the plan, employees may defer up to the
lesser of 100% of their eligible compensation or the limitations set by the IRS.
The employees may also make "catch-up" contributions to the extent the IRS
allows. During 2004, 2003 and 2002, the Board of Directors elected to contribute
a matching contribution equal to 100% of the first 2% and 50% of the next 2% of
the employee's deferred compensation. Employee contributions and the Company's
matching percentages are vested immediately. The Company's matching percentages
are determined annually by the Board of Directors and resulted in total
contributions of $73,000, $73,000 and $71,000 in 2004, 2003 and 2002.
NOTE 8 - STOCK OPTIONS
Stock Option Plan: The shareholders approved an incentive stock option plan in
May 1996 under which options may be issued at market prices to employees. The
right to exercise the options vests over a one year period. The exercise price
of options granted is equivalent to the market value of underlying stock at the
grant date. As of December 31, 2004, a total of 9,952 shares were available for
future grants.
Activity in the option plan for the years ended, and as restated for all stock
dividends, is summarized as follows:
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
----------- ----------------- ------------ ----------
Balance at January 1, 2002 32,294 $ 23.92-57.01 $ 41.92
Exercised (1,337) 23.92 23.92
------ ----------------- ------------
Balance at December 31, 2002 30,957 23.92-57.01 42.70
Granted 8,662 47.62-48.57 48.54 $ 5.45
Exercised (277) 23.92-33.61 25.39
------ ----------------- ------------
Balance at December 31, 2003 39,342 23.92-57.01 44.10
Exercised (8,867) 23.92-33.62 31.41
Forfeitures (2,636) 57.01 57.01
------ ----------------- ------------
Balance at December 31, 2004 27,839 $ 23.92-57.01 $ 46.92
======
(Continued)
19.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 8 - STOCK OPTIONS (Continued)
Options outstanding at year-end 2004 were as follows.
Outstanding Exercisable
----------------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life (in years) Price Number Price
- ------ ------ --------------- ---------- ------ ----------
$20.00-$30.00 1,180 1.5 $ 23.92 1,180 $ 23.92
$30.00-$40.00 6,012 3.1 33.62 6,012 33.62
$40.00-$50.00 12,307 7.4 48.79 12,307 48.79
$50.00-$60.00 8,340 5.0 57.01 8,340 57.01
------ ------
Outstanding at year end 27,839 5.5 $ 46.92 27,839 $ 46.92
====== ======
There were 30,680 options exercisable at December 31, 2003 with a weighted
average exercise price of $42.85. There were 30,957 options exercisable at
December 31, 2002 with a weighted average exercise price of $42.70.
NOTE 9 - INCOME TAXES
Income tax expense consists of:
2004 2003 2002
------------ ------------ ------------
(In thousands)
Current $ 1,265 $ 1,595 $ 1,591
Deferred (89) (95) 18
------------- ------------- ------------
$ 1,176 $ 1,500 $ 1,609
============ ============ ============
Year end deferred tax assets and liabilities consist of:
2004 2003
------------ ------------
(In thousands)
Deferred tax assets
Allowance for loan losses $ 322 $ 405
Deferred compensation 848 729
Minimum pension liability 162 166
Unrealized losses on securities available for sale 56 0
Other 8 11
------------ ------------
Total deferred tax assets 1,396 1,311
------------ ------------
(Continued)
20.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 9 - INCOME TAXES (Continued)
2004 2003
------------ ------------
(In thousands)
Deferred tax liabilities
Pension 17 155
Unrealized gains on securities available for sale - 328
Fixed assets 152 129
Mortgage servicing rights 176 153
Accretion 44 21
Other 48 35
------------ ------------
Total deferred tax liabilities 437 821
------------ ------------
Net deferred tax asset $ 959 $ 490
============ ============
Income tax expense calculated at the statutory rate of 34% differs from actual
income tax expense as follows:
2004 2003 2002
------------ ------------ ------------
(In thousands)
Statutory rate applied to income before taxes $ 1,405 $ 1,831 $ 1,939
Deduct
Tax-exempt interest income, net (218) (269) (278)
Other (11) (62) (52)
------------- ------------ ------------
$ 1,176 $ 1,500 $ 1,609
============ ============ ============
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations is presented below:
2004 2003 2002
------------ ------------ ------------
Basic earnings per share
Net income available to common
shareholders (in thousands) $ 2,955 $ 3,885 $ 4,094
============ ============ ============
Weighted average shares outstanding 1,241,624 1,245,653 1,252,254
Basic earnings per share $ 2.38 $ 3.12 $ 3.27
============ ============ ============
(Continued)
21.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 10 - EARNINGS PER SHARE (Continued)
2004 2003 2002
------------ ------------ ------------
Diluted earnings per share
Net income available to common
shareholders (in thousands) $ 2,955 $ 3,885 $ 4,094
============ ============ ============
Weighted average shares outstanding 1,241,624 1,245,653 1,252,254
Add dilutive effects of assumed exercises
of stock options 3,883 3,541 4,960
------------ ------------ ------------
Weighted average dilutive
potential shares outstanding 1,245,477 1,249,194 1,257,214
============ ============ ============
Diluted earnings per share $ 2.37 $ 3.11 $ 3.26
============ ============ ============
Stock options for 10,976 shares of common stock were not considered in computing
diluted earnings per share for 2004 because they were antidilutive.
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank (including
family members, affiliates and companies in which they are principal owners) had
loans outstanding with the Bank in the ordinary course of business. A summary of
the aggregate loans outstanding which exceeded $60,000 to these individuals
follows:
2004 2003
------------ ------------
(In thousands)
Balance outstanding, January 1 $ 2,022 $ 2,456
New loans and rewrites 997 1,474
Payments and payoffs (921) (1,908)
Change in persons included (55) -
------------- ------------
Balance outstanding, December 31 $ 2,043 $ 2,022
============ ============
Related party deposits totaled $2,005,000 and $1,553,000 at year end 2004 and
2003.
(Continued)
22.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or result of operations of the Company.
At year end 2004 and 2003, reserves of $1,975,000 and $1,778,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit and standby
letters of credit. These involve, to a varying degree, credit and interest-rate
risk in excess of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. The same credit policies are used for commitments and conditional
obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
to guarantee a customer's performance to a third party.
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk at year end were as follows:
2004 2003
-------- --------
(In thousands)
Commitments to extend credit $ 16,798 $ 17,449
Standby letters of credit 148 107
The fair values of these commitments are not material. Substantially all of
these commitments are at variable or uncommitted rates.
(Continued)
23.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and variable rate loans or deposits that reprice frequently and fully.
Securities fair values are based on quoted market prices or, if no quotes are
available, on the rate and term of the security and on information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, the fair value is estimated by
discounted cash flow analysis or underlying collateral values, where applicable.
The fair value of off-balance-sheet items approximates cost and is not
considered significant to this presentation.
The estimated year end values of financial instruments were:
2 0 0 4 2 0 0 3
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
Assets
Cash and cash equivalents $ 12,695 $ 12,695 $ 17,065 $ 17,065
Securities available for sale 78,280 78,280 75,717 75,717
Securities held to maturity 4,621 4,663 4,892 5,009
Other securities 6,050 6,050 6,312 6,312
Loans, net 143,258 146,427 141,910 147,465
Liabilities
Deposits
Noninterest-bearing $ (37,289) $ (37,289) $ (36,062) $ (36,062)
Interest-bearing (188,122) (187,956) (188,852) (189,832)
NOTE 14 - REGULATORY CAPITAL
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors, and
the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
(Continued)
24.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 14 - REGULATORY CAPITAL (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk-
Weighted Assets Tier 1 Capital
Total Tier 1 To Average Assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
The Bank was categorized as well capitalized at year end. There are no
conditions or events since year-end that management believes has changed the
Bank's category. Actual capital levels (in millions) and minimum required levels
were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
----- ----- ------- -------- ------ -----
2004
Total capital (to risk weighted assets)
Consolidated $25.6 17.7% $ 11.6 8.0% $ N/A 10.0%
Bank 25.5 17.7 11.6 8.0 14.5 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 24.2 16.7 5.8 4.0 N/A 6.0
Bank 24.2 16.7 5.8 4.0 8.7 6.0
Tier 1 capital (to average assets)
Consolidated 24.2 9.4 10.3 4.0 N/A 5.0
Bank 24.2 9.4 10.3 4.0 12.9 5.0
2003
Total capital (to risk weighted assets)
Consolidated $26.1 18.5% $ 11.3 8.0% $ N/A 10.0%
Bank 26.0 18.5 11.3 8.0 14.1 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 24.5 17.4 5.6 4.0 N/A 6.0
Bank 24.5 17.4 5.6 4.0 8.5 6.0
Tier 1 capital (to average assets)
Consolidated 24.5 9.6 10.2 4.0 N/A 5.0
Bank 24.5 9.6 10.2 4.0 12.7 5.0
(Continued)
25.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 14 - REGULATORY CAPITAL (Continued)
One of the principal sources of cash for the Company is dividends from the Bank.
Regulatory agencies can place dividend restrictions on the Bank based on their
evaluation of its financial condition. No restrictions are currently imposed by
regulatory agencies on the Bank other than the limitations found in the
regulations which govern the payment of dividends to the Company. Under the most
restrictive of these regulations, in 2005, the Bank is limited to paying
dividends of approximately $841,000 plus 2005 net income, without prior
regulatory approval.
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company financial statements:
CONDENSED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
---------- ----------
(In thousands)
ASSETS
Cash $ - $ 7
Investment in subsidiary 24,134 25,137
Dividends receivable 1,260 1,200
---------- ----------
Total assets $ 25,394 $ 26,344
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 1,238 $ 1,185
Other liabilities - 21
Shareholders' equity 24,156 25,138
---------- ----------
Total liabilities and shareholders' equity $ 25,394 $ 26,344
========== ==========
(Continued)
26.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
---------- ---------- ----------
(In thousands)
Dividends from subsidiary $ 3,240 $ 2,802 $ 2,826
Operating expenses (28) (36) (40)
---------- ---------- ----------
Income before income tax and equity
in undistributed income of subsidiary 3,212 2,766 2,786
Income tax benefit 9 12 13
Equity in undistributed income of subsidiary (266) 1,107 1,295
---------- ---------- ----------
NET INCOME $ 2,955 $ 3,885 $ 4,094
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,955 $ 3,885 $ 4,094
Equity in undistributed net income of subsidiary 266 (1,107) (1,295)
Change in dividends receivable (60) 258 (402)
Change in other assets - 4 -
Change in other liabilities (21) (270) 270
---------- ---------- ----------
Net cash from operating activities 3,140 2,770 2,667
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (2,675) (2,612) (2,438)
Net shares purchased (472) (170) (282)
---------- ---------- ----------
Net cash from financing activities (3,147) (2,782) (2,720)
---------- ---------- ----------
Net change in cash and cash equivalents (7) (12) (53)
Cash at beginning of year 7 19 72
---------- ---------- ----------
CASH AT END OF YEAR $ - $ 7 $ 19
========== ========== ==========
(Continued)
27.
CNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Earnings Per Share
Interest Interest Net ------------------
Income Income Income Basic Diluted
-------- -------- ------- ------ -------
(In thousands, except per share data)
2004
First quarter $ 3,071 $ 2,315 $ 773 $ .62 $ .62
Second quarter 3,073 2,359 732 .59 .59
Third quarter 3,138 2,455 819 .66 .66
Fourth quarter 3,184 2,573 631 .51 .50
2003
First quarter $ 3,476 $ 2,534 $ 989 $ .79 $ .79
Second quarter 3,410 2,534 978 .78 .78
Third quarter 3,276 2,480 1,098 .89 .88
Fourth quarter 3,120 2,354 820 .66 .66
The decrease from third quarter to fourth quarter 2004 net income was the effect
of the Company making additional expense for the defined benefit pension expense
which reduced net income.
During the third quarter 2003 the Company received payment from life insurance
proceeds which amounted to $125,000. Net income for the fourth quarter of 2003
was lower over the previous three quarters due to a decline in gains received
from the sale of mortgages to the secondary market.
28.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CNB Corporation
Cheboygan, Michigan
We have audited the accompanying consolidated balance sheets of CNB Corporation
as of December 31, 2004 and 2003, and the related consolidated statements of
income and comprehensive income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Corporation as
of December 31, 2004 and 2003 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
Crowe Chizek and Company LLC
South Bend, Indiana
February 10, 2005
29.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation (the Company) and its wholly-owned
subsidiary, Citizens National Bank of Cheboygan and the Bank's wholly-owned
subsidiary CNB Mortgage Corporation (the Bank and the Mortgage Corporation are
hereafter collectively referred to as the Bank). This discussion should be read
in conjunction with the consolidated financial statements beginning on page 2
and the related footnotes.
FINANCIAL CONDITION
The overall financial condition of the Company was strong for 2004. The Company
continues to see growth in both investment and loan portfolios. Deposits had
slight overall growth during 2004 while the Company's equity declined during
2004 due to the stock repurchase program the Company has in place.
CASH AND CASH EQUIVALENTS
The Company's balances of cash and cash equivalents decreased $4.4 million from
2003 to 2004. During the year, $4.6 million of cash was provided from operating
activities due primarily to net income. The company utilized $6.3 million of
cash from investing activities and $2.7 million from financing activities. The
balances maintained in cash and cash equivalents vary based on daily
fluctuations in loan and deposit balances. Sufficient cash is maintained on a
daily basis to meet the anticipated liquidity needs of the Company for customer
transactions and to clear checks drawn on other financial institutions. The
amount of clearings can vary by as much as $3.0 million in one day, causing the
Company's cash position to vary. It was the intent of the Company to reduce the
cash and cash equivalents balances to invest in higher yielding investments.
SECURITIES
The Company maintains securities portfolios that include obligations of federal
agencies and government sponsored entities as well as securities issued by
states and political subdivisions. Security balances increased $2.0 million
during 2004. Securities available for sale represent 88.0% of the portfolio.
Currently, the Company primarily maintains a short-term securities portfolio.
The Company will extend the average life of the portfolio moving forward as the
rate environment continues to increase. As the amount of securities maturing on
a regular basis decreases, liquidity will be maintained by adding to the
available for sale portfolio. During 2004, the Company invested in short-term
U.S. Government and agency securities with the belief that during 2005 rates
will start to rise; therefore these securities would be replaced with higher
yielding assets in a higher rate environment.
30.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
The chart below shows the change in each of the categories of the portfolio.
2004 2003 2002
------------ ------------- -------------
(In thousands)
U.S. Government and agency securities $ 7,984 $ 21,813 $ (6,068)
Mortgage backed 3,149 - -
Tax exempt state and municipal (4,902) (2,810) 501
Taxable state and municipal (3,941) (1,542) 429
Other (262) 60 1,442
------------ ------------- -------------
Total change in securities $ 2,030 $ 17,521 $ (3,696)
============ ============= =============
Holdings in state and municipal securities decreased during the year primarily
due to lack of opportunity to invest in municipalities. Therefore the Company
chose to invest in U.S. Government and agency securities. The Company also added
a mortgage-backed security to the portfolio which has been a higher yielding
investment. The Company maintains a short-term investment portfolio with
maturities averaging less than two years. As the rate environment increases the
Company will extend the maturities of the investment portfolio. The chart below
shows the percentage composition of the portfolio as of December 31.
2004 2003
------ ------
U.S. Government and agency securities 63.84% 56.14%
Mortgage-backed 3.54 -
Tax exempt state and municipal 20.67 26.80
Taxable state and municipal 5.15 9.80
Other 6.80 7.26
------ ------
100.00% 100.00%
====== ======
Securities available for sale are recorded at fair value and securities held to
maturity are recorded at amortized cost. The net unrealized loss on securities
available for sale at December 31, 2004 was $109,000, net of taxes. The
unrealized gains and losses are temporary since they are a result of market
changes rather than a reflection of credit quality. Management has no specific
intent to sell these securities at the present time.
The Company maintains a conservative security portfolio with a majority of the
investments in U.S. Government and agency securities and issues of governmental
units in its service area. The maturities of the U.S. Government and agency
securities have typically been very short, two years or less, providing
liquidity in addition to quality.
