1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
--------------------------
Form 10-QSB
[ x ] QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File # 0-28388
CNB CORPORATION
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-2662386
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
303 NORTH MAIN STREET, CHEBOYGAN, MI 49721
(Address of principal executive offices, including Zip code)
(616) 627-7111
Issuer's telephone number, including area code
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 October 31, 1997 there were outstanding 977,289 shares of the issuer's
common stock, $2.50 par value.
2
CROSS REFERENCE TABLE
ITEM NO. DESCRIPTION PAGE NO.
- ------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Consolidated Balance Sheets 2
(b) Consolidated Statements of Income 3
(c) Consolidated Statements of Changes in Shareholders' Equity 4
(d) Consolidated Statements of Cash Flows 5
(e) Notes to Financial Statements 6
Item 2. Managements Discussion and Analysis
Financial Condition 7
Liquidity and Funds Management 8
Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(a) CONSOLIDATED BALANCE SHEETS
Sept 30, December 31,
1997 1996
In thousands of dollars (unaudited)
=============================================================================================================
ASSETS
Cash and demand balances in other banks $ 8,265 $ 6,054
Federal funds sold 9,450 4,050
- -------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 17,715 10,104
Securities available for sale 15,848 8,165
Securities held to maturity (fair value of
$46,929 and $53,416 respectively) 46,755 53,085
- -------------------------------------------------------------------------------------------------------------
Total securities 62,603 61,250
Total loans 104,182 96,741
Less: allowance for loan losses (1,436) (1,361)
- -------------------------------------------------------------------------------------------------------------
102,746 95,380
Premises and equipment, net 2,542 2,679
Accrued interest receivable and other assets 4,012 3,672
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $189,618 $173,085
=============================================================================================================
LIABILITIES
Deposits
Noninterest bearing $ 26,141 $ 22,419
Interest bearing 143,318 131,449
- -------------------------------------------------------------------------------------------------------------
Total deposits 169,459 153,868
Accrued interest payable and other liabilities 1,994 2,164
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 171,453 156,032
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; 2,000,000 shares authorized;
shares outstanding: 9/30/97-977,289; 12/31/96-977,310 2,443 2,327
Capital surplus 6,583 4,979
Retained earnings 9,107 9,749
Unrealized gain (loss) on securities available for sale,
net of tax of $16, ($1) respectively 32 (2)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 18,165 17,053
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $189,618 $173,085
=============================================================================================================
(a) All per share statistics have been retroactively adjusted to reflect the 5%
stock dividend of June 25, 1997.
See Notes to consolidated financial statements.
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(b) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
In thousands of dollars 1997 1996 1997 1996
=====================================================================================================================
INTEREST INCOME
Interest and fees on loans $ 2,495 $ 2,274 $7,127 $6,657
Interest on securities
Taxable 821 858 2,393 2,464
Tax exempt 95 103 279 302
Interest on federal funds sold 166 87 354 252
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 3,577 3,322 10,153 9,675
INTEREST ON DEPOSITS 1,581 1,459 4,485 4,271
NET INTEREST INCOME 1,996 1,863 5,668 5,404
Provision for loan losses 25 25 75 75
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,971 1,838 5,593 5,329
OTHER INCOME
Service charges on deposit accounts 172 158 497 472
Other service charges 24 14 54 63
Other income 185 101 378 239
- ---------------------------------------------------------------------------------------------------------------------
Total other income 381 273 929 774
OTHER EXPENSE
Salaries and employee benefits 716 751 2,110 2,037
Occupancy expense 56 66 180 172
Federal deposit insurance premiums 5 1 14 1
Furniture & equipment expense 93 82 248 243
Supplies and printing expense 36 32 124 102
Other expense 300 195 830 783
- ---------------------------------------------------------------------------------------------------------------------
Total other expense 1,206 1,127 3,506 3,338
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,146 984 3,016 2,765
Income tax expense 358 298 926 834
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 788 $ 686 $2,090 $1,931
=====================================================================================================================
Net income per share of common stock (a) $ 0.81 $ 0.70 $ 2.14 $ 1.98
Cash dividends declared per share of
common stock (a) $ 0.35 $ 0.33 $ 1.03 $ 0.98
Return on average assets (annualized) 1.67% 1.54% 1.55% 1.50%
Return on average equity (annualized) 17.45% 16.05% 15.76% 15.32%
(a) All per share statistics have been retroactively adjusted to reflect the 5%
stock dividend of June 25, 1997.
See Notes to consolidated financial statements.
