UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 6, 2002 there were 1,193,000 shares of the issuer's common stock
outstanding.
1
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, December 31,
ASSETS 2002 2001
(Unaudited)
Cash and due from banks $ 7,790 $ 9,229
Interest-bearing deposits with other
financial institutions 8,033 2,718
Federal funds sold 6,600 4,900
-------- --------
Total cash and cash equivalents 22,423 16,847
Securities available for sale 63,246 61,118
Securities held to maturity (market value of $ 5,838
in 2002 and $7,114 in 2001) 5,716 7,168
Other securities 4,452 4,810
Loans, net of allowance for loan losses of $ 1,681
in 2002 and $ 1,667 in 2001 142,576 133,106
Premises and equipment, net 3,399 3,592
Other assets 4,822 4,390
-------- --------
Total assets $246,634 $231,031
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 35,763 $ 32,919
Interest-bearing 182,406 171,670
-------- --------
Total deposits 218,169 204,589
Other liabilities 3,265 3,065
-------- --------
Total liabilities 221,434 207,654
-------- --------
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 1,193,000 and 1,193,415 shares issued
and outstanding in 2002 and 2001 2,983 2,984
Additional paid-in capital 18,488 18,509
Retained earnings 2,582 983
Accumulated other comprehensive income, net of tax 1,147 901
-------- --------
Total shareholders' equity 25,200 23,377
-------- --------
Total liabilities and shareholders' equity $246,634 $231,031
======== ========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands)
Three months ended Nine months ended
September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
INTEREST INCOME $ 3,726 $ 3,935 $11,141 $11,920
INTEREST EXPENSE ON DEPOSITS 1,317 1,733 4,224 5,347
------- ------- ------- -------
NET INTEREST INCOME 2,409 2,202 6,917 6,573
Provision for loan losses -- 28 -- 83
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,409 2,174 6,917 6,490
------- ------- ------- -------
NON-INTEREST INCOME 610 398 1,540 1,163
NON-INTEREST EXPENSES 1,579 1,418 4,357 4,155
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,440 1,154 4,100 3,498
Income tax expense 419 322 1,141 1,001
------- ------- ------- -------
NET INCOME $ 1,021 $ 832 $ 2,959 $ 2,497
======= ======= ======= =======
TOTAL COMPREHENSIVE INCOME $ 1,257 $ 1,216 $ 3,205 $ 3,317
======= ======= ======= =======
Basic earnings per share $ 0.86 $ 0.70 $ 2.48 $ 2.10
Diluted earnings per share $ 0.85 $ 0.70 $ 2.47 $ 2.09
Return on average assets (annualized) 1.66% 1.49% 1.66% 1.49%
Return on average equity (annualized) 16.40% 14.71% 16.25% 14.72%
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Nine months ended September 30,
2002 2001
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,959 $ 2,497
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 481 234
Provision for loan losses -- 83
Loans originated for sale (21,830) (11,642)
Proceeds from sales of loans originated for sale 22,277 11,736
Gain on sales of loans (447) (94)
(Increase) decrease in other assets (559) (958)
Increase (decrease) in other liabilities 221 (197)
-------- --------
Total adjustments 143 (838)
-------- --------
Net cash from operating activities 3,102 1,659
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 15,246 23,324
Purchase of securities available for sale (17,189) (39,940)
Proceeds from maturities of securities held to maturity 2,151 3,017
Purchase of securities held to maturity (699) (2,724)
Proceeds from maturities of other securities 2,700 100
Purchase of other securities (2,342) (1,157)
Net (increase) in portfolio loans (9,470) (2,705)
Premises and equipment expenditures (100) (155)
-------- --------
Net cash from investing activities (9,703) (20,240)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 13,580 12,636
Dividends paid (1,381) (1,294)
Proceeds from exercise of stock options 18
Purchases of common stock (22) (76)
-------- --------
Net cash from financing activities 12,177 11,284
Net change in cash and cash equivalents 5,576 (7,297)
Cash and cash equivalents at beginning of year 16,847 23,310
-------- --------
Cash and cash equivalents at end of period $ 22,423 $ 16,013
======== ========
Cash paid during the period for:
Interest $ 4,289 $ 5,365
Income taxes $ 1,259 $ 995
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
inter-company accounts and transactions are eliminated in consolidation. The
statements have been prepared by management without an audit by independent
certified public accountants. However, these statements reflect all adjustments
(consisting of normal recurring accruals) and disclosures which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented and should be read in conjunction with the notes to
the financial statements included in the CNB Corporation's Form 10-K for the
year ended December 31, 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 are calculated solely on weighted-average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. For the three and nine month
periods ending September 30, 2002 the weighted average shares outstanding in
calculating basic earnings per share were 1,193,062 and 1,193,156 while the
weighted average number of shares for diluted earnings per share were 1,197,558
and 1,198,380. For the three and nine month periods ending September 30, 2001
the weighted average shares outstanding in calculating basic earnings per share
were 1,190,759 and 1,191,197 while the weighted average number of shares for
diluted earnings per share were 1,198,787 and 1,199,444.
