CNBZ CNB Corporation (PK)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Or

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period                      to                     

Commission file # 033-00737

CNB CORPORATION

(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)		38-2662386 (I.R.S. Employer 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)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 or the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a small reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No þ

As of August 6, 2010 there were 1,212,098 shares of the issuer’s common stock outstanding.

 

 

CNB CORPORATION
Index

PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements (Condensed):
Consolidated Balance Sheets — June 30, 2010 and December 31, 2009			3
Consolidated Statements of Income — Three and Six Months Ended June 30, 2010 and 2009			4
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2010 and 2009			5
Notes to Consolidated Financial Statements			6 – 10
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			11 – 17
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			18
Item 4 — Controls and Procedures			18 – 19
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			19
Item 1A — Risk Factors			19
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 3 — Defaults Upon Senior Securities			19
Item 4 — (Removed and Reserved)			19
Item 5 — Other Information			19
Item 6 — Exhibits and Reports on Form 8-K			19
Signatures			21
Exhibit Index			22
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1-FINANCIAL STATEMENTS (CONDENSED)

CNB CORPORATION

CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Cash and due from banks		$	2,566			$	4,055
Interest-bearing deposits with other financial institutions			15,954				13,192
Total cash and cash equivalents			18,520				17,247
Time Deposits with other financial institutions			8,795				8,669
Securities available for sale			48,768				45,473
Securities held to maturity (market value of $8,177 in 2010 and $10,837 in 2009)			7,825				10,302
Other securities			1,008				1,008
Loans, held for sale			602				—
Loans, net of allowance for loan losses of $1,214 in 2010 and $2,863 in 2009			141,110				148,171
Premises and equipment, net			5,717				5,921
Other assets			12,652				12,711
Total assets		$	244,997			$	249,502
LIABILITIES
Deposits
Noninterest-bearing		$	39,879			$	40,016
Interest-bearing			179,477				184,542
Total deposits			219,356				224,558
Other liabilities			4,563				4,624
Total liabilities			223,919				229,182
SHAREHOLDERS’ EQUITY
Common stock — $2.50 par value; 2,000,000 shares authorized; and 1,212,098 and 1,213,598 shares issued and outstanding in 2010 and 2009			3,030				3,034
Additional paid-in capital			19,498				19,509
Accumulated deficit			(684	)			(1,456	)
Accumulated other comprehensive loss, net of tax			(766	)			(767	)
Total shareholders’ equity			21,078				20,320
Total liabilities and shareholders’ equity		$	244,997			$	249,502

See accompanying notes to consolidated financial statements.

CNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Unaudited)
INTEREST INCOME
Loans, including fees		$	2,232			$	2,637			$	4,466			$	5,234
Securities
Taxable			261				332				476				751
Tax exempt			133				125				278				254
Other interest income			56				57				115				119
Total interest income			2,682				3,151				5,335				6,358
INTEREST EXPENSE ON DEPOSITS			542				932				1,129				1,921
NET INTEREST INCOME			2,140				2,219				4,206				4,437
Provision for loan losses			150				225				375				500
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			1,990				1,994				3,831				3,937
NONINTEREST INCOME
Service charges and fees			269				277				515				542
Net realized gains from sales of loans			50				184				80				272
Loan servicing fees, net of amortization			25				(27	)			45				(75	)
Gains on life insurance proceeds			189				0				189				0
Gain on the sale of investment securities			5				620				5				620
Other income			88				115				170				191
Total noninterest income			626				1,169				1,004				1,550
NONINTEREST EXPENSES
Salaries and employee benefits			975				1,031				1,959				2,076
Deferred compensation			47				80				108				158
Occupancy			240				256				496				546
Legal and professional			188				169				363				268
FDIC Premiums			134				274				262				374
ORE losses and carrying costs			151				246				265				288
Other expenses			231				290				481				586
Total noninterest expense			1,966				2,346				3,934				4,296
INCOME BEFORE INCOME TAXES			650				817				901				1,191
Income tax expense			103				12				129				64
NET INCOME		$	547			$	805			$	772			$	1,127
TOTAL COMPREHENSIVE INCOME		$	596			$	1,550			$	773			$	1,738
Return on average assets (annualized)			0.89	%			1.25	%			0.62	%			0.87	%
Return on average equity (annualized)			10.61	%			17.72	%			7.47	%			11.72	%
Basic earnings per share		$	0.45			$	0.66			$	0.64			$	0.93
Diluted earnings per share		$	0.45			$	0.66			$	0.64			$	0.93
Dividends declared per share		$	—			$	—			$	—			$	—