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(c) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
Common Capital Retained
In thousands of dollars Stock Surplus Earnings (a) Total
- -------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 $ 2,327 $ 4,979 $ 8,893 $ 52 $ 16,251
Net income, 1996 2,601 2,601
Cash dividends declared, $1.79 per share (1,745) (1,745)
Net change in unrealized gain (loss)
on securities available for sale (54) (54)
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,327 4,979 9,749 (2) $ 17,053
Net Income YTD 1997 2,090 2,090
5% stock dividend, fractional shares 116 1,599 (1,722) (7)
Stock option exercised 5 5
Cash dividends declared, $1.03 per share (b) (1,010) (1,010)
Net change in unrealized gain (loss)
on securities available for sale 34 34
- --------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $ 2,443 $ 6,583 $9,107 $32 $18,165
========================================================================================================
(a) Unrealized gain (loss) on securities available for sale.
(b) All per share statistics have been retroactively adjusted to reflect the 5%
stock dividend of June 25, 1997.
See Notes to consolidated financial statements.
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(d) YEAR TO DATE CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30,
-------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
===========================================================================================
Cash flows from operating activities
------------------------------------
Net Income $2,090 $1,931
-------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash from operating activities
-------------------------------------------------------------------------
Depreciation 215 188
Accretion/amortization on securities, net 102 657
Provision for loan losses 75 75
Loans originated for sale (4,036) (3,040)
Proceeds from sales of loans originated for sale 4,040 3,050
Gain on sales of loans (4) (10)
(Increase) decrease in other assets (311) (756)
Increase (decrease) in other liabilities 286 156
-------------------------------------------------------------------------------------
Total adjustments 367 320
-------------------------------------------------------------------------------------
Net cash from operating activities 2,457 2,251
-------------------------------------------------------------------------------------
Cash flows from investing activities
------------------------------------
Proceeds from maturities of securities available for sale 3,000 3,485
Purchase of securities available for sale (10,633) (3,049)
Proceeds from maturities of securities held to maturity 18,427 28,801
Purchase of securities held to maturity (12,198) (36,378)
Net increase in portfolio loans (7,495) (7,398)
Premises and equipment expenditures (79) (152)
-------------------------------------------------------------------------------------
Net cash from investing activities (8,978) (14,691)
-------------------------------------------------------------------------------------
Cash flows from financing activities
------------------------------------
Net change in deposits 15,591 8,429
Dividends paid (1,459) (1,396)
-------------------------------------------------------------------------------------
Net cash from financing activities 14,132 7,033
-------------------------------------------------------------------------------------
Net change in cash and cash equivalents 7,611 (5,407)
-------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 10,104 15,290
-------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $17,715 $ 9,883
=====================================================================================
Cash Paid During the Period for
-------------------------------
Interest $ 4,441 $ 4,262
Income taxes $ 1,016 $ 1,870
=====================================================================================
See Notes to consolidated financial statements.
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(e) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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, after
elimination of significant inter-company transactions and accounts. The
statements have been prepared by management without 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 conjuction with
the notes to the financial statements included in the CNB Corporation's Form
10-KSB for the year ended December 31, 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
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
Earnings per share of common stock is computed by dividing net income by
weighted average number of common stock outstanding during the period.
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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 nine month period ending September
30, 1997.
FINANCIAL CONDITION
LOANS
Loans at September 30, 1997 increased $ 7.4 million or 7.7% compared to
December 31, 1996. Residential mortgages increased for the period by $ 4.7
million or 8.3% as the Bank continues to retain, rather than sell on the
secondary market, residential mortgages of 15 years or less. This pattern is
expected to continue throughout the year. As the yield on these loans is
greater than the yield available on the types of securities that the Bank
typically invests in this increase will help to maintain the Bank's net
interest margin.
The table below shows total loans outstanding by type, in thousands of dollars,
at September 30, 1997 and December 31, 1996, and their percentage of the total
loan portfolio. All loans are domestic. A quarterly review of loan
concentrations at September 30, 1997 indicates that 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 12.19% of total loans.
September 30, 1997 December 31, 1996
---------------------- ------------------------
Portfolio loans: Balance % of total Balance % of total
--------- ---------- ------- ------------
Residential real estate $ 61,384 58.92% $56,699 58.61%
Commercial real estate 17,358 16.66% 18,110 18.72%
Construction 3,870 3.72% 3,221 3.33%
Consumer loans 10,213 9.80% 9,239 9.55%
Commercial loans 11,498 11.04% 9,632 9.96%
Net deferred fees and costs (141) -0.14% (160) -0.17%
----------------------------------------------
$104,182 100.00% $96,741 100.00%
==============================================
Allowance for Loan Losses
An analysis of the allowance for loan losses, in thousand of dollars, for the
nine months ended September 30, 1997 and 1996 follows:
1997 1996
---------- --------
Balance at beginning of period $1,361 $1,306
Loans charged off (16) (53)
Recoveries credited to allowance 16 11
Provision charged to operations 75 75
------ ------
Balance at end of period $1,436 $1,339
====== ======
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively monitoring
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delinquencies, nonperforming assets and potential problem loans. The Bank
performs an ongoing review of all large credits in an attempt to detect 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, in
thousands of dollars, is shown in the table below.