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 wholly owned subsidiary,
Citizens National Bank of Cheboygan ("Bank") and the Bank's wholly owned
subsidiary CNB Mortgage Corporation for the three and nine month periods ending
September 30, 2002.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents increased $5.6 million or
33.1%. During the period ending September 30, 2002, $ 3.1 million in cash was
provided from operating activities. Investing activities utilized $ 9.7 million
during the nine months ended September 30, 2002 and financing activities
provided $ 12.2 million due to an increase in deposits.
SECURITIES
Securities available for sale and held to maturity increased $676,000 or 1.0%
since December 31, 2001. The available for sale portfolio increased to 91.7% of
the investment portfolio up from 89.5% at year-end.
The carrying amount and fair values of securities were as follows, in thousands
of dollars:
Gross Gross
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
-------- ---------- ---------- ----
Available for Sale
SEPTEMBER 30, 2002
U.S. Government agency $ 32,336 $ 794 $ -- $ 33,130
State and municipal 29,171 967 (22) 30,116
-------- -------- -------- --------
$ 61,507 $ 1,761 $ (22) $ 63,246
======== ======== ======== ========
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
======== ======== ======== ========
Held to Maturity
SEPTEMBER 30, 2002
State and municipal $ 5,716 $ 122 $ -- $ 5,838
-------- -------- -------- --------
$ 5,716 $ 122 $ -- $ 5,838
======== ======== ======== ========
DECEMBER 31, 2001
State and municipal $ 7,168 $ 132 $ (186) $ 7,114
-------- -------- -------- --------
$ 7,168 $ 132 $ (186) $ 7,114
======== ======== ======== ========
6
The carrying amount and fair value of securities by contractual maturity at
September 30, 2002 are shown below, in thousands of dollars.
Available for Sale Held to Maturity
------------------ ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
Due in one year or less $14,938 $15,251 $ 774 $ 786
Due after one year through five years 39,317 40,617 2,419 2,488
Due after five years through ten years 3,943 4,063 930 971
Due after ten years 3,309 3,315 1,593 1,593
------- ------- ------- -------
Total $61,507 $63,246 $ 5,716 $ 5,838
======= ======= ======= =======
LOANS
Loans at September 30, 2002 increased $ 9.5 million from December 31, 2001. The
table below shows total loans outstanding by type, in thousands of dollars, at
September 30, 2002 and December 31, 2001 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
September 30, 2002 indicates the pattern of loans in the portfolio has not
changed significantly. There is no individual industry with more than a 10%
concentration. However, all tourism related businesses, when combined, total
10.9% of total loans.
September 30, 2002 December 31, 2001
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate $ 86,260 59.79% $ 84,588 62.75%
Consumer 10,942 7.58% 11,767 8.73%
Commercial real estate 35,506 24.61% 26,536 19.69%
Commercial 11,572 8.02% 11,912 8.83%
--------- ------ -------- ------
144,280 100.00% 134,803 100.00%
Deferred loan origination fees, net (23) (30)
Allowance for loan losses (1,681) (1,667)
--------- --------
Loans, net $ 142,576 $133,106
========= ========
7
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, follows:
2002 2001
---- ----
Beginning balance $ 1,667 $ 1,652
Provision for loan losses -- 83
Charge-offs (38) (21)
Recoveries 52 13
------- -------
Ending balance $ 1,681 $ 1,727
======= =======
The Company has had no impaired loans during 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 loan problems. The
Company performs an ongoing review of all large credits to watch for any
deterioration in quality. Nonperforming loans are comprised of: (1) loans
accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or
more as to interest or principal payments (but not included in nonaccrual loans
in (1) above); and (3) other loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower (exclusive of loans in (1) or (2) above).
The aggregate amount of nonperforming loans is shown in the table below.