See accompanying notes to consolidated financial statements.

CNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).

		Six months ended June 30,
		2010				2009
		(Unaudited)
Cash flows from operating activities
Net Income		$	772			$	1,127
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net			309				366
Provision for loan losses			375				500
Loans originated for sale			(4,853	)			(16,261	)
Proceeds from sales of loans originated for sale			4,299				14,733
Gain on sales of loans			(80	)			(272	)
Gain on sales of other real estate owned properties			—				(3	)
Other real estate owned writedowns/losses			125				208
Net losses on impairment of investment securities			—				37
Increase in deferred tax benefit			(204	)			(315	)
(Increase) decrease in other assets			275				(606	)
Decrease in other liabilities			(61	)			(103	)
Total adjustments			185				(1,716	)
Net cash (used in) provided by operating activities			957				(589	)
Cash flows from investing activities
Proceeds from sales of securities available for sale			420				—
Proceeds from maturities of securities available for sale			24,086				16,347
Purchase of securities available for sale			(27,847	)			(21,264	)
Proceeds from maturities of securities held to maturity			3,437				2,519
Purchase of securities held to maturity			(960	)			(1,297	)
Proceeds from maturities of time deposits			1,054				1,077
Purchase of time deposits			(1,180	)			(2,112	)
Net change in portfolio loans			6,581				(2,390	)
Premises and equipment expenditures			(58	)			(250	)
Net cash (used in) provided by investing activities			5,533				(7,370	)
Cash flows from financing activities
Net increase (decrease) in deposits			(5,202	)			2,398
Purchases of common stock			(15	)			—
Net cash (used in) provided by financing activities			(5,217	)			2,398
Net change in cash and cash equivalents			1,273				(5,561	)
Cash and cash equivalents at beginning of year			17,247				23,286
Cash and cash equivalents at end of period		$	18,520			$	17,725
Cash paid during the period for:
Interest		$	1,141			$	1,948
Income taxes			—				138
Non-cash transactions:
Transfer from loans to other real estate owned			376				1,375

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

FORWARD-LOOKING STATEMENTS

When used in this filing and in future filings involving the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “project,” or similar expressions are intended to identify, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company’s market area, and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as to the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Note 1-Basis of Presentation

The consolidated financial statements for June 30, 2010 and December 31, 2009 include CNB Corporation and its wholly-owned subsidiary, Citizens National Bank of Cheboygan. The consolidated financial statements for the three and six months ended June 30, 2009 include the accounts of CNB Corporation (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”) and the Bank’s then wholly owned subsidiary CNB Mortgage Corporation. All significant intercompany accounts and transactions are eliminated in the consolidation process. In November 2009, Citizens National Bank of Cheboygan and CNB Mortgage Corporation merged leaving Citizens National Bank of Cheboygan as the survivor. The statements have been prepared by management without an audit by independent certified public accountants. However, these statements reflect all adjustments (consisting of normal recurring accruals) and disclosures which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and should be read in conjunction with the notes to the consolidated financial statements included in the CNB Corporation’s Form 10-K for the year ended December 31, 2009.

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.

New Accounting Standards

In July 2010, FASB issued a statement which expands disclosures about credit quality of financing receivables and allowance for credit losses. The standard will require the Company to expand disclosures about the credit quality of our loans and the related reserves against them. The extra disclosures will include details on our past due loans, credit quality indicators, and modifications of loans. The Company will adopt the standard beginning with our December 31, 2010 financial statements.