9/30/97 12/31/96
--------- ----------
Nonaccrual loans $ 29 $ 70
Loans past due 90 days or more 374 61
Troubled debt restructurings 0 0
----- ----
Total nonperforming loans $ 403 $131
===== ====
Percent of total loans 0.39% 0.14%
===== ====
LIQUIDITY ANd FUNDS MANAGEMENT
LIQUIDITY
Total deposits increased $ 15.6 million or 10.1% compared to December 31, 1996
while loans increased $ 7.4 million or 7.7% for the same period. Typically the
September balances represents the annual peak in deposits from summer
businesses. The Bank maintains a steady schedule of investment securities
maturing each month to meet anticipated decline in deposits through next spring
when deposits are again expected to increase. The security portfolio continues
to have short maturities, adding to available liquidity.
The loan to deposit ratio was 61.48% as of September 30, 1997 compared to
62.87% at December 31, 1996. Management continues to emphasize loan growth and
would like to see this ratio at a minimum of 65%. This change in the mix from
investments to loans will help to increase net interest income over time.
FUNDS MANAGEMENT
The following chart shows the Bank's interest rate sensitivity as of September
30, 1997 in thousands of dollars.
up to 4 to 12 1 to 5 over
3 months months years 5 years
------------------------------------------
Federal funds sold $ 9,450
Taxable investment securities 8,408 15,510 28,314
Non-taxable investment securities 565 2,452 $ 4,518 2,120
Loans 32,963 31,325 30,708 9,186
-------------------------------------------
Total rate sensitive assets 51,386 49,287 63,540 11,306
Interest bearing demand deposits 1,380 3,725 8,690
Savings 5,988 5,390 12,575
Money market savings 17,481 6,779 15,821
Other time deposits 20,206 24,212 21,072
-------------------------------
Total rate sensitive liabilities $45,055 $40,106 $ 58,158
================================
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Gap $ 6,331 $ 9,181 $ 5,382 $11,306
------------------------------------------
Cumulative gap $ 6,331 $15,512 $20,894
=============================
Cumulative ratio 114.05% 118.21%
==================
The asset and liability portfolios are managed to ensure adequate liquidity and
to control interest rate risk exposure. Management seeks to minimize the risk
of a reduction in net interest income that could result from fluctuations in
market interest rates. This process is carried out through regular meetings of
executive and senior management representing various areas of the Company
including finance, lending, investment and deposit gathering areas.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. The following table shows the Company's capital
ratios and ratio calculations at September 30, 1997 and December 31, 1996.
Dollars are shown in millions.
Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Regulations
------ ---------------------
September 30, 1997 Amt Ratio Amt Ratio
--- ----- --- -----
Total capital to risk weighted assets $19.3 19.5% $10.0 10.0%
Tier I capital to risk weighted assets 18.1 18.2% 6.0 6.0%
Tier I capital to average assets 18.1 10.1% 9.0 5.0%
December 31, 1996
Total capital to risk weighted assets $18.2 19.6% $9.2 10.0%
10.0% Tier I capital to risk weighted assets 17.1 18.3% 5.6 6.0%
Tier I capital to average assets 17.1 9.9% 8.6 5.0%
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income continued to improve for the quarter ending September 30,
1997 compared to the same period last year. Interest and fees on loans
increased 9.7% or $ 221,000 for the quarter reported while interest on fed
funds sold increased $ 79,000 in 1997 compared to the same period last year.
Non-interest income increased $ 108,000 or 39.6% in the quarter-to-quarter
comparison with substantial increases in the service charge income and sales of
non-deposit funds, while non-interest expense increased $ 79,000 or 7.0%.
