<PAGE> 1
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, 1999
Commission file # 0-28388
CNB CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Michigan 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 8, 1999 there were 1,080,092 shares of the issuer's common stock
outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September December
30, 1999 31, 1998
ASSETS (unaudited)
<S> <C> <C>
Cash and due from banks $ 10,697 $ 6,580
Federal funds sold 2,300 12,700
--------- ---------
Total cash and cash equivalents 12,997 19,280
Securities available for sale 47,013 24,157
Securities held to maturity (market value of
$ 22,700 in 1999 and $ 36,849 in 1998) 22,685 36,367
Other securities 826 752
Loans, net 117,147 108,987
Premises and equipment, net 3,093 3,196
Other assets 4,246 3,771
--------- ---------
Total assets $ 208,007 $ 196,510
========= =========
LIABILITIES
Deposits
Non-interest bearing $ 28,378 $ 26,044
Interest-bearing 156,974 148,417
--------- ---------
Total deposits 185,352 174,461
Other liabilities 2,375 2,555
--------- ---------
Total liabilities 187,727 177,016
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, 2,000,000
shares authorized, shares outstanding
9/30/99-1,080,255; 12/31/98-1,027,701 2,701 2,569
Additional paid-in capital 11,688 8,597
Retained earnings 6,076 8,099
Unrealized gains (losses) on securities
available for sale, net of tax (185) 229
--------- ---------
Total shareholders' equity 20,280 19,494
--------- ---------
Total liabilities and shareholders' equity $ 208,007 $ 196,510
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME (in thousands)
- ------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME $ 3,657 $ 3,648 $ 10,615 $ 10,753
INTEREST EXPENSE ON DEPOSITS 1,531 1,616 4,530 4,844
-------------------------------------------------------
NET INTEREST INCOME 2,126 2,032 6,085 5,909
Provision for loan losses 22 25 77 75
-------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,104 2,007 6,008 5,834
-------------------------------------------------------
NON-INTEREST INCOME 353 343 963 977
NON-INTEREST EXPENSES 1,261 1,267 3,673 3,557
INCOME BEFORE INCOME TAXES 1,196 1,083 3,298 3,254
Income tax expense 369 325 952 951
-------------------------------------------------------
NET INCOME $ 827 $ 758 $ 2,346 $ 2,303
=======================================================
Other comprehensive income (loss), net of tax (18) 146 (415) 161
TOTAL COMPREHENSIVE INCOME 809 904 1,931 2,464
=======================================================
Return on average assets (annualized) 1.63% 1.56% 1.54% 1.58%
Return on average equity (annualized) 16.55% 16.02% 15.65% 16.22%
Basic earnings per share 0.77 0.70 2.17 2.13
Diluted earnings per share 0.75 0.70 2.13 2.12
</TABLE>
All per share statistics have been retroactively adjusted to reflect the 5%
stock dividends on February 20, 1998 and March 1, 1999. See accompanying notes
to consolidated financial statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,346 $ 2,303
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 220 197
Accretion and amortization of investment securities, net 103 28
Provision for loan losses 77 75
Loans originated for sale (8,070) (9,473)
Proceeds from sales of loans originated for sale 8,071 9,479
Gain on sales of loans (48) (77)
(Increase) decrease in other assets (214) (308)
Increase (decrease) in other liabilities 369 243
------- -------
Total adjustments 508 164
------- -------
Net cash from operating activities 2,854 2,467
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 7,254 5,228
Purchase of securities available for sale (30,815) (10,041)
Proceeds from maturities of securities held to maturity 19,433 14,045
Purchase of securities held to maturity (5,777) (12,462)
Purchase of other securities (74) 1,000
Net (increase) decrease in portfolio loans (8,237) (4,918)
Premises and equipment expenditures (117) (411)
------- -------
Net cash from investing activities (18,333) (7,559)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,891 4,441
Dividends paid (1,702) (1,544)
Proceeds from exercise of stock options 37 6
Purchases of common stock (30) -
------- -------
Net cash from financing activities 9,196 2,903
Net change in cash and cash equivalents (6,283) (2,189)
Cash and cash equivalents at beginning of year 19,280 19,304
------- -------
Cash and cash equivalents at end of period $12,997 $17,115
======= =======
Cash paid during the period for
Interest $ 4,522 $ 4,887
Income taxes $ 972 $ 967
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
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, 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-K for the year
ended December 31, 1998.
