UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission file # 0-28388
CNB CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 North Main Street, Cheboygan, MI 49721
(Address of principal executive offices, including Zip Code)
(231) 627-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of May 7, 2002 there were 1,193,195 shares of the issuer's common stock
outstanding.
1
ITEM 1- FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (in thousands)
March December
31, 2002 31, 2001
ASSETS (unaudited)
Cash and due from banks $ 5,657 $ 9,229
Interest-bearing deposits with other financial
institutions 2,408 2,718
Federal funds sold 1,450 4,900
-------- --------
Total cash and cash equivalents 9,515 16,847
Securities available for sale 64,447 61,118
Securities held to maturity(market value of
$ 6,222 in 2002 and $ 7,114 in 2001) 6,349 7,168
Other securities 3,610 4,810
Loans, net of allowance for loan losses of $ 1,705
in 2002 and $ 1,667 in 2001 141,399 133,106
Premises and equipment, net 3,499 3,592
Other assets 4,247 4,390
-------- --------
Total assets $233,066 $231,031
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 29,239 $ 32,919
Interest-bearing 177,569 171,670
-------- --------
Total deposits 206,808 204,589
Other liabilities 2,576 3,065
-------- --------
Total liabilities 209,384 207,654
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, 2,000,000
shares authorized, shares outstanding
3/31/02-1,193,195; 12/31/01-1,193,415 2,983 2,984
Additional paid-in capital 18,498 18,509
Retained earnings 1,560 983
Accumulated other comprehensive income,
net of tax 641 901
-------- --------
Total shareholders' equity 23,682 23,377
-------- --------
Total liabilities and shareholders' equity $233,066 $231,031
======== ========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (in thousands)
Three months ended
March 31,
2002 2001
(Unaudited)
INTEREST INCOME $3,714 $4,017
INTEREST EXPENSE ON DEPOSITS 1,463 1,849
------ ------
NET INTEREST INCOME 2,251 2,168
Provision for loan losses - 28
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,251 2,140
------ ------
NON-INTEREST INCOME 474 344
NON-INTEREST EXPENSES 1,329 1,338
------ ------
INCOME BEFORE INCOME TAXES 1,396 1,146
Income tax expense 366 338
------ ------
NET INCOME $1,030 $ 808
====== ======
TOTAL COMPREHENSIVE INCOME $ 770 $1,181
====== ======
Return on average assets (annualized) 1.88% 1.48%
Return on average equity (annualized) 18.72% 14.69%
Basic earnings per share $ 0.86 $ 0.68
Diluted earnings per share $ 0.86 $ 0.67
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Three months ended March 31,
2002 2001
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,030 $ 808
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 152 56
Provision for loan losses - 28
Loans originated for sale (6,120) (2,992)
Proceeds from sales of loans originated for sale 6,190 3,012
Gain on sales of loans (116) (43)
(Increase)decrease in other assets 276 (191)
Increase (decrease) in other liabilities (468) 164
-------- --------
Total adjustments (86) 34
-------- --------
Net cash from operating activities 944 842
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 2,817 7,431
Purchase of securities available for sale (6,595) (9,454)
Proceeds from maturities of securities held to maturity 859 535
Purchase of securities held to maturity (40) (1,600)
Proceeds from maturities of other securities 1,200 -
Purchase of other securities - (200)
Net (increase)decrease in portfolio loans (8,247) 1,297
Premises and equipment expenditures (4) (69)
-------- --------
Net cash from investing activities (10,010) (2,060)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,219 691
Dividends paid (474) (1,056)
Purchases of common stock (11) (4)
-------- --------
Net cash from financing activities 1,734 (369)
Net change in cash and cash equivalents (7,332) (1,587)
Cash and cash equivalents at beginning of year 16,847 23,310
-------- --------
Cash and cash equivalents at end of period $ 9,515 $ 21,723
======== ========
Cash paid during the period for:
Interest $ 1,451 $ 1,823
Income taxes $ 323 $ 400
See accompanying notes to consolidated financial statements.
