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 September 30, 2009

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		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)

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 (232.405 of this chapter) 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 November 9, 2009 there were 1,213,598 shares of the issuer’s common stock outstanding.

 

 

CNB CORPORATION
Index

PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements (Condensed):
Consolidated Balance Sheets — September 30, 2009 and December 31, 2008			3
Consolidated Statements of Income — Three and Nine Months Ended September 30, 2009 and 2008			4
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2009 and 2008			5
Notes to Consolidated Financial Statements			6 - 9
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			10 - 15
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			16
Item 4 — Controls and Procedures			16 - 17
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			17
Item 1A — Risk Factors			17
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3 — Defaults Upon Senior Securities			17
Item 4 — Submission of Matters to a Vote of Security Holders			17
Item 5 — Other Information			18
Item 6 — Exhibits and Reports on Form 8-K			18
Signatures			19
Exhibit Index			20
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1-FINANCIAL STATEMENTS (CONDENSED)

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

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Cash and due from banks		$	10,065			$	5,188
Federal funds sold			4,601				18,098
Total cash and cash equivalents			14,666				23,286
Time Deposits with other financial institutions			8,755				5,757
Securities available for sale			53,657				37,438
Securities held to maturity (market value of $11,393 in 2009 and $11,119 in 2008)			10,845				10,883
Other securities			1,008				1,008
Loans, held for sale			416				201
Loans, net of allowance for loan losses of $3,287 in 2009 and $1,996 in 2008			154,410				159,569
Premises and equipment, net			5,925				6,019
Other assets			10,849				9,755
Total assets		$	260,531			$	253,916
LIABILITIES
Deposits
Noninterest-bearing		$	39,846			$	37,163
Interest-bearing			195,599				193,380
Total deposits			235,445				230,543
Other liabilities			5,521				5,833
Total liabilities			240,966				236,376
SHAREHOLDERS’ EQUITY
Common stock — $2.50 par value; 2,000,000 shares authorized; and 1,213,598 shares
issued and outstanding in 2009 and 2008			3,034				3,034
Additional paid-in capital			19,509				19,509
Retained earnings (accumulated deficit)			(2,823	)			(3,571	)
Accumulated other comprehensive loss, net of tax			(155	)			(1,432	)
Total shareholders’ equity			19,565				17,540
Total liabilities and shareholders’ equity		$	260,531			$	253,916

See accompanying notes to consolidated financial statements.

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Unaudited)									(Unaudited)
INTEREST INCOME
Loans, including fees		$	2,435			$	2,879			$	7,669			$	8,919
Securities
Taxable			287				417				1,038				1,344
Tax exempt			137				137				391				417
Other interest income			59				139				178				359
Total interest income			2,918				3,572				9,276				11,039
INTEREST EXPENSE ON DEPOSITS			868				1,240				2,789				3,796
NET INTEREST INCOME			2,050				2,332				6,487				7,243
Provision for loan losses			1,225				400				1,725				1,131
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			825				1,932				4,762				6,112
NONINTEREST INCOME
Service charges and fees			295				313				837				896
Net realized gains from sales of loans			80				12				352				95
Loan servicing fees, net of amortization			43				33				(32	)			93
Gain on the sale of investment securities			—				—				620				—
Gain on the sale of other real estate owned			—				297				3				304
Other income			73				83				264				196
Total noninterest income			491				738				2,044				1,584
NONINTEREST EXPENSES
Salaries and employee benefits			1,034				1,105				3,110				3,303
Director Deferred compensation			81				104				239				282
Occupancy			259				284				805				835
Legal and professional			149				125				417				327
Securities impairment write-down			—				1,936				37				1,936
FDIC insurance premiums			125				37				499				70
Expenses relating to ORE property			80				325				368				437
Other expenses			267				241				816				848
Total noninterest expense			1,995				4,157				6,291				8,038
INCOME/(LOSS) BEFORE INCOME TAXES			(679	)			(1,487	)			515				(342	)
Income tax expense/(benefit)			(297	)			58				(233	)			274
NET INCOME/(LOSS)		$	(382	)		$	(1,545	)		$	748			$	(616	)
TOTAL COMPREHENSIVE INCOME/(LOSS)		$	287			$	(1,942	)		$	2,025			$	(1,393	)
Return on average assets (annualized)			-0.58	%			-2.31	%			0.38	%			-0.31	%
Return on average equity (annualized)			-7.78	%			-25.64	%			5.39	%			-3.36	%
Basic earnings/(loss) per share		$	(0.31	)		$	(1.27	)		$	0.62			$	(0.51	)
Diluted earnings/(loss) per share		$	(0.31	)		$	(1.27	)		$	0.62			$	(0.51	)
Dividends declared per share		$	—			$	—			$	—			$	0.72

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).

		Nine months ended September 30,
		2009				2008
		(Unaudited)
Cash flows from operating activities
Net Income (loss)		$	748			$	(616	)
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net			442				516
Provision for loan losses			1,725				1,131
Loans originated for sale			(19,406	)			(4,367	)
Proceeds from sales of loans originated for sale			19,200				4,288
Gain on sales of loans			(352	)			(95	)
Gain on sales of other real estate owned properties			(3	)			(304	)
Other real estate owned writedowns/losses			201				220
Net losses on impairment of investment securities			37				1,936
Increase (decrease) in deferred tax benefit			(658	)			400
Decrease in other assets			576				507
Increase (decrease) in other liabilities			(310	)			434
Total adjustments			1,452				4,666
Net cash provided by operating activities			2,200				4,050
Cash flows from investing activities
Proceeds from maturities of securities available for sale			25,853				17,087
Purchase of securities available for sale			(39,216	)			(16,091	)
Proceeds from maturities of securities held to maturity			3,116				4,069
Purchase of securities held to maturity			(4,087	)			(4,077	)
Proceeds from maturities of time deposits			2,720				—
Purchase of time deposits			(5,718	)			—
Net change in portfolio loans			1,908				6,635
Premises and equipment expenditures			(296	)			(159	)
Net cash (used in) provided by investing activities			(15,720	)			7,464
Cash flows from financing activities
Net increase in deposits			4,902				14,533
Dividends paid			(2	)			(2,119	)
Net cash provided by financing activities			4,900				12,414
Net change in cash and cash equivalents			(8,620	)			23,928
Cash and cash equivalents at beginning of year			23,286				17,272
Cash and cash equivalents at end of period		$	14,666			$	41,200
Cash paid during the period for:
Interest		$	2,830			$	3,846
Income taxes			286				169
Non-cash transactions:
Transfer from loans to other real estate owned			2,176				1,884

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 include the accounts 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. All significant intercompany accounts and transactions are eliminated in the consolidation process. 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, 2008.

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.

Fair Value Measurements

The following tables present information about the Company’s assets measured at fair value on a recurring basis at September 30, 2009, 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:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Balance at

Identical Assets

Inputs

Inputs (Level

September

(Level 1)

(Level 2)

3)

30, 2009

Assets

Investment securities-available-for-sale

$

44,062

$

—

$

9,595

$

53,657

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, 2008		$	6,954
Total realized and unrealized gains (losses) included in income			—
Total unrealized gains (losses) included in other comprehensive income			824
Net purchases, sales, calls and maturities			1,817
Net transfers in/out of Level 3			—
Balance at September 30, 2009		$	9,595

Available-for-sale investment securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and an auction rate security. 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 at September 30, 2009
(dollars in thousands)

						Prices in
						Active				Significant								Total Losses
						Markets for				Other								for the Period
		Balance at				Identical				Observable				Significant				Ended
		September 30,				Assets				Inputs (Level				Unobservable				September
		2009				(Level 1)				2)				Inputs (Level 3)				30, 2009
Assets
Impaired loans accounted for under FAS 114		$	166				—				—			$	166			$	103
Other real estate owned			775				—				—				775				145

Impaired loans accounted for under FAS 114 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 the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The FAS 114 losses for the period ending September 30, 2009 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 realizable 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:

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In thousands)
Assets
Cash and cash equivalents		$	14,666			$	14,666			$	23,286			$	23,286
Time Deposits with other financial institutions			8,755				8,755				5,757				5,757
Securities available for sale			53,657				53,657				37,438				37,438
Securities held to maturity			10,845				11,393				10,883				11,119
Other securities			1,008				1,008				1,008				1,008
Loans, net			154,826				155,637				159,770				162,770
Accrued interest receivable on loans			517				517				608				608
Liabilities
Deposits:
Noninterest-bearing		$	(39,846	)		$	(39,846	)		$	(37,163	)		$	(37,163	)
Interest bearing			(195,599	)			(196,226	)			(193,380	)			(194,258	)
Accrued interest payable on deposits			(106	)			(106	)			(147	)			(147	)

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 September 30, 2009 and 2008.

Due to the plan end date, there are no options available for grant as of September 30, 2009 and 2008.

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, 2009			10,546			$	52.74
Options exercised			—				—
Options expired			—				—
Options forfeited			(315	)			47.62
Balance at September 30, 2009			10,231			$	52.90			2.2 years				$	—

There were no options exercised during the three months ended September 30, 2009 and 2008 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, 2008.

Note 2-Earnings Per Share

Basic earnings per share are calculated solely on weighted-average common shares outstanding. Diluted earnings per share will reflect the potential dilution of stock options and other common stock equivalents. For the three and nine month periods ending September 30, 2009 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,213,598. As of September 30, 2009 all of the 10,231 options outstanding were not considered in the three and nine month earnings per share calculations because they were antidilutive. For the three and nine month periods ending September 30, 2008 the weighted average shares outstanding in calculating basic earnings per share were 1,213,606 and 1,213,625 while the weighted average number of shares for diluted earnings per share were 1,213,606 and 1,213,625. As of September 30, 2008 there were 13,499 options not considered in the three and nine 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 nine month period ending September 30, 2009.

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 2008 Annual Report.

Financial Condition

As of September 30, 2009 total assets of the company were $260.5 million which represents an increase of $6.6 million or 2.6% from December 31, 2008. The Company recognized a decrease in the loan portfolio of $3.6 million or 2.2% while deposits increased $4.9 million or 2.1%.

Securities

The securities portfolio increased $16.2 million since December 31, 2008. The available for sale portfolio increased to 81.9% of the investment portfolio at September 30, 2009 compared to 75.9% at December 31, 2008.

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
September 30, 2009
U.S. Government and agency		$	31,841			$	166			$	—
Mortgage-backed			8,110				148				(7	)
State and municipal			7,995				232				(13	)
Corporate Obligations			1,013				15				—
Auction rate securities			1,600				600				—
Preferred Shares			3,098				1,120				—
		$	53,657			$	2,281			$	(20	)
December 31, 2008
U.S. Government and agency		$	17,061			$	265			$	—
Mortgage-backed			9,629				78				(38	)
State and municipal			5,955				77				(56	)
Auction rate securities			4,793				—				—
		$	37,438			$	420			$	(94	)

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
September 30, 2009
State and municipal		$	10,845			$	561			$	(13	)		$	11,393
December 31, 2008
U.S. Government and agency		$	2,001			$	19			$	—			$	2,020
State and municipal			8,882				236				(19	)			9,099
			10,883				255				(19	)			11,119

The carrying amount and fair value of securities by contractual maturity at September 30, 2009 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		$	20,254			$	3,070			$	3,099
Due from one to five years			18,754				4,815				5,156
Due from five to ten years			915				2,230				2,309
Due after ten years			926				730				829
			40,849				10,845				11,393
Subtotal
Mortgage-backed securities			8,110				—				—
Auction Rate Securities			1,600				—				—
Preferred Shares			3,098				—				—
		$	53,657			$	10,845			$	11,393

Loans

Gross loans at September 30, 2009 decreased $3.6 million from December 31, 2008. The table below shows total loans outstanding by type, in thousands of dollars, at September 30, 2009 and December 31, 2008 and their percentages of the total loan portfolio. All loans are domestic. A quarterly review of loan concentrations at September 30, 2009 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 13.8% of total loans.

		September 30, 2009								December 31, 2008
		Balance				% of total				Balance				% of total
Portfolio loans:
Residential real estate		$	79,363				50.27	%		$	77,533				47.96	%
Consumer			7,155				4.53	%			7,518				4.65	%
Commercial real estate			63,833				40.44	%			67,282				41.62	%
Commercial			7,512				4.76	%			9,314				5.76	%
Gross Loans			157,863				100.00	%			161,647				100.00	%
Deferred loan origination fees, net			(166	)							(82	)
Allowance for loan losses			(3,287	)							(1,996	)
Loans, net		$	154,410							$	159,569

Since December 31, 2008 commercial real estate mortgages have decreased $3.4 million while consumer mortgages have increased $2.0 million. This increase in residential real estate loans is primarily due to in-house mortgages being recorded from mortgage refinances that were previously sold in the secondary market. The refinances are the result of an in-house mortgage loan special offered by the Bank in February 2009 and the Bank’s stronger emphasis on residential real estate lending. 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								Nine Month Ended
		September 30,								September 30,
		2009				2008				2009				2008
Beginning balance		$	2,212			$	1,642			$	1,996			$	1,670
Provision for loan losses			1,225				400				1,725				1,131
Charge-offs			(171	)			(396	)			(492	)			(1,170	)
Recoveries			21				14				58				29
Ending balance		$	3,287			$	1,660			$	3,287			$	1,660

Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $1.7 million for the first nine months of 2009 compared to the prior year amount of $1.1 million in the first nine months of 2008. 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.

A report on Form 8-K filed on November 6, 2009 explained that $1.2 million of the provision is an allocation attributable to a single borrower who has been with the bank since 2007. Management has been working diligently with the borrower since 2008 to mitigate any potential loss, but in late September 2009 it became evident the condition of the credit, secured by real estate, was continuing to decline. The decline in credit quality, coupled with the weakening real estate market and consequential deterioration of collateral value, resulted in the determination the most prudent course was to increase the provision for loan losses to include an allocation to recognize a potential loss.

Credit Quality

The Company has experienced a continued decrease in the quality of its loan portfolio as a result of persisting strain on the Michigan economy and the results of recognizing and working out of problem commercial real estate credits. The Company continues to actively manage its 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 loans is shown in the table below.

		September 30,				December 31,
		2009				2008
		(dollars in thousands)
Nonaccrual		$	9,473			$	5,356
Loans past due 90 days or more still accruing			134				295
Troubled debt restructurings			260				393
Other real estate owned			2,864				1,762
Total nonperforming assets		$	12,731			$	7,806
Percent of total assets			4.89	%			3.07	%

At September 30, 2009, total nonperforming assets increased by $4.9 million from December 31, 2008. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans increased to a balance of $9.5 million at September 30, 2009 from $5.4 million at December 31, 2008. Loans past due 90 days and still accruing are loans that management considers to be collectable including accrued interest. Other real estate owned increased to a balance of $2.9 million since December 31, 2008. The increase in nonaccrual loans was due in most part to the single borrower mentioned previously in the allowance and provision for loan loss section of this report. Total nonperforming assets have also increased due to continued deteriorating credit quality. Uncertainty in the local economic conditions also contributed to the weakness in credit quality.

The Company had 58 problem commercial loans that were reviewed for impairment totaling $15.7 million as of September 30, 2009. 24 of the 55 loans were considered impaired and have a valuation allowance against loss potential. The balance of these 24 loans at September 30, 2009 totaled $6.5 million and the valuation allowance was $2.1 million.

Beginning in the fall of 2008, 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 2009. The Bank believes it is adequately reserved on the nonperforming loans.

Deposits

Deposits at September 30, 2009 increased $4.9 million since December 31, 2008. This increase is due primarily to regular deposit seasonality. Interest-bearing deposits increased $2.2 million or 1.1% for the nine months ended September 30, 2009, while noninterest-bearing deposits increased $2.7 million or 7.2%. As stated above, this increase in deposits is due for the most part to regular seasonal activity in deposits. The overall elevated level of deposits continues as some customers have fled more risky market investment for the safety of FDIC insured bank deposits.

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 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 decreased $8.6 million or 37.0% to $14.7 million . During the nine month period ending September 30, 2009, $2.2 million in cash was provided by operating activities . Investing activities utilized $15.7 million during the nine months ended September 30, 2009, primarily due to purchases of available for sale securities. Financing activities provided $4.9 million due to increase in deposits.

As of September 30, 2009, the Company had $4.6 million in federal funds sold, $53.7 million in securities available for sale and $3.1 million in held to maturity securities maturing within one year. These sources of liquidity are supplemented by new deposits and loan payments received from customers. These short-term assets represent 26.0% of total deposits as of September 30, 2009.

Total equity of the Company at September 30, 2009 was $19.6 million compared to $17.5 million at December 31, 2008. The increase in equity for the nine months ended September 30, 2009 includes an increase in retained earnings from net income and net changes related to accumulated other comprehensive loss. The Board of Directors of CNB Corporation voted at its September 10, 2009 meeting that no dividend will be paid for the third quarter of 2009. As reported on Form 8-K dated September 10, 2009, CNB Corporation continues to be focused on preserving and building Capital. One component of accomplishing this goal is suspending dividends until there are signs of improvement in the capital and credit markets. The CNB Corporation Board of Directors reassesses the dividend each quarter based on earnings performance and the economic outlook.