The table below shows the year to date daily average Consolidated Balance
Sheet, revenue on earning assets (on a pre-tax basis), or expense of interest
bearing liabilities, and the annualized effective rate or yield for the period
ending September 30,1997 and 1996.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
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in thousands of dollars
Nine months ended 9/30/97 Nine months ended 9/30/96
--------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------
ASSETS
Interest earning assets
Federal funds sold 8,209 354 5.75% 5,737 252 5.86%
Taxable securities 52,043 2,405 6.16% 54,923 2,464 5.98%
Tax exempt securities 7,805 279 4.77% 8,313 302 4.84%
Loans 100,757 7,116 9.42% 92,182 6,355 9.19%
------------------ -------------------------
Total int. earning assets 168,814 10,154 8.02% 161,155 9,373 7.75%
---------------------------------------------------------
Cash and due from banks 5,849 5,479
Premises and equipment, net 2,616 1,941
Other assets 2,434 2,544
-------- --------
Total assets $179,713 $171,119
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
Interest bearing demand
deposits $ 13,797 $ 246 2.38% $ 13,974 $ 251 2.39%
Savings deposits 23,562 506 2.86% 25,631 553 2.88%
CDs $100,000 and over 14,147 560 5.28% 10,242 421 5.48%
Other time deposits 86,743 3,173 4.88% 82,245 3,046 4.94%
---------------------------------------------------
Total int bearing deposits 138,249 4,485 4.33% 132,092 4,271 4.31%
---------------------------------------------------
Noninterest bearing deposits 22,076 20,582
Other liabilities 1,705 1,643
Shareholders' equity 17,683 16,802
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $179,713 $171,119
======== ========
Net interest income $5,669 $ 29,063 $5,102
====== ======== ======
Net spread 3.69% 3.44%
==== ====
Net yield on interest earning assets 4.48% 4.22%
==== ====
Ratio of interest earning assets to
interest bearing liabilities 1.22 1.22
======== ========
The table below shows the effect of volume and rate changes on net interest income for the
nine months ended September 30, on a pre-tax basis, in thousands of dollars.
1997 Compared to 1996 1996 Compared to 1995
Volume Rate Net Volume Rate Net
------------------------------------------------------------
Federal funds sold 108 (6) 102 (109) -16 (125)
Taxable securities (131) 72 (59) 214 187 401
Tax exempt securities (18) (5) (23) 147 -17 130
Loans 598 163 761 448 -121 327
--------------------------------------------------------
Total interest income $ 557 $224 $781 $700 $ 33 $ 733
--------------------------------------------------------
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Interest bearing demand
deposits $ (3) $ (2) $ (5) $ 12 0 12
Savings deposits (45) (2) (47) (28) 2 (26)
CDs $100,000 and over 158 (19) 139 112 7 119
Other interest bearing deposits 166 (39) 127 327 92 419
---------------------------------------------------------
Total interest expense $ 276 $ (62) $214 $423 $101 $524
---------------------------------------------------------
Net change in net interest
income (a) $ 281 $ 286 $567 $277 $(68) $209
=========================================================
(a) The net change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
OTHER INCOME
Noninterest income continues to improve with year to date figures up $ 155,000
or 20.0% over last year. The bank made some changes to service charge fees
that went into effect late June 1997 which accounts for most of the increase to
other income.
OTHER EXPENSES
Other expenses for the year ended September 30, 1997 increased $ 168,000 or
5.0% compared to the same period last year. All categories of other expenses
increased this year from last year with the biggest increase in supplies and
printing expense which increased 21.6% or $ 22,000.
FEDERAL INCOME TAX
There was no significant change in the income tax position of the Company
during the first half of 1997 with the increase corresponding to an increase in
pre-tax income.
NET INCOME
Year to date consolidated net income for the period was $ 2,090 compared to $
1,931 for 1996. For the quarter ended September 30, 1997 net income increased
$102,000 or 14.9% for the same period last year. The increase in earnings was
a result of loan growth and an overall improvement in net interest income.
Return on average assets for nine months ended September 30, 1997 was 1.55%
compared to 1.50% from last year. The quarter end return on average assets was
1.67% compared to 1.54% for the same period last year. The return on average
equity was 15.32% compared to 15.76% for the nine month period ended September
30, 1997 and the quarter ended return on average equity was 17.45% compared to
16.05% for the same period last year.
PART II
Other Information
ITEM 1 - LEGAL PROCEEDINGS
None
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ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 20, 1997 annual shareholders meeting, shareholders voted to increase
the number of shares authorized from 1,000,000 to 2,000,000.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits (numbered as in Item 601 of Regulation S-B):
None
(b) The Company has filed no reports on Form 8-K during the quarter ended
September 30, 1997.
SIGNATURES
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
DATE November 12, 1997
/s/ Robert E. Churchill /s/ John P. Ward
---------------------------- ---------------------------
Robert E. Churchill John P. Ward
President and Chief Executive Officer Secretary/Treasurer
(Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE