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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 24, 2002 there were 1,193,060 shares of the issuer's common
stock outstanding.
ITEM 1- FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (in thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2002 2001
(unaudited)
ASSETS
Cash and due from banks $ 7,902 $ 9,229
Interest-bearing deposits with other financial
institutions 5,006 2,718
Federal funds sold 3,000 4,900
-------- --------
Total cash and cash equivalents 15,908 16,847
Securities available for sale 58,809 61,118
Securities held to maturity (fair value of
$6,454 in 2002 and $7,114 in 2001) 6,333 7,168
Other securities 3,152 4,810
Loans, net 144,902 133,106
Premises and equipment, net 3,478 3,592
Other assets 4,945 4,390
-------- --------
Total assets $237,527 $231,031
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 32,878 $ 32,919
Interest-bearing 177,361 171,670
-------- --------
Total deposits 210,239 204,589
Other liabilities 2,887 3,065
-------- --------
Total liabilities 213,126 207,654
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, 2,000,000
shares authorized, shares outstanding
6/30/02-1,193,072; 12/31/01-1,193,415 2,983 2,984
Additional paid-in capital 18,492 18,509
Retained earnings 2,015 983
Accumulated other comprehensive income,
net of tax 911 901
-------- --------
Total shareholders' equity 24,401 23,377
-------- --------
Total liabilities and shareholders' equity $237,527 $231,031
======== ========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME (in thousands)
- --------------------------------------------------------------------------------
Three months ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
INTEREST INCOME $3,701 $3,968 $7,415 $7,985
INTEREST EXPENSE ON DEPOSITS 1,444 1,765 2,907 3,614
------ ------ ------ ------
NET INTEREST INCOME 2,257 2,203 4,508 4,371
Provision for loan losses -- 27 -- 55
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,257 2,176 4,508 4,316
------ ------ ------ ------
NON-INTEREST INCOME 456 421 930 765
NON-INTEREST EXPENSES 1,449 1,399 2,778 2,737
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 1,264 1,198 2,660 2,344
Income tax expense 356 341 722 679
------ ------ ------ ------
NET INCOME $ 908 $ 857 $1,938 $1,665
====== ====== ====== ======
TOTAL COMPREHENSIVE INCOME $1,178 $ 920 $1,948 $2,101
====== ====== ====== ======
Basic earnings per share $ 0.76 $ 0.72 $ 1.62 $ 1.40
Diluted earnings per share $ 0.76 $ 0.71 $ 1.62 $ 1.39
Return on average assets (annualized) 1.55% 1.56% 1.65% 1.52%
Return on average equity (annualized) 15.16% 15.11% 16.18% 14.90%
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- -------------------------------------------------------------------------------
Six months ended June 30,
2002 2001
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,938 $ 1,665
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 305 106
Provision for loan losses -- 55
Loans originated for sale (10,399) (7,865)
Proceeds from sales of loans originated for sale 10,600 7,979
Gain on sales of loans (201) (114)
(Increase) decrease in other assets (560) (866)
Increase (decrease) in other liabilities (157) 376
-------- --------
Total adjustments (412) (329)
-------- --------
Net cash from operating activities 1,526 1,336
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 8,809 18,063
Purchase of securities available for sale (6,595) (22,595)
Proceeds from maturities of securities held to maturity 1,400 1,813
Purchase of securities held to maturity (565) (2,620)
Proceeds from maturities of other securities 2,700 --
Purchase of other securities (1,042) (257)
Net (increase) decrease in portfolio loans (11,796) (1,028)
Premises and equipment expenditures (81) (96)
-------- --------
Net cash from investing activities (7,170) (6,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,650 3,993
Dividends paid (927) (1,487)
Purchases of common stock (18) (74)
-------- --------
Net cash from financing activities 4,705 2,432
Net change in cash and cash equivalents (939) (2,952)
Cash and cash equivalents at beginning of year 16,847 23,310
-------- --------
Cash and cash equivalents at end of period $ 15,908 $ 20,358
======== ========
Cash paid during the period for:
Interest $ 2,925 $ 3,589
Income taxes $ 742 $ 723
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 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
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. For the three and six month
periods ending June 30, 2002 the weighted average shares outstanding in
calculating basic earnings per share were 1,193,163 and 1,193,203 while the
weighted average number of shares for the diluted earnings per share were
1,198,622 and 1,198,662. For the three and six month periods ending June 30,
2001 the weighted average shares outstanding in calculating basic earnings per
share were 1,191,233 and 1,191,706 while the weighted average number of shares
for the diluted earnings per share were 1,199,442 and 1,200,132.
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 and six month period ending
June 30, 2002.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $939,000 or 5.6%.
During the period ending June 30, 2002, $1.5 million of cash was provided from
operating activities. Investing activities utilized $7.2 million during the
period ending June 30, 2002 and financing activities provided $4.7 million due
to an increase in deposits.