Fair Value Measurements

The following tables present information about the Company’s assets measured at fair value on a recurring basis at June 30, 2010, and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements required judgment and considers factors specific to each asset or liability.

Disclosures concerning assets measured at fair value are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)

						Significant
		Quoted Prices in				Other				Significant
		Active Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs (Level
		(Level 1)				(Level 2)				3)				Balance
Assets
June 30, 2010
Investment securities-available-for-sale:
U.S. Government and agency		$	27,311			$	—			$	—			$	27,311
Mortgage-backed			14,246				—				—				14,246
State and municipal			—				—				5,154				5,154
Corporate Obligations			1,025				—				—				1,025
Auction rate securities			—				—				1,000				1,000
Preferred Shares			32				—				—				32
		$	42,614			$	—			$	6,154			$	48,768
December 31, 2009
Investment securities-available-for-sale:
U.S. Government and agency		$	26,312							$	—			$	26,312
Mortgage-backed			9,259								—				9,259
State and municipal											7,836				7,836
Corporate Obligations			1,020								—				1,020
Auction rate securities											1,000				1,000
Preferred Shares			46								—				46
		$	36,637			$	—			$	8,836			$	45,473

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)

		Investment
		securities-
		available-for-
		sale
Balance at December 31, 2009		$	8,836
Total realized and unrealized gains (losses) included in income			5
Total unrealized gains (losses) included in other comprehensive income			(52	)
Net purchases, sales, calls and maturities			(2,625	)
Net transfers in/out of Level 3			—
Balance at June 30, 2010		$	6,164

Available-for-sale investment securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and an auction rate security which has no recent trades. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

Assets Measured at Fair Value on a Nonrecurring Basis
(dollars in thousands)

						Prices in
						Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs (Level				Inputs (Level				Total Losses
		Balance				(Level 1)				2)				3)				for the Period
Assets
June 30, 2010
Impaired loans		$	2,543											$	2,543			$	1,272
Other real estate owned			1,194												1,194				85
December 31, 2009
Impaired loans		$	248											$	248			$	211
Other real estate owned			1,336												1,336				343

Loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on management’s best estimate of key assumptions. These assumptions include future payment ability and estimated realizable values of available collateral (typically based on outside appraisals). The FAS 114 losses for the period ending June 30, 2010 represents charge-offs of loan balances written down through the allowance for loan losses.

The Company’s other real estate owned is held at an estimated fair value and that value changes periodically with the real estate market. Losses for the period associated with other real estate owned represent valuation adjustments and are write downs through the income statement.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis or underlying collateral values, where applicable. The fair value of off-balance sheet items approximates cost and is not considered significant to this presentation.

The estimated values of financial instruments were:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In thousands)
Assets
Cash and cash equivalents		$	18,520			$	18,520			$	17,247			$	17,247
Time Deposits with other financial institutions			8,795				8,795				8,669				8,669
Securities available for sale			48,768				48,768				45,473				45,473
Securities held to maturity			7,825				8,177				10,302				10,837
Other securities			1,008				1,008				1,008				1,008
Loans held for sale			602				611				—				—
Loans, net			141,110				142,062				148,171				148,376
Accrued interest receivable			1,217				1,217				991				991
Liabilities
Deposits:
Noninterest-bearing		$	(39,879	)		$	(39,879	)		$	(40,016	)		$	(40,016	)
Interest bearing			(179,477	)			(179,762	)			(184,542	)			(185,023	)
Accrued interest payable on deposits			(75	)			(75	)			(87	)			(87	)

Stock Options

The Company adopted a stock option plan in May 1996 under which the stock options may be issued at market prices to employees. The plan states that no grant or award shall be made under the plan more than ten years from the date of adoption of the plan and therefore the plan ended in 2006. Stock options were used to reward certain officers and provide them with an additional equity interest. Options were issued for 10 year periods and have varying vesting schedules. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. The Company has a policy of issuing new shares to satisfy option exercises. There were no modification of awards during the periods ended June 30, 2010 and 2009.

Due to the plan end date, there are no options available for grant as of June 30, 2010 and 2009.

Information about options outstanding and options exercisable follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Options				Exercise				Contractual				Intrinsic
		Outstanding				Price				Term				Value
Balance at January 1, 2010			4,462			$	48.57
Options exercised			—				—
Options expired			—				—
Options forfeited			—				—
Balance at June 30, 2010			4,462			$	48.57			3.5 years				$	—
Exercisable at June 30, 2010			4,462			$	48.57

There were no options exercised during the six months ended June 30, 2010 and 2009 therefore the aggregate intrinsic value of options exercised was $0 for both periods. There were no shares vested for the same periods. Also, there was no cash received or tax benefits realized from option exercises during the same periods

There have been no significant changes in the Company’s critical accounting policies since December 31, 2009.

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 six month periods ending June 30, 2010 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,213,021 and 1,213,308. As of June 30, 2010 there were 4,462 options not considered in the three and six month earnings per share calculations because they were antidilutive. For the three and six month periods ending June 30, 2009 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,213,598. As of June 30, 2009 there were 10,231 options not considered in the three and six month earnings per share calculations because they were antidilutive.

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 (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”) and the Bank’s wholly owned subsidiary CNB Mortgage Corporation for the three month period ending June 30, 2009. In November 2009, Citizens National Bank of Cheboygan and CNB Mortgage Corporation merged leaving Citizens National Bank of Cheboygan as the survivor. The consolidated financial statements for June 30, 2010 and December 31, 2009 include CNB Corporation and its wholly-owned subsidiary, Citizens National Bank of Cheboygan.

Critical Accounting Policies

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in fact and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities. The Company’s critical accounting policies are described in the Management Discussion and Analysis section of its 2009 Annual Report.

Financial Condition

As of June 30, 2010 total assets of the company were $245.0 million which represents a decrease of $4.5 million or 1.8% from December 31, 2009. The Company recognized a decrease in the loan portfolio of $8.4 million or 5.6% while deposits decreased $5.2 million.

Securities

The securities portfolio increased $818,000 since December 31, 2009. The available for sale portfolio increased to 84.7% of the investment portfolio at June 30, 2010 compared to 80.1% at December 31, 2009.

The fair values and related unrealized gains and losses for securities available for sale were as follows, in thousands of dollars:

						Gross				Gross
		Fair				Unrealized				Unrealized
		Value				Gains				Losses
Available for Sale
June 30, 2010
U.S. Government and agency		$	27,311			$	168			$	—
Mortgage-backed			14,246				227				(12	)
State and municipal			5,154				236				(31	)
Corporate Obligations			1,025				27				—
Auction rate securities			1,000				—				—
Preferred Shares			32				10				—
		$	48,768			$	668			$	(43	)
December 31, 2009
U.S. Government and agency		$	26,312			$	179			$	—
Mortgage-backed			9,259				136				—
State and municipal			7,836				285				(21	)
Corporate Obligations			1,020				22				—
Auction rate securities			1,000				—				—
Preferred Shares			46				24				—
		$	45,473			$	646			$	(21	)

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows, in thousand of dollars:

						Gross				Gross
		Carrying				Unrecognized				Unrecognized				Fair
		Amount				Gains				Losses				Value
Held to Maturity
June 30, 2010
State and municipal		$	7,825			$	421			$	(69	)		$	8,177
December 31, 2009
State and municipal		$	10,302			$	556			$	(21	)		$	10,837

The carrying amount and fair value of securities by contractual maturity at June 30, 2010 are shown below, in thousands of dollars.

		Available for sale				Held to Maturity
		Fair				Carrying				Fair
		Value				Amount				Value
Due in one year or less		$	9,317			$	480			$	486
Due from one to five years			21,946				4,009				4,308
Due from five to ten years			1,646				2,666				2,643
Due after ten years			581				670				740
			33,490				7,825				8,177
Subtotal
Mortgage-backed securities			14,246				—				—
Auction Rate Securities			1,000				—				—
Preferred Shares			32				—				—
		$	48,768			$	7,825			$	8,177

Loans

Net loans at June 30, 2010 decreased $7.1 million from December 31, 2009. The table below shows total loans outstanding by type, in thousands of dollars, at June 30, 2010 and December 31, 2009 and their percentages of the total loan portfolio. All loans are domestic. A quarterly review of loan concentrations at June 30, 2010 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 13.1% of total loans.

		June 30, 2010								December 31, 2009
		Balance				% of total				Balance				% of total
Portfolio loans:
Residential real estate		$	72,930				51.17	%		$	77,152				51.02	%
Consumer			6,611				4.64	%			7,002				4.63	%
Commercial real estate			56,592				39.71	%			60,150				39.78	%
Commercial			6,388				4.48	%			6,903				4.57	%
Gross Loans			142,521				100.00	%			151,207				100.00	%
Deferred loan origination fees, net			(197	)							(173	)
Allowance for loan losses			(1,214	)							(2,863	)
Loans, net		$	141,110							$	148,171

Since December 31, 2009 commercial real estate mortgages have decreased $3.6 million while consumer mortgages have decreased $4.2 million. This decrease in residential real estate loans is primarily due to loan pay downs and payoffs. Demand for new commercial loans of any kind has become stagnant and the Bank continues to work with its current borrowers and their financial commitments during these tough economic times in Michigan.

Allowance and Provision for Loan Losses

An analysis of the allowance for loan losses, in thousands of dollars, follows:

		Three Months Ended								Six Month Ended
		June 30,								June 30,
		2010				2009				2010				2009
Beginning balance		$	3,038			$	2,172			$	2,863			$	1,996
Provision for loan losses			150				225				375				500
Charge-offs			(2,069	)			(200	)			(2,131	)			(321	)
Recoveries			95				15				107				37
Ending balance		$	1,214			$	2,212			$	1,214			$	2,212

Net charge-offs for the year to date period totaled $2.0 million as of June 30, 2010 compared to $284,000 at June 30, 2009. The majority of the net charge off amount in 2010 is related to 5 loans. Prior to the charge offs, management had recorded specific allocations in its allowance for loan losses related to expect losses on these 5 loans.

The balance of the allowance for loan loss at June 30, 2010 is $1.2 million compared to $2.2 million at June 30, 2009. Management performs an analysis of the adequacy of the allowance on a regular basis. Based on the most recent analysis, management believes the current level to be adequate to provide for potential losses. As exhibited in the credit quality section below, the Company has started to see decreases is its levels of nonperforming loans.

Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $375,000 for the first six months of 2010 compared to the prior year amount of $500,000 in the first six months of 2009. The amount of provisions for loan losses recognized by the Company is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio.

Credit Quality

The Company has experienced a decrease in the quality of its loan portfolio in recent years as a result of persisting strain on the Michigan economy and the results of recognizing and working out of problem commercial real estate credits. Since December 31, 2009 the Company has experienced improvements in the delinquencies, non accruals and substandard assets. The Company maintains an acceptable 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 assets 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); (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); and (4) other real estate owned properties . The aggregate amount of nonperforming assets is shown in the table below.

		June 30,				December 31,
		2010				2009
Nonaccrual		$	4,630			$	8,095
Loans past due 90 days or more			2				83
Troubled debt restructurings			—				260
Other real estate owned			2,509				2,660
Total nonperforming assets		$	7,141			$	11,098
Percent of total assets			2.91	%			4.45	%

At June 30, 2009, total nonperforming assets decreased by $4.0 million from December 31, 2009. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans decreased to $4.6 million since December 31, 2009. Loans past due 90 days and still accruing are loans that management considers to be collectable including accrued interest. Other real estate owned decreased slightly to $2.5 million since December 31, 2009. The decrease in non-performing assets was due to the beginning of a leveling off from the multiple periods of continued deteriorating credit quality and change-offs. Uncertainty in the local economic conditions continues and could result in continued weakness in credit quality.

The Company had 24 problem commercial loans that were reviewed for impairment totaling $4.7 million as of June 30, 2010. 5 of the 24 loans were have a valuation allowance against loss potential. The balance of these 5 loans at June 30, 2010 totaled $388,000 and the valuation allowance was $147,000.

The Bank has outsourced a loan review process performed twice per year. Because of the continuing efforts to identify and analyze the overall amount of credit risk in the Company’s loan portfolio, the Company expects the level of non-performing assets to remain at current levels throughout the remainder of 2010. The Bank believes it is adequately reserved on the nonperforming loans.

Deposits

Deposits at June 30, 2010 decreased $5.2 million since December 31, 2009. In 2009, the Bank experienced an overall elevated level of deposits as some customers fled more risky market investments for the safety of FDIC insurance bank deposits. The decrease in deposits during the first six months of 2010 is due primarily to growing customer confidence in placing money back into the market and customer desires for higher returns as the Bank continues to be in a low interest rate cycle. Interest-bearing deposits decreased $5.1 million or 2.7% for the six months ended June 30, 2010, while noninterest-bearing deposits decreased $137,000 or 0.34%.

Liquidity and Capital

The Company maintains an adequate liquidity position in order to respond to extensions of credit, the short-term demand for funds caused by withdrawals from deposit accounts, and for the payment of operating expenses. Maintaining adequate liquidity is accomplished through the management of a combination of liquid assets – those which can be converted into cash – and access to additional sources of funds. If necessary, additional sources of funds include Federal Home Loan Bank advances, Federal Home Loan Bank overdraft line of credit and Federal Reserve Discount Window availability. Primary liquid assets of the Company are cash and due from banks, federal funds sold, investments held as “available for sale” and maturing loans. The company does not rely on borrowings for sources of liquidity. Liquidity management is both a daily and long-term function of business management. Maturities in the Company’s loan and investment portfolios are monitored regularly to avoid matching short-term deposits with long-term investments and loans. Other assets and liabilities are also monitored to provide the proper balance between liquidity, safety, and profitability. This monitoring process must be continuous due to the constant flow of cash that is inherent in a financial institution.

The Company’s balances of cash and cash equivalents increased $1.3 million or 7.4% to $18.5 million . During the six month period ending June 30, 2010, $957,000 in cash was provided by operating activities . Investing activities provided $5.5 million during the six months ended June 30, 2010, primarily due to the net decrease in portfolio loans and financing activities utilized $5.2 million due to decreased deposits.

As of June 30, 2010, the Company had no federal funds sold, $13.8 million on deposit at the Federal Reserve, $48.8 million in securities available for sale and $480,000 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 28.8% of total deposits as of June 30, 2010.

Total equity of the Company at June 30, 2010 was $21.1 million compared to $20.3 million at December 31, 2009. The increase in equity for the six months ended June 30, 2010 is due to an increase in retained earnings from net income. The Board of Directors of CNB Corporation voted at its June 10, 2010 meeting that no dividend will be paid for the second quarter of 2010.

RESULTS OF OPERATIONS

CNB Corporations 2010 net income for the first six months was $772,000, a decrease of $355,000 compared to 2009 results. This decrease in net income can be attributed in part to the fact that in 2009 the Company recorded gains on the sale of investment securities in the amount of $620,000 and did not have the same level of gains in 2010 at only $5,000. Also contributing to the decrease in net income was a decrease in gains on sales of loans due to decrease mortgage activity. Although, the Company had minimal gains on securities sale in 2010, it recorded $189,000 in gains on life insurance proceeds due to the death of a retired director. The return on assets was 0.62% for the first six months of the year versus 0.87% for the same period in 2009. The return on equity was 7.47% compared to 11.72% for the same period last year.

Net income for the three months ending June 30, 2010 was $547,000 compared to $805,000 for 2009. This was a decrease of $258,000. The return on average assets was 0.89% compared to 1.25% for 2009. The return on average equity was 10.61% compared to 17.72% for 2009. This decrease in quarterly earnings is due to the same reasons as mentioned above.

Interest income for the first six months of 2010 was $5.3 million, a decrease of $1.0 million or 16.1% compared to the 2009 results. This decrease in interest income can be attributed to a continuing low rate environment coupled with increasing loan payoffs. The low interest rates cause customers to refinance their loans to take advantage of the decreased rates which in turn decreases the interest income earned on those loans. The extended low rate environment also causes customers to take money from low yielding savings accounts and use the money to payoff loans thus decreasing total loans outstanding and total interest income. Additional reason for the decreases in the total loan portfolio are a result of decreasing loan demand, loans being sold to the secondary market, loan charge-offs and loan balances being transferred to Other Assets as collateral is collected on loans through the foreclosure process.

Interest income for the quarter ending June 30, 2010 was $2.7 million compared to $3.2 million for the same period last year. This decreased is primarily for the same reasons as noted above for the year to date period.

Interest expense for the first six months of 2010 was $1.1 million, a decrease of $792,000 or 41.2% compared to 2009 results. This decrease can be attributed to the decreasing rate environment.

Interest expense for the quarter ending June 30, 2010 was $542,000 compared to $932,000 for the same period last year. This decrease is attributed to the same reasons as noted above for the year to date period.

For the first six months of 2010, net interest income was $4.2 million representing a decrease of 5.2% from the same period in 2009. The fully taxable equivalent net interest margin decreased to 3.84% for the six month period ending June 30, 2010 compared to 3.86% for the same period ending June 30, 2009.

Year to date net charge-offs recorded in the allowance for loan losses were $2.0 million for 2010 compared to $284,000 for the same period in 2009. A provision expense of $375,000 was recorded in the first six months of 2010 compared to $500,000 in the first six months in 2009 in order to maintain an acceptable allowance for loan loss level. The decreased provision expense is in response to the decreasing total loan portfolio and the stabilizing asset quality.

Noninterest income for the six months ending June 30, 2010 was $1.0 million, a decrease of $546,000 from the same period last year. This change between the two periods is attributed, mostly, due to the same reasons as

indicated for the change in year to date net income. 2009 noninterest income included $620,000 of gains on the sale of investment securities. The investment securities sold in 2009 were one auction rate security with Bank of America preferred shares as underlying collateral and Bank of America preferred shares. 2010 noninterest income included just $5,000 of gains on the sale of investment securities.

The decrease in noninterest income between the two periods is also due, in part, to the decreasing rate environment in 2009 resulting in an increased number of refinances of mortgages sold to the secondary market during that year thus increasing the banks gains from the sales of these types of loans. There have been fewer mortgage refinances in 2010 and therefore less gains realized from the sales of mortgages.

Noninterest income for the three month period ending June 30, 2010 was $626,000 compared to $1.2 million for the same period last year. This represents a decrease of $543,000. This increase is attributable, mostly, to the investment securities gains recorded in 2009 and other reasons as noted above.

Noninterest expense for the first six months of 2010 was $3.9 million, a decrease of $362,000 or 8.4% compared to 2009 results. The decrease in noninterest expense is attributable to small decrease in multiple expense categories. Salaries and employee benefits decrease as the number of employees decreased from 77 full-time equivalent employees as of June 30, 2009 to 75 full-time equivalent employees as of June 30, 2010. Deferred compensation expenses decreased over the same period last year. This decrease is partially attributable to the amendment of the 1985 Deferred Compensation Plan. The amendment no longer allows for additional accrual of benefits. The Bank has had decrease FDIC premiums for the first six months of 2010 compared to the same period last year. In March 2009 the FDIC announced an immediate emergency special assessment. This special assessment premium was charged to all banks due to the large number of bank failures and the need for the insurance fund to be replenished. Although the overall insurance rates have not changed significantly in 2010, there have been no emergency special assessments. All of these expense decreases were offset by an increase in legal and professional expenses. This increase is due to legal fees from the ongoing litigation against the Bank’s former investment advisor and additional legal fees from the increased level of foreclosures and bankruptcies.