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. All prior calculations will be
restated to be comparable to the new methods. The weighted average shares
outstanding in calculating the basic earnings per share was 1,079,540 while the
weighted average dilutive potential shares for the diluted earnings per share
was 1,101,768.
<PAGE> 6
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, 1999.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents decreased $ 6.3 million or
32.6%. During the period ending September 30, 1999, $ 2.9 million of cash was
provided from operating activities while $ 9.2 million was provided from
financing activities due to an increase in deposits. Investing activities
utilized $ 18.3 million of cash during the period ending September 30, 1999.
SECURITIES
Securities increased $ 9.2 million or 15.2% since December 31, 1998. The
available for sale portfolio increased to 67.5% of the investment portfolio up
from 39.9% at year-end.
The amortized cost and fair values of securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
U.S. Government and agency $ 40,760 $ 21 $ (273) $ 40,508
State and municipal 6,534 18 (47) 6,505
-----------------------------------------------------
$ 47,294 $ 39 $ (320) $ 47,013
=====================================================
DECEMBER 31, 1998
U.S. Government and agency $ 21,046 $ 211 $ 21,257
State and municipal 2,763 137 2,900
-----------------------------------------------------
$ 23,809 $ 348 $ - $ 24,157
=====================================================
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
U.S. Government and agency $ 3,002 $ 6 $ - $ 3,008
State and municipal 19,683 70 (61) 19,692
----------------------------------------------------
$ 22,685 $ 76 $ (61) $ 22,700
====================================================
DECEMBER 31, 1998
U.S. Government and agency $ 14,053 $ 95 $ 14,148
State and municipal 22,314 388 (1) 22,701
----------------------------------------------------
$ 36,367 $ 483 $ (1) $ 36,849
====================================================
</TABLE>
The amortized cost and fair value of securities by contractual maturity at
September 30, 1999 are shown below, in thousands of dollars.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 13,259 $ 13,265 $ 12,497 $ 12,493
Due after one year through five years 33,344 33,047 7,332 7,329
Due after five years through ten years 691 701 1,635 1,659
Due after ten years 1,221 1,219
---------------------------------------------------------
Total $ 47,294 $ 47,013 $ 22,685 $ 22,700
=========================================================
</TABLE>
LOANS
Loans at September 30, 1999 increased $ 8.2 million from December 31, 1998. The
table below shows total loans outstanding by type, in thousands of dollars, at
September 30, 1999 and December 31, 1998, and their percentage of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
September 30, 1999 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 10.8% of total
loans.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Portfolio loans: Balance % of total Balance % of total
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Residential real estate $ 71,023 59.79% $ 69,319 62.68%
Consumer 10,750 9.05% 10,229 9.25%
Commercial real estate 24,541 20.66% 20,202 18.27%
Commercial 12,473 10.50% 10,836 9.80%
----------------------------------------------------
118,787 100.00% 110,586 100.00%
Deferred loan origination fees, net (63) (81)
Allowance for loan losses (1,577) (1,518)
-------- --------
$117,147 $108,987
======== ========
</TABLE>
<PAGE> 8
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 1,518 $ 1,442
Provision for loan losses 77 75
Charge-offs (25) (38)
Recoveries 7 25
------- -------
Ending balance $ 1,577 $ 1,504
======= =======
</TABLE>
The Company had no impaired loans for 1999 and 1998.
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.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Nonaccrual $ - $ -
Loans past due 90 days or more 179 62
Troubled debt restructurings
====== ====
Total nonperforming loans $ 179 $ 62
====== ====
Percent of total loans 0.15% 0.06%
</TABLE>
DEPOSITS
Deposits at September 30, 1999 increased $ 10.9 million or 6.2% from December
31, 1998. This growth can be attributed to seasonal activity.