31.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
During 2005, management feels that there will be sufficient liquidity to
increase the maturity of the investment portfolio, in addition to increasing
yields.
LOANS
Total loans increased $1.1 million or .8% during 2004, with the primary increase
in commercial real estate loans of $8.1 million or 22.9%. As a full service
lender, the Company offers a variety of personal and commercial loans. Home
mortgages comprise the largest portion of the loan portfolio. The Company
generally retains the ownership of adjustable rate loans and short to
medium-term fixed-rate loans and originates and sells long-term single family
residential fixed-rate mortgage loans to the secondary market. This practice
allows the Company to meet the housing credit needs of its service area while
maintaining an appropriate interest rate sensitivity and liquidity position. Due
to the low rate environment consumer real estate mortgage refinancing was
stronger in 2003 than 2004. The Company originated $18.6 million in loans for
sale in 2004 and $40.4 million in 2003. Management anticipates the volume of
mortgage refinancing in 2005 will be comparable to 2004. In addition to mortgage
loans, the Company makes loans for personal and business use, secured and
unsecured, to customers in its service area. It is the Company's intent to
increase both the commercial mortgage and commercial loan portfolios during
2005.
The Company maintains a conservative loan policy and strict credit underwriting
standards, which reflects highly in its credit quality with a small percent of
total loans as non-performing. All loans are domestic. An annual review of loan
concentrations at December 31, 2004 indicated the pattern of loans in the
portfolio has not changed. There is no individual industry with more than a 10%
concentration, except for all tourism-related businesses which, when combined,
represent 12.7% of total loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents that amount which management estimates
is adequate to provide for probable incurred losses in the loan portfolio.
Management determines the adequacy of the allowance for loan losses by reviewing
selected loans (including large loans, nonaccrual loans, problem loans and
delinquent loans) and establishes specific loss allowances on these loans.
Historical loss information, local economic conditions and other factors are
considered in establishing allowances on the remaining loan portfolio. The
allowance is increased by provisions charged to expense and reduced by
charge-offs, net of recoveries.
The quality of the Company's loan portfolio compares well with its peer group
with non-performing loans at .47% of total loans at December 31, 2004 and 0.28%
at December 31, 2003. Net loans charged off were .16% of total loans during 2004
and .07% in 2003. There were no significant changes in the allowance for loan
losses in 2004 and 2003 due to stable loan quality and insignificant loss
potential identified for individual loans and groups of loans.
32.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively managing delinquencies, nonperforming assets and potential problem
loans. The Company performs an ongoing review of all large credits to watch for
any deterioration in quality. Nonperforming loans are comprised of: (1) loans
accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or
more as to interest or principal payments (but not included in the nonaccrual
loans in (1) above); and (3) other loans whose terms have been renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower (exclusive of loans in
(1) or (2) above). The aggregate amount of nonperforming loans is shown in the
table below.
2004 2003
------ ------
(Dollars in thousands)
Nonaccrual loans $ - $ -
Loans past due 90 days or more 674 408
Troubled debt restructurings - -
------ ------
Total nonperforming loans $ 674 $ 408
====== ======
Percent of total loans .47% .28%
====== ======
DEPOSITS
The Company offers competitive deposit products and has, therefore, increased
its market share. Deposits increased $497,000 or .22% during 2004. The Company
experienced less deposit growth than what it has been accustomed to with the
increase being minimal during 2004. The Company has seen some outflow of
deposits back into the stock and bond markets as those markets continue to
recover from sharp declines in recent years. The Company has seen a shift from
its time deposit portfolios into more liquid deposit accounts. As the interest
rate environment increases the Company will in turn change the rates it offer
its customers.
The majority of the Company's deposits are derived from core customers, as a
result of long-term personal, business and public relationships. Deposit rates
are monitored continually to assure that the Company pays a competitive rate.
As of December 31, 2004, the loan to deposit ratio was 64.2% compared to 63.8%
at December 31, 2003. This ratio increased due to a higher increase in the loan
portfolio than the deposit portfolio. Management continues to emphasize loan
growth with a targeted loan to deposit ratio at a minimum of 65.0%. A change in
asset mix from securities to higher yielding loans would increase the net
interest margin.
33.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
As of December 31, 2004, long-term debt obligations consist of the Company's
time deposits which are presented in Note 6 to the consolidated financial
statements.
EQUITY
Total equity for the Company at year end 2004 was $24.2 million compared to
$25.1 million in 2003. The Company has a stock repurchase program in place and
during 2004 repurchased $520,000 worth of stock under the plan. Accumulated
other comprehensive income decreased by $737,000 as the market value of the
Company's available for sale securities declined.
LIQUIDITY AND FUNDS MANAGEMENT
Effective liquidity management ensures that the cash flow requirements of the
Company's depositors and borrowers, as well as the operating cash needs of the
Company are met. The Company's primary source of funds is dividends from the
Bank. The Company manages its liquidity position to provide cash necessary to
pay dividends to shareholders and satisfy other operating requirements.