Noninterest expense for the three month period ending June 30, 2010 was $2.0 million, a decrease of $380,000 or 16.2% compared to 2009 results. This increase is primarily for the same reasons as noted above for the year to date period. Additional discussion is included in the Allowance and Provision for Loan Losses and the Credit Quality section above.

The provision for federal income tax was 14.3% of pretax income for the six months ended June 30, 2010 as compared to 5.4% for the same period in 2009. The difference between the tax rates for the two periods is due, in part, to the circumstance surrounding the original impairment loss on the securities investment reported in prior periods. The gains on the securities sold in 2009 were not taxable as the gain is offsetting prior capital losses. The difference between the effective tax rate and the federal corporate tax rate of 34% is generally due to tax-exempt interest earned on investments and loans and other tax-related items.

ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary source of market risk for the financial instruments held by the Company is interest rate risk. That is, the risk that a 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 Company’s net interest margin to swings in interest rates, to assuring sufficient capital and liquidity to support future balance sheet growth. The Company manages interest rate risk through the Asset Liability Committee. The Asset Liability Committee is comprised of bank officers from various disciplines. The Committee reviews policies and establishes 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, 2009 Management Discussion and Analysis appearing in the December 31, 2009 10K.

ITEM 4-CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “Evaluation Date”) an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Treasurer who serves as our Chief Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Treasurer have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that material information relating to the Company known to others within the Company required to be disclosed by the Company 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.

Management’s Annual Report on Internal Controls Over Financial Reporting

The management of CNB Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. CNB Corporation’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of its financial statements.

Management of CNB Corporation assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Dodd-Frank Bill that permits the company to provide only management’s report in this annual report

The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. It meets quarterly with management and the internal auditor and periodically with the independent auditors to ensure that they are carrying out their responsibilities. The independent auditors and the internal auditor have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over

financial reporting, and any other matter which they believe should be brought to the attention of the Audit Committee.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2009 that materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Limitations of the Effectiveness of Internal Controls

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective, provide only reasonable assurance with respect to financial statement preparation and presentation.

PART II-OTHER INFORMATION

Item 1-Legal Proceedings

CNB vs. Heber Fuger Wendin, Inc. and Mark Williams

The Bank filed a complaint in the Circuit Court for the County of Cheboygan on May 19, 2009 and served the defendants in this matter, Heber Fuger Wendin, Inc. (HFW) and Mark Williams, President of HFW, on May 26, 2009. The complaint is the consequence of losses incurred by the Bank as a result of its purchase of money market preferred (MMP) securities beginning in 2006 and ending in 2007 on the advice of Mr. Williams. Upon subsequent review and investigation it was determined MMPs were not a suitable investment for the Bank and as an investment advisor HFW did not perform sufficient due diligence to adequately advise the Bank of the associated potential risk. The six counts charged in the complaint are: (i) breach of fiduciary duty; (ii) negligence; (iii) breach of contract; (iv) common law fraud; (v) negligent misrepresentation; and (vi) violation of Michigan Uniform Securities Act. The case is in discovery.

Item 1A.-Risk Factors

Not applicable.

Item 2- Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3-Defaults Upon Senior Securities

None

Item 4-(Removed and Reserved)

Item 5-Other Information

None

Item 6-Exhibits and Reports of Form 8-K

	a.)		Exhibits
	31.1		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

	31.2		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
	32.1		Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
	32.2		Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
	b.)		Reports on Form 8-K

A Current Report on Form 8-K was filed on May 21, 2010 announcing the results of the annual vote for directors.

A Current Report on Form 8-K was filed on June 10, 2010 announcing that no dividend was declared for the second quarter 2010.

Signature

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.

EXHIBIT INDEX

Number		Exhibit
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31.2		Certification pursuant to Section 302 of he Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32.1		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

CNB (PK) (USOTC:CNBZ)
Historical Stock Chart
From Nov 2024 to Dec 2024

CNB (PK) (USOTC:CNBZ)
Historical Stock Chart
From Dec 2023 to Dec 2024