<PAGE> 9
LIQUIDITY AND FUNDS MANAGEMENT
As of September 30, 1999 the Company had $ 2.3 million in federal funds sold,
$47.0 million in securities available for sale and $ 12.5 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 represents 33.3% of total deposits as of September 30, 1999.
Total equity for the Company at September 30, 1999 was $ 20.3 million compared
to $ 19.5 million at December 31, 1998. The Company has realized $ 2.3 million
in income and paid out $ 1.1 million in dividends for the period ended September
30, 1999.
RESULTS OF OPERATIONS
CNB Corporation's 1999 earnings for the first nine months were $ 2,346,000, a
slight increase compared to 1998 results. Earnings per share for 1999 was $ 2.17
per share compared to $ 2.13 from 1998. The return on assets was 1.54% for the
nine months of the year versus 1.58% for the same period in 1998. The return on
equity was 15.65% compared to 16.22% for the same period last year.
For the quarter ending September 30, 1999 earnings were $ 827,000 compared to
$758,000 for the same period last year. Earnings per share for the quarter
ending September 30, 1999 was $ 0.77 compared to $ 0.70 for the same period last
year.
For the first nine months of 1999 net interest income was $ 6.1 million a slight
increase over the $ 5.9 million for the same period in 1998. The net interest
margin decreased to 4.26% from 4.32% in 1998. This decrease can be attributable
to a lower yield on an increasing volume on interest-earning assets.
Net interest income for the quarter ending September 30, 1999 was $ 2.1 million
compared to $ 2.0 million for the same period last year.
Non-interest income decreased to $ 963,000 from $ 977,000 for 1998, while
non-interest expense increased to $ 3.7 million, or 3.3% from $ 3.6 million
reported for the nine month period ending September 30, 1998. For the quarter
ending September 30, 1999 non-interest income was reported at $ 353,000 compared
to $343,000 for the same period last year. Non-interest expense for the quarter
ending remained unchanged for the same period last year. There was no
significant change in the income tax position for Company during the first nine
months of 1999.
YEAR 2000 ISSUE
This global issue poses a threat to businesses everywhere. The problems, which
will evidence themselves in the year 2000, derive from a two digit limitation in
source programming for calendar years. The Company has assembled an internal
technology committee to thoroughly identify and correct any potential problems
in this area well ahead of the year 2000. Our mission is to continue to offer
continuous quality financial services, which meet the needs of the customers and
communities we serve, into the next millennium. We are committed to allocating
sufficient resources, capital and personnel to accomplish our mission. We will
identify Y2K risks to the bank and holding company, develop plans and programs
to lower risk to acceptable levels, develop
<PAGE> 10
backup plans for failure and adhere to regulatory requirements.
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, 1998 Management
Discussion and Analysis appearing in the December 31, 1998 10K.
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
<PAGE> 11
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 10, 1999 /s/ Robert E. Churchill
--------------------- ----------------------------------------
Robert E. Churchill
President and Chief Executive Officer
Date: November 10, 1999 /s/ Susan A. Eno
--------------------- ----------------------------------------
Susan A. Eno
Senior Vice President
<PAGE> 12
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,697
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,013
<INVESTMENTS-CARRYING> 22,685
<INVESTMENTS-MARKET> 22,700
<LOANS> 118,724
<ALLOWANCE> 1,577
<TOTAL-ASSETS> 208,007
<DEPOSITS> 185,352
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,375
<LONG-TERM> 0
0
0
<COMMON> 2,701
<OTHER-SE> 17,579
<TOTAL-LIABILITIES-AND-EQUITY> 208,007
<INTEREST-LOAN> 7,403
<INTEREST-INVEST> 3,212
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,615
<INTEREST-DEPOSIT> 4,530
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 6,085
<LOAN-LOSSES> 77
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,673
<INCOME-PRETAX> 3,298
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,346
<EPS-BASIC> 2.17
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 4.26
<LOANS-NON> 179
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,518
<CHARGE-OFFS> 25
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 1,577
<ALLOWANCE-DOMESTIC> 399
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,178
</TABLE>