The Company's most readily available sources of liquidity are federal funds
sold, securities classified as available for sale and securities classified as
held to maturity maturing within one year. These sources of liquidity are
supplemented by new deposits and by loan payments received from customers. As of
December 31, 2004, the Company held $4.9 million in federal funds sold, $78.3
million in securities available for sale, and $776,000 in held to maturity
securities maturing within one year. These short-term assets represent 37.2% of
total deposits as of December 31, 2004. Historically, the Company's security
portfolio has been short term in nature, with the average life of the portfolio
consistently being less than two years. The Company serves a market which is
highly tied to the tourist industry. Consequently, the Company experiences
seasonal swings in liquidity. Deposit growth occurs during July, August, and
September, then may decline through the fall and winter months. The Company does
not anticipate any significant change in its seasonal pattern.
34.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
INTEREST RATE SENSITIVITY
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates at December 31, 2004
and 2003. For loans receivable, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-average
interest rates by contractual maturities, as well as the Company's historical
experience relative to the impact of interest rate fluctuations on the
prepayment of loans. For core deposits (demand deposits, interest-bearing
checking, savings, and money market deposits) that have no contractual maturity,
the table presents principal cash flows and, as applicable, related
weighted-average interest rates based upon the Company's historical experience,
management's judgment, and statistical analysis concerning their most likely
withdrawal behaviors. The current historical interest rates for core deposits
are assumed to apply for future periods in this table as the actual interest
rates that will need to be paid to maintain these deposits are not currently
known. Weighted-average variable rates are based upon contractual rates existing
at the reporting date.
The primary source of market risk for the financial instruments presented is
interest rate risk, that is, the risk that a change in market rates could
adversely affect the market value of the instruments. Generally, the longer the
maturity, the greater the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from assuring sufficient capital and liquidity
in support of future balance sheet growth to reducing the exposure of the
Company's net interest margin from swings in interest rates. The Company manages
interest rate risk through the Asset/Liability Committee. The Asset/Liability
Committee is comprised of Bank officers from various disciplines. The Committee
establishes policies and rates which lead to the prudent investment of
resources, the effective management of risks associated with changing interest
rates, the maintenance of adequate liquidity and the earning of an adequate
return on shareholders' equity.
The following market risk disclosure table allows management to measure the
imbalance between the amount of assets and liabilities repricing in the next
five years and thereafter.
35.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
MARKET RISK DISCLOSURE AT DECEMBER 31, 2004
(Dollars in thousands)
Fair Value
2005 2006 2007 2008 2009 Thereafter Total 12/31/04
-------- ---------- ---------- --------- ------ ---------- -------- -----------
RATE-SENSITIVE ASSETS
Variable interest rate loans $ 29,812 $ 1,410 $ 1,161 $ 214 $ - $ - $ 32,597 $ 32,787
Average interest rate 5.67% 6.54% 7.26% 7.10% -% -% 5.77%
Fixed interest rate loans 20,496 12,968 12,198 9,653 13,207 43,500 112,022 113,640
Average interest rate 6.29% 6.13% 5.97% 5.46% 5.61% 5.92% 5.94%
Variable interest rate
securities 515 - - - - 6,259 6,774 6,774
Average interest rate 3.26% -% -% -% -% 2.68% 2.72%
Fixed interest rate securities 18,246 34,702 18,938 1,155 560 8,576 82,177 82,218
Average interest rate 2.99% 2.95% 2.83% 4.04% 3.40% 3.97% 3.06%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing
deposits 37,289 - - - - - 37,289 37,289
Average interest rate -% -% -% -% -% -% -%
Fixed interest rate
savings and
interest-bearing deposits 124,655 - - - - - 124,655 124,655
Average interest rate .88% -% -% -% -% -% .88%
Fixed interest rate
time deposits 41,596 14,487 3,694 2,180 1,510 - 63,467 63,301
Average interest rate 2.19% 1.98% 3.92% 3.23% 3.34% -% 2.31%
MARKET RISK DISCLOSURE AT DECEMBER 31, 2003
(Dollars in thousands)
Fair Value
2004 2005 2006 2007 2008 Thereafter Total 12/31/03
-------- ---------- ---------- --------- ------ ---------- -------- ----------
RATE-SENSITIVE ASSETS
Variable interest rate loans $ 9,471 $ 2,921 $ 1,264 $ 1,894 $2,526 $ 13,494 $ 31,570 $ 33,152
Average interest rate 5.45% 7.28% 7.31% 8.44% 7.60% 6.06% 6.31%
Fixed interest rate loans 18,469 13,002 12,133 10,552 8,798 48,976 111,930 114,313
Average interest rate 7.21% 7.17% 7.12% 7.02% 6.69% 6.48% 6.82%
Variable interest rate
securities - - - - - 7,648 7,648 7,648
Average interest rate -% -% -% -% -% 2.63% 2.63%
Fixed interest rate securities 11,312 19,001 27,748 14,570 1,891 4,751 79,273 79,390
Average interest rate 3.93% 3.01% 2.95% 2.75% 4.15% 3.77% 3.15%
RATE-SENSITIVE LIABILITIES
Noninterest-bearing deposits 36,062 - - - - - 36,062 36,062
Average interest rate -% -% -% -% -% -% -%
Fixed interest rate
savings and
interest-bearing deposits 119,178 - - - - - 119,178 119,178
Average interest rate .83% -% -% -% -% -% .83%
Fixed interest rate
time deposits 49,303 12,381 3,609 2,801 1,580 - 69,674 70,654
Average interest rate 2.99% 2.31% 3.78% 4.32% 3.34% -% 2.97%
36.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
CAPITAL RESOURCES
The capital ratios of the Bank exceed the regulatory guidelines for well
capitalized institutions. This strong capital position of the Company provides
the Company with the flexibility to take advantage of expansion opportunities
and to continue with a high dividend payout ratio which has averaged 73.9% over
the past three years. As earnings continue at current levels or better, the
Company anticipates continuing to pay dividends at this level.
A five percent stock dividend was declared to shareholders in 2003. The stock of
the Company is generally traded locally. Additional information concerning
capital ratios and shareholder return is included in the Financial Highlights
schedule. The Company maintains a five-year plan and utilizes a formal strategic
planning process. Management and the Board continue to monitor long-term goals,
which include increasing market share and maintaining long-term earnings
sufficient to pay consistent dividends.
RESULTS OF OPERATIONS
NET INCOME
Consolidated net income was $3.0 million for 2004 compared to $3.9 million for
2003. The decrease can be attributed to a large increase in noninterest expenses
and a decrease in interest income from 2003. Noninterest income also declined
during 2004 due to a run off in loan refinancing and also due to a decline in
loans sold to the secondary market during 2004. These negative trends were
offset in part by a decline in interest expense on deposits due to the interest
rate environment remaining flat during the first part of 2004. Basic earnings
per share for 2004 was $2.38 compared to $ 3.12 for 2003. Diluted earnings per
share for 2004 was $2.37 compared to $3.11 for 2003.
Consolidated net income was $3.9 million for 2003 compared to $4.1 million for
2002. The decrease can be attributed to an increase in noninterest expense
during 2003. The Company had decreased the discount rate on both the deferred
directors compensation plan and the defined benefit pension plan which
attributed to the increase in total noninterest expenses. Basic earnings per
share for 2003 was $3.12 compared to $3.27 for 2002. Diluted earnings per share
was $3.11 compared to $3.26 for 2002.
NET INTEREST INCOME
Interest income is the total amount earned on funds invested in federal funds
sold, securities and loans. Interest expense is the amount of interest paid on
interest-bearing checking, money market, savings and time deposits accounts. Net
interest income is the difference between interest income and interest expense.
The net margin is the net interest income as a percentage of average
interest-earning assets. Interest spread is the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities. In 2004, net interest income decreased by $200,000, due primarily
to the change in the rate on our interest-earning assets. Interest expense paid
on the Company's deposit accounts also declined in 2004 due to the rate
environment.
37.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
The $382,000 increase in net interest income from 2003 to 2002 was due primarily
to the greater increase in the volume of interest-earning assets over
interest-bearing liabilities.
The following table shows the daily average consolidated balance sheets, revenue
on average interest-earning assets (on a pre-tax basis), expense on average
interest-bearing liabilities and the annualized effective yield or rate for the
periods ending:
Yield Analysis of Consolidated Average Assets and Liabilities
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Average Yield/ Average Yield/ Average Yield/
Balance Int Rate Balance Int Rate Balance Int Rate
---------- ---------- ------ ------------ ----------- ------ ---------- --------- ------
Interest-earning assets:
Other interest-
earning assets $ 10,842 $ 145 1.34% $ 18,101 $ 203 1.12% $ 11,350 $ 192 1.69%
Total securities (1) 89,737 2,616 2.92 74,604 2,596 3.48 69,844 3,243 4.64
Loans 143,800 9,705 6.75 146,330 10,483 7.16 143,840 11,385 7.92
---------- ---------- ------------ ----------- ---------- ---------
Total
interest-earning
assets 244,379 12,466 5.10% 239,035 13,282 5.56% 225,034 14,820 6.59%
---------- ----------- ---------
Cash and due from
banks 6,181 6,645 6,885
Premises and
equipment, net 4,462 3,407 3,475
Allowance for loan
losses (1,469) (1,634) (1,692)
Other assets 4,759 5,754 6,100
---------- ------------ ----------
Total $ 258,312 $ 253,207 $ 239,802
========== ============ ==========
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 17,648 $ 87 .49% $ 16,899 $ 103 .61% $ 16,795 $ 231 1.38%
Savings deposits 105,587 917 .87 100,979 1,159 1.15 88,662 1,689 1.90
Time deposits 67,282 1,760 2.62 69,851 2,118 3.03 73,197 3,380 4.62
---------- ---------- ------------ ----------- ---------- ---------
Total
interest-bearing
liabilities 190,517 2,764 1.45% 187,729 3,380 1.80% 178,654 5,300 2.97%
---------- ---------- ----------- ---------
Noninterest-bearing
deposits 38,888 36,867 33,780
Other liabilities 3,607 2,955 2,786
Shareholders' equity 25,300 25,656 24,582
---------- ------------ ----------
Total $ 258,312 $ 253,207 $ 239,802
========== ============ ==========
Net interest income $ 9,702 $ 9,902 $ 9,520
========== =========== =========
Net interest spread 3.65% 3.76% 3.62%
==== ==== ====
Net yield on
Interest-earning
assets 3.97% 4.14% 4.23%
==== ==== ====
Ratio of interest-
earning assets
to interest-bearing
liabilities 1.28x 1.27x 1.26x
==== ==== ====
(1) Yield computed using the average amortized cost for securities available for
sale.
38.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
The table below shows the effect of volume and rate changes on net interest
income on a pre-tax basis.
2004 Compared to 2003 2003 Compared to 2002
--------------------- ---------------------
Volume Rate Net Volume Rate Net
---------- ----------- ----------- ---------- ---------- ----------
(In thousands)
Other interest-earning assets $ (92) $ 34 $ (58) $ 90 $ (79) $ 11
Total securities 479 (459) 20 209 (856) (647)
Loans, net (179) (599) (778) 194 (1,096) (902)
---------- ----------- ----------- ---------- ---------- ----------
Total interest-earning assets 208 (1,024) (816) 493 (2,031) (1,538)
Interest-bearing demand deposits 4 (20) (16) 1 (129) (128)
Savings deposits 51 (293) (242) 210 (740) (530)
Time deposits (76) (282) (358) (148) (1,114) (1,262)
---------- ----------- ----------- ---------- ---------- ----------
Total interest-bearing liabilities (21) (595) (616) 63 (1,983) (1,920)
---------- ----------- ----------- ---------- ---------- ----------
Net change in net interest income (a) $ 229 $ (429) $ (200) $ 430 $ (48) $ 382
========== =========== =========== ========== ========== ==========
(a) The net change in interest due to both rate and volu me has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
NONINTEREST INCOME
Noninterest income includes fees and service charges on deposit accounts, loan
servicing fees, gains on sales of loans and other income. Noninterest income
decreased during 2004, primarily in the net realized gains from the sale of
loans due to a decline in the refinance boom that had occurred during the lower
rate environment in 2003 and 2002. This decrease was partially offset by
increases in service charges and fees on deposit accounts and loan servicing
fees, net of amortization. The number of loans processed during 2004 decreased
from 2003. The Company will focus more on commercial lending during 2005.
NONINTEREST EXPENSE
Noninterest expense increased during 2004. During 2003 and 2002, the Company
lowered benefit plan discount rates due to the low rate environment, which
resulted in increased pension and deferred compensation expense. During 2004,
the Company distributed a lump sum pension benefit to a highly compensated
executive which triggered a settlement of the Company's pension expense.
Accordingly, pension expense for 2004 was $768,000 compared to $370,000 and
$228,000 for 2003 and 2002. The Company continues to fund 100% of the employee
hospitalization premium which was $490,000 for 2004 compared to $394,000 and
$372,000 for 2003 and 2002 respectively. The deferred compensation expense for
2004 was $315,000 compared to $436,000 and $208,000 in 2003 and 2002.
39.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
FEDERAL INCOME TAXES
Income tax expense decreased during 2004 to $1.2 million compared to $1.5
million in 2003. Income before taxes declined from 2003 which resulted in the
decline in income tax expense.
The effective tax rates for 2004, 2003 and 2002 are shown in the table below:
2004 2003 2002
---- ---- ----
Income before tax (In thousands) $ 4,131 $ 5,385 $ 5,703
Income tax expense (In thousands) 1,176 1,500 1,609
Effective tax rate 28.5% 27.9% 28.2%
CRITICAL ACCOUNTING POLICIES
Certain of the Company's accounting policies are important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in facts and
circumstances. Facts and circumstances which could effect these judgments
include, but without limitation, changes in interest rates, in the performance
of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan
losses and determining the fair value of securities.
The Company believes that the allowance for loan losses and related provision
expense are particularly susceptible to material change in the near term. As a
result of strong asset quality and low levels of charge-offs during the past
three years, the Company recorded no provision expense during 2004, 2003 and
2002. In future periods the allowance for loan losses may be dramatically
impacted due to changes in the local economy and individual borrower situations.
The Company believes its significant concentration in residential mortgage loans
and the importance of the tourism industry to the local economy are particularly
important factors that could have a significant impact on the allowance for loan
losses and provision for loan losses if these factors significantly change from
current conditions. As of December 31, 2004, the Company held $52.6 million of
commercial and commercial real estate loans, and the ability of our borrowers to
repay such loans may be significantly impacted by changes in the economy or
individual borrower conditions. Management continues to take steps to help
ensure the asset quality of the loan portfolio; however, the allowance for loan
losses and related provision expense could increase significantly in future
periods depending on changes in the factors discussed above.
Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported separately in accumulated other comprehensive income,
net of tax. As a result of changes in the fair market value of the Company's
available for sale securities portfolio, total comprehensive income
increased/(decreased) by $(745,000), $(361,000) and $96,000 for 2004, 2003 and
2002. Additionally, all investment securities are required to be written down to
fair value when a decline in fair value is not temporary; therefore, future
changes in the fair value of securities could have a significant impact on the
Company's operating results.
40.
CNB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2004, 2003 and 2002
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings involving the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area and competition, all or some of
which could cause actual results to differ materially from historical earnings
and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
41.