4
NOTES TO FINANCIAL STATEMENTS
Note 1-Basis of Presentation
The consolidated financial statements include the accounts of CNB Corporation
and its wholly-owned subsidiary, Citizens National Bank of Cheboygan and the
Bank's wholly-owned subsidiary CNB Mortgage Corporation. All significant
intercompany accounts and transactions are eliminated in consolidation. The
statements have been prepared by management without an audit by independent
certified public accountants. However, these statements reflect all adjustments
(consisting of normal recurring accruals) and disclosures which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented and should be read in conjunction with the notes to
the consolidated financial statements included in the CNB Corporation's Form
10-K for the year ended December 31, 2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission.
Because the results of operations are so closely related to and responsive to
changes in economic conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the entire year.
Note-2 Earnings Per Share
Basic earnings per share is calculated solely on weighted-average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. All prior calculations will be
restated to be comparable to the new methods. At March 31, 2002 the weighted
average shares outstanding in calculating the basic earnings per share were
1,193,244 while the weighted average dilutive potential shares for the diluted
earnings per share were 1,199,050. At March 31, 2001 the weighted average shares
outstanding in calculating the basic earnings per share were 1,192,233 while the
weighted average dilutive potential shares for the diluted earnings per share
were 1,206,946.
Note-3 New Accounting Pronouncement
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, "Accounting for Business Combinations and Goodwill.
SFAS No. 141 required all business combinations to be recorded using the
purchase method of accounting for any transaction initiated after June 30, 2001.
Adoption of this standard on January 1, 2002 did not have a material impact on
the financial condition or results of operations of the Company.
5
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation and its subsidiary, Citizens
National Bank of Cheboygan ("Bank") for the three month period ending March 31,
2002.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $ 7.3 million or
43.5% since December 31, 2001. During the period ending March 31, 2002,
$944,000 of cash was provided from operating activities due to net income.
Investing activities utilized $ 10.0 million during the period ending March 31,
2002. This can be attributed to an increase in securities available for sale and
the loan portfolios.
SECURITIES
Securities increased $ 2.5 million or 3.7% since December 31, 2001. The
available for sale portfolio increased to 91.0% of the investment portfolio from
89.5% at year-end.
The amortized cost and fair values of securities were as follows, in thousands
of dollars:
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
------------------------------------------------------------
MARCH 31, 2002
U.S. Government agency $ 34,121 $ 670 $ (46) $ 34,745
State and municipal 29,353 400 (51) 29,702
------------------------------------------------------------
$ 63,474 $ 1,070 $ (97) $ 64,447
============================================================
DECEMBER 31, 2001
U.S. Government agency $ 32,071 $ 986 $ - $ 33,057
State and municipal 27,682 432 (53) 28,061
------------------------------------------------------------
$ 59,753 $ 1,418 $ (53) $ 61,118
============================================================
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Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
------------------------------------------------------------
MARCH 31, 2002
State and municipal $ 6,349 $ 101 $ (228) $ 6,222
============================================================
DECEMBER 31, 2001
State and municipal $ 7,168 $ 132 $ (186) $ 7,114
============================================================
The amortized cost and fair value of securities by contractual maturity at March
31, 2002 are shown below, in thousands of dollars.
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 16,473 $ 16,686 $ 957 $ 966
Due after one year through five years 40,179 40,859 2,756 2,815
Due after five years through ten years 5,525 5,621 992 1,024
Due after ten years 1,297 1,281 1,644 1,417
--------------------------------------------------------------
Total $ 63,474 $ 64,447 $ 6,349 $ 6,222
==============================================================
LOANS
Loans at March 31, 2002 increased $ 8.3 million from December 31, 2001.
Substantial growth occurred in our commercial real estate lending which
increased to $ 35.7 million in 2002 from $ 26.5 million in 2001, or a 34.5%
increase. The table below shows total loans outstanding by type, in thousands of
dollars, at March 31, 2002 and December 31, 2001, and their percentage of the
total loan portfolio. All loans are domestic. A quarterly review of loan
concentrations at March 31, 2002 indicates the pattern of loans in the portfolio
has not changed. There is no individual industry with more than a 10%
concentration. However, all tourism related businesses, when combined, total
9.7% of total loans.