September 30, December 31,
2002 2001
(dollars in thousands)
Nonaccrual $ -- $ --
Loans past due 90 days or more 164 647
Troubled debt restructurings -- --
----- -------
Total nonperforming loans $ 164 $ 647
===== =======
Percent of total loans .11% 0.48%
8
DEPOSITS
Deposits at September 30, 2002 increased $ 13.6 million since December 31, 2001.
Interest-bearing deposits increased $ 10.7 million for the nine months ended
September 30, 2002, while non-interest bearing deposits increased $ 2.8 million
or 8.6%.
LIQUIDITY AND FUNDS MANAGEMENT
As of September 30, 2002 the Company had $ 6.6 million in federal funds sold, $
63.2 million in securities available for sale and $ 774,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 32.3% of total deposits as of September 30, 2002.
Total equity of the Company at September 30, 2002 was $ 25.2 million compared to
$ 23.4 million at December 31, 2001.
RESULTS OF OPERATIONS
CNB Corporation's 2002 earnings for the first nine months were $ 3.0 million an
increase of $ 462,000 compared to 2001 results. This increase can be partially
attributed to life insurance proceeds, which amounted to $ 105,000. Income, not
including life insurance proceeds, for the first nine months of 2002 was $ 2.9
million compared to $ 2.5 million last year or a 16.0% increase. Basic earnings
per share were $ 2.48 per share for 2002 compared to $ 2.10 for 2001. The return
on assets was 1.66% for the first nine months of the year versus 1.49% for the
same period in 2001. The return on equity was 16.25% compared to 14.72% for the
same period last year.
For the quarter ending September 30, 2002, earnings were $ 1.0 million compared
to $ 832,000 for the same period last year. Basic earnings per share for the
quarter ending September 30, 2002 was $ 0.86 compared to $ 0.70 for the same
period last year.
For the nine months of 2002, net interest income was $ 6.9 million representing
an increase of $427,000 increase over the same period in 2001. The net interest
margin decreased to 4.12% from the 4.18% reported in 2001. The increase in
interest income was primarily due to an increase in average interest-earning
asset volume.
Net interest income for the quarter ending September 30, 2002 was $ 2.4 million,
which is slightly higher than the same period last year. This can be attributed
to the Company's growth in interest-earning assets.
Non-interest income for the nine months ending September 30, 2002 was $ 1.5
million an increase of $ 377,000 or 32.4% 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 life insurance proceeds received. For the quarter ending
September 30, 2002, non-interest income was reported at $610,000 compared to
$398,000 for the same period last year. Non-interest expense for the first nine
months of 2002 was $ 4.4 million compared to $ 4.2 million for 2001.
Non-interest expense for the quarter ending September 30, 2002 was $1.6 million
compared to $1.4 million compared to the same period last year. There was no
significant change in the income tax position for the Company during the first
nine months of 2002.
9
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 risks that an adverse change in
market rates will adversely affect the market value of the instruments.
Generally, the longer the maturity, the higher the interest rate risk exposure.
While maturity information does not necessarily present all aspects of exposure,
it may provide an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the
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
of an adequate return of shareholders' equity.
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2001 Management
Discussion and Analysis appearing in the December 31, 2001 10K.
ITEM 4-CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of CNB
Corporation's management, including our Chief Executive Officer and Treasurer
who serves as our Chief Financial Accounting Officer, of the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on
their evaluation, our Chief Executive Officer and Treasurer have concluded that
the Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by CNB
Corporation in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, our Chief Executive Officer and
Treasurer have concluded that there were no significant changes in CNB
Corporation's internal controls or in other factors that could significantly
affect its internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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: November 14, 2002 /s/ Robert E. Churchill
----------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
Date: November 14, 2002 /s/ James C. Conboy, Jr.
----------------------------------------
James C. Conboy, Jr.
President and Chief Operating Officer
11
CERTIFICATION
The undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2002 ("Report")
fully complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that information contained in this Report fairly presents, in
all material respects, the financial condition and results of operations of the
registrant.
CNB CORPORATION
(Registrant)
By: /s/ Robert E. Churchill
---------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
By: /s/ Irene M. English
---------------------------------------
Irene M. English
Treasurer
12
I, Robert E. Churchill, Chairman and Chief Executive Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of CNB Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert E. Churchill
- ------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
13
I, Irene M. English, Treasurer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of CNB Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) f)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Irene M. English
- --------------------
Irene M. English
Treasurer
14