SECURITIES
Securities decreased $3.1 million or 4.6% since December 31, 2001. The
available for sale portfolio increased to 90.3% of the investment portfolio up
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
----------------------------------------------------
JUNE 30, 2002
U.S. Government agency $ 29,118 $ 734 $ -- $ 29,852
State and municipal 28,311 652 (6) 28,957
----------------------------------------------------
$ 57,429 $ 1,386 $ (6) $ 58,809
====================================================
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
====================================================
6
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
--------------------------------------------------
JUNE 30, 2002
State and municipal $ 6,333 $ 122 $ (1) $ 6,454
=================================================
$ 6,333 $ 122 $ (1) $ 6,454
=================================================
DECEMBER 31, 2001
State and municipal $ 7,168 $ 132 $ (186) $ 7,114
-------------------------------------------------
$ 7,168 $ 132 $ (186) $ 7,114
=================================================
The amortized cost and fair value of securities by contractual maturity at June
30, 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 $20,357 $20,636 $ 1,102 $ 1,110
Due after one year through five years 36,249 37,301 2,730 2,805
Due after five years through ten years 823 872 878 916
Due after ten years -- -- 1,623 1,623
----------------------------------------------
Total $57,429 $58,809 $ 6,333 $ 6,454
==============================================
LOANS
Loans at June 30, 2002 increased $11.8 million from December 31, 2001. The
table below shows total loans outstanding by type, in thousands of dollars, at
June 30, 2002 and December 31, 2001, and their percentage of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
June 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
11.1% of total loans.
June 30, 2002 December 31, 2001
Balance % of total Balance % of total
------- ---------- ------- ----------
Portfolio loans:
Residential real estate $86,234 58.82% $84,588 62.75%
Consumer 11,378 7.76% 11,767 8.73%
Commercial real estate 37,550 25.61% 26,536 19.69%
Commercial 11,454 7.81% 11,912 8.83%
------------------------------------
146,616 100.00% 134,803 100.00%
Deferred loan origination fees, net (26) (30)
Allowance for loan losses (1,688) (1,667)
-------- --------
$144,902 $133,106
======== ========
7
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
six months ended June 30, follows:
2002 2001
---- ----
Beginning balance $ 1,667 $ 1,652
Provision for loan losses -- 55
Charge-offs (30) (11)
Recoveries 51 10
------- -------
Ending balance $ 1,688 $ 1,706
======= =======
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 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.
June 30, December 31,
2002 2001
---- ----
(In thousands)
Nonaccrual $ -- $ --
Loans past due 90 days or more 11 647
Troubled debt restructurings -- --
------- -------
Total nonperforming loans $ 11 $ 647
======= =======
Percent of total loans 0.01% 0.48%
DEPOSITS
Deposits at June 30, 2002 increased $5.7 million since December 31, 2001.
Interest-bearing deposits increased $5.7 million for the six months ended June
30, 2002, while non-interest bearing deposits remained relatively unchanged.
8
LIQUIDITY AND FUNDS MANAGEMENT
As of June 30, 2002 the Company had $3.0 million in federal funds sold, $58.8
million in securities available for sale and $1.1 million 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
represent 29.9% of total deposits as of June 30, 2002.
Total equity of the Company at June 30, 2002 was $24.4 million compared to
$23.4 million at December 31, 2001.
RESULTS OF OPERATIONS
CNB Corporation's 2002 earnings for the first six months were $1.9 million an
increase of $273,000 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 six months of 2002 was $1.8
million compared to $1.7 million last year or a 10.1% increase. Basic earnings
per share were $1.62 per share for 2002 compared to $1.40 for 2001. The return
on assets was 1.65% for the first six months of the year versus 1.52% for the
same period in 2001. The return on equity was 16.18% compared to 14.90% for the
same period last year.
For the quarter ending June 30, 2002, earnings were $908,000 compared to
$857,000 for the same period last year. Basic earnings per share for the quarter
ending June 30, 2002 was $0.76 compared to $0.72 for the same period last year.
For the first six months of 2002, net interest income was $4.5 million
representing a slight increase over the same period in 2001. The net interest
margin decreased to 4.07% from the 4.24% reported in 2001. This decrease can be
attributed to the declining rate environment.
Net interest income for the quarter ending June 30, 2002 was $2.3 million which
is slightly higher than the same period last year. This can be attributed to the
Company's growth in interest-earning assets and interest-bearing liabilities.
Non-interest income for the six months ending June 30, 2002 was $930,000 an
increase of $165,000 or 21.6% 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 June 30, 2002
non-interest income was reported at $456,000 compared to $421,000 for the same
period last year. Non-interest expense for the first six months of 2002 was
$2.8 million compared to $2.7 million for 2001. Non-interest expense for the
quarter ending June 30, 2002 remained relatively unchanged at $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 six 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
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 10K.
9
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
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
--------------------------
(Registrant)
Date: August 8, 2002 /s/ Robert E. Churchill
----------------------- ------------------------------------
Robert E. Churchill
Chairman and Chief Executive Officer
Date: August 8, 2002 /s/ James C. Conboy, Jr.
----------------------- ------------------------------------
James C. Conboy, Jr.
President and Chief Operating Officer
10
CERTIFICATION
The undersigned hereby certify pursuant to 18 U.S.C. ss. 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 June 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
Date: August 8, 2002