March 31, 2002 December 31, 2001
Portfolio loans: Balance % of total Balance % of total
------- ---------- ------- ----------
Residential real estate $ 85,522 59.75% $ 84,588 62.74%
Consumer 11,249 7.86% 11,767 8.73%
Commercial real estate 35,703 24.94% 26,536 19.69%
Commercial 10,660 7.45% 11,912 8.84%
------------------------------------------------------
143,134 100.00% 134,803 100.00%
Deferred loan origination fees, net (30) (30)
Allowance for loan losses (1,705) (1,667)
--------- --------
$ 141,399 $133,106
========= ========
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ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended March 31, follows:
2002 2001
---- ----
Beginning balance $ 1,667 $ 1,652
Provision for loan losses - 28
Charge-offs (8) (2)
Recoveries 46 4
------- -------
Ending balance $ 1,705 $ 1,682
======= =======
The Company had no impaired loans for 2002 and 2001.
CREDIT QUALITY
The Company maintains 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 nonaccrual loans
in (1) above); and (3) other loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower (exclusive of loans in (1) or (2) above).
The aggregate amount of nonperforming loans is shown in the table below.
March 31, December 31,
2002 2001
---- ----
(In thousands)
Nonaccrual $ - $ -
Loans past due 90 days or more 693 647
Troubled debt restructurings - -
---- ----
Total nonperforming loans $693 $647
==== ====
Percent of total loans 0.48% 0.48%
DEPOSITS
Deposits at March 31, 2002 increased $ 2.2 million since December 31, 2001.
Interest-bearing deposits increased $ 5.9 million or 3.4% for the three months
ended March 31, 2002, while non-interest bearing deposits decreased $ 3.7
million or 11.2%.
8
LIQUIDITY AND FUNDS MANAGEMENT
As of March 31, 2002 the Company had $ 1.5 million in federal funds sold, $ 64.4
million in securities available for sale and $ 957,000 in held to maturity
maturing within one year. These sources of liquidity are supplemented by new
deposits and by loan payments received by customers. These short-term assets
represents 32.3% of total deposits as of March 31, 2002.
Total equity for the Company at March 31, 2002 was $ 23.7 million compared to $
23.4 million at December 31, 2001.
RESULTS OF OPERATIONS
CNB Corporation's 2002 earnings for the first three months were $ 1,030,000 an
increase of $ 222,000 compared to 2001 results. This increase can be partially
attributed to life insurance proceeds, which amounted to $ 105,000. Income,
prior to life insurance proceeds, for the first three months of 2002 was
$925,000 compared to $808,000 or a 14.4% increase. Basic earnings per share were
$ .86 per share for 2002 compared to $ .68 for 2001. The return on assets was
1.88% for the first three months of the year versus 1.48% for the same period in
2001. The return on equity was 18.72% compared to 14.69% for the same period
last year.
For the first three months of 2002 net interest income was $ 2.3 million, a
slight increase over the $ 2.2 million for the same period in 2001. The net
interest spread increased to 3.44% from 3.35% in 2001. This can be attributed to
a greater decrease in the rate of interest-bearing liabilities compared to the
yield earned on interest-earning assets.
Non-interest income was $ 474,000, a $ 130,000 increase or 37.8% over the same
period last year. The increase can be attributed to an increase in the volume of
loans sold to the secondary market and to life insurance proceeds as previously
discussed. Non-interest expense was $ 1.3 million for the periods ending 2002
and 2001. There was no significant change in the income tax position for the
Company during the first three months of 2002.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary source of market risk for the financial instruments held by the
Corporation is interest rate risk. That is, the risk that an adverse change in
market rates will adversely affect the market value of the instruments.
Generally, the longer the maturity, the higher the interest rate risk exposure.
While maturity information does not necessarily present all aspects of exposure,
it may provide an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the
Corporation's net interest margin to swings in interest rates, to assuring
sufficient capital and liquidity to support future balance sheet growth. The
Corporation manages interest rate risk through the Asset/Liability Committee.
The Asset/Liability Committee is comprised of bank officers from various
disciplines. The Committee establishes policies and rates which lead to prudent
investment of resources, the effective management of risks associated with
changing interest rates, the maintenance of adequate liquidity, and the earning
9
of an adequate return on shareholders' equity.
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2001 Management
Discussion and Analysis appearing in the December 31, 2001 Annual Report.
PART II- OTHER INFORMATION
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6- EXHIBITS AND REPORTS OF FORM 8-K
a.) None
b.) None
10
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
------------------------------
(Registrant)
Date: May 9, 2002 /s/ Robert E. Churchill
----------------- -------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
Date: May 9, 2002 /s/ James C. Conboy, Jr.
----------------- -------------------------------------
James C. Conboy, Jr.
President and Chief Operating Officer
11