CNB CORPORATION
OFFICERS, COMMUNITY ADVISORS AND STAFF
OFFICERS AND COMMUNITY ADVISORS OF
CNB CORPORATION AND CITIZENS NATIONAL BANK
CNB CITIZENS NATIONAL RANDY J. MALTBY MACKINAW CITY
CORPORATION BANK OFFICERS AND TECHNOLOGY OFFICER
OFFICERS COMMUNITY ADVISORS SUSAN J. CLEARY SUSAN M. BRANDT
LOAN OFFICER BANKING OFFICER &
ROBERT E. CHURCHILL ROBERT E. CHURCHILL MICHELLE J. OSTWALD BRANCH MANAGER
CHAIRMAN CHAIRMAN LOAN OFFICER DEAN SCHEERENS
JAMES C. CONBOY, JR. JAMES C. CONBOY, JR. FLORENCE CASWELL COMMUNITY ADVISOR
PRESIDENT & CHIEF PRESIDENT & CHIEF ASSISTANT LOAN JAMES E. TAMLYN
EXECUTIVE OFFICER EXECUTIVE OFFICER OPERATIONS OFFICER COMMUNITY ADVISOR
SUSAN A. ENO SUSAN A. ENO NANCY K. LINDSAY
EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT DIRECTOR OF MARKETING &
DOUGLAS W. DAMM & CASHIER COMMUNITY RELATIONS
SENIOR VICE PRESIDENT DOUGLAS W. DAMM CHRISTINA E. SWEET PELLSTON
JEFFREY L. SCHMIDT SENIOR VICE PRESIDENT & MANAGER OF INTERNAL
SENIOR VICE PRESIDENT SENIOR LOAN OFFICER AUDIT BARBARA A. ANDERSON
JOHN P. WARD JEFFREY L. SCHMIDT BANKING OFFICER &
SECRETARY SENIOR VICE PRESIDENT BRANCH MANAGER
IRENE M. ENGLISH IRENE M. ENGLISH KELLEY ATKINS
TREASURER VICE PRESIDENT & ONAWAY COMMUNITY ADVISOR
CONTROLLER RICHARD CONRAD
KENNETH N. SHELDON LAURA L. SHACK COMMUNITY ADVISOR
VICE PRESIDENT BANKING OFFICER &
EXAMINATION BRANCH MANAGER
RICHARD L. WINE
VICE PRESIDENT
SUSAN L. CASWELL INDIAN RIVER
ASSISTANT VICE PRESIDENT
STEPHEN J. CRUSOE BARBARA J. JOPPICH
ASSISTANT VICE PRESIDENT ASSISTANT VICE PRESIDENT
VICTORIA J. HAND & BRANCH MANAGER
ASSISTANT VICE PRESIDENT PAUL FISHER
& COMPLIANCE OFFICER COMMUNITY ADVISOR
MARIAN L. HARRISON JOHN J. OLSZEWSKI
ASSISTANT VICE PRESIDENT COMMUNITY ADVISOR
SALLY J. LACROSS JEFF SWADLING
ASSISTANT VICE PRESIDENT COMMUNITY ADVISOR
42.
CNB CORPORATION
OFFICERS, COMMUNITY ADVISORS AND STAFF
STAFF OF CITIZENS NATIONAL BANK
MAIN OFFICE DOWNTOWN MACKINAW CITY INDIAN RIVER
DRIVE-IN
Eugene Andrzejewski Lynne J. Nissley CHEBOYGAN Susan M. Brandt Barbara J. Joppich
Kurt Blaskowski Kelli M. Reimann Deborah L. Closs Julie Davis
Kathleen A. Charboneau Katherine H. Rhome Deanna Hudson Jennifer M. LaHaie Jody L. Jacobs
Joan T. Clarey Ronald D. Rose Carla Jankoviak Amber LaPrairie
Lora L. Clouser Carla Roznowski PELLSTON Michelle Miller
Patricia K. Comps Carolyn A. Scheele EAST SIDE Tammy Reimann
Arlene Daniel Nancy Scott DRIVE-IN Barbara A. Anderson Helen K. Stumpf
Trisha M. Dobias Darren Selden CHEBOYGAN Sheri L. Kindell
Mary E. Greenwood Sandra L. Shawl
Debra Grice Kim Sinclair Sharon Coppernoll ONAWAY
Susan M. Hansen Sally A. Spray Lori Thornton
Helen R. Hart Kelisue Stachon Laura L. Shack
Miranda Lake M. Teresa Sullivan SOUTH BRANCH Rachel Bischoff-Peel
Betty J. Lewis Kathy S. Swackhamer DRIVE-IN Pamela A. Kolasa
Steven R. Luttmann Megan Tomaski CHEBOYGAN Sara L. LaLonde
Loretta Merchant Rebecca Tomaski Lynn D. Porter
Kathryn Miller Darlene L. Vallance Karen Barrette Kathleen T. Robbins
Adam Newman Wendelin K. Whippo Susan D. Bliss Kathleen S. Wilson
Penny L. Newman Sherry M. Wichlacz Diane S. Mushlock
Diane S. Poirier
43.
CNB CORPORATION
DIRECTORS AND DIRECTORS EMERITI
DIRECTORS OF CNB CORPORATION &
CITIZENS NATIONAL BANK
ROBERT E. CHURCHILL
Chairman
STEVEN J. BAKER, D.V.M.
Indian River Veterinary Clinic
JAMES C. CONBOY, JR.
President & Chief Executive Officer, CNB Corporation
President & Chief Executive Officer, Citizens National Bank
KATHLEEN M. DARROW
President, Darrow Bros. Excavating, Inc.
Retired, formerly Group Sales & Special Events
Coordinator for the Mackinac State Historic Parks
THOMAS J. ELLENBERGER
Vice President & Secretary
Albert Ellenberger Lumber Company
VINCENT J. HILLESHEIM
President, Anchor In Marina
Co-Manager, Crusoe Enterprises, LLC
JOHN L. ORMSBEE
Owner, Jack's Sales
FRANCIS J. VANANTWERP, JR.
Vice President Durocher Marine Division
Kokosing Construction Company, Inc.
JOHN P. WARD
Retired, formerly Senior Vice President,
CNB Corporation and Citizens National Bank
Secretary, CNB Corporation
DIRECTORS EMERITI
LYLE MCKINLEY, THOMAS A. ELLENBERGER,
THOMAS J. FISHER
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K or the 2004 Annual
Report Summary & Highlights by writing John P. Ward, Secretary, CNB Corporation,
P.O. Box 10, Cheboygan, Michigan 49721.
44.