RESULTS OF OPERATIONS

CNB Corporation’s 2009 net income/(loss) for the first nine months was $748,000 compared to ($616,000) for the first nine months of 2008. This is an increase of $1.4 million compared to 2008 results. The 2008 year to date results as of September 30 included a securities impairment write-down of $1.9 million while 2009 results included a $620,000 gain on the sale of investment securities and increased gains from the sales of loans. The gains in 2009 were offset by increases in FDIC insurance premiums, the large provision for loan losses (as discussed in the credit quality section of this report) and a lower net interest margin. Basic and diluted earnings/(loss) per share were $0.62 for 2009 compared to ($0.51) for 2008. The return on assets was .38% for the first nine months of the year versus (0.31%) for the same period in 2008. The return on equity was 5.39% compared to (3.36%) for the same period last year.

Both three month periods ending September 30 resulted in a net loss for the Company. The net loss for the three months ending September 30, 2009 was ($382,000) compared to ($1.5 million) for 2008. The 2009 results yielded an increase of $1.1 million in income. Basic and diluted loss per share were ($0.31) compared to ($1.27) for 2008. The return on average assets was (0.58%) compared to (2.31%) for 2008. The return on average equity was (7.78%) compared to (25.64%) for 2008. This increase in quarterly earnings is primarily due to the same reasons as noted above for the year to date period.

Interest income for the first nine months of 2009 was $9.3 million, a decrease of $1.8 million or 16.0% compared to the 2008 results. This decrease in interest income can be attributed to a decreasing rate environment as loan customers refinance their loans to take advantage of the decreasing rates, interest income earned on those loans also decreases. In addition to the decreasing rate environment, interest income is affected by loans that are on nonaccrual status and are not accruing interest. The Bank’s average total loan portfolio has decreased since the same period last year also contributing to the decreased interest income. Decreases in the 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 September 30, 2009 was $2.9 million compared to $3.6 million for the same period last year. This decrease is primarily for the same reasons as noted above for the year to date period.

Interest expense for the first nine months of 2009 was $2.8 million, a decrease of $1 million or 26.5% compared to 2008 results. This decrease can be attributed to the decreasing rate environment.

Interest expense for the quarter ending September 30, 2009 was $868,000 compared to $1.2 million 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 nine months of 2009, net interest income was $6.5 million representing a decrease of 10.4% from the same period in 2008. The fully taxable equivalent net interest margin decreased to 3.77% for the nine month period ending September 30, 2009 compared to 4.11% for the same period ending September 30, 2008. This change can be attributed in part to the Bank’s increased level of nonaccrual loans.

Year to date net charge-offs recorded in the allowance for loan losses were $434,000 for 2009 compared to $1.1 million for the same period in 2008. A provision expense of $1.7 million was recorded in the first nine months of 2009 compared to $1.1 million in the first nine months in 2008 in order to maintain an acceptable allowance for loan loss level. The increased provision expense was discussed earlier in the allowance and provision for loan loss section of this report.

Noninterest income for the nine months ending September 30, 2009 was $2.0 million, an increase of $460,000 from the same period last year. This change between the two periods is attributed, mostly, due to the gain on the sale of investment securities. The investment securities sold were one auction rate security with Bank of America preferred shares as underlying collateral and Bank of America (BofA) preferred shares. The BofA preferred shares were the underlying collateral of an auction rate securities investment held by the bank in 2008. This auction rate security was originally collateralized with Merrill Lynch preferred stock, but the purchase of Merrill Lynch by BofA replaced the Merrill Lynch shares with BofA shares as the underlying collateral. The meltdown of the auction rate securities market triggered the distribution of the investment’s underlying collateral, thus resulting in the Bank acquiring the BofA preferred shares. During the second quarter of 2009 BofA announced a tender offer for its preferred share holders. Management along with the Board of Directors reviewed the details of the tender offer and considered the tender offer to be an opportunity for the Bank to liquidate its BofA holdings with limited market risk.

The increase in noninterest income between the two periods is also due, in part, to the decreasing rate environment resulting in an increased number of refinances of mortgages sold to the secondary market thus increasing the banks gains from the sales of these types of loans.

Noninterest income for the three month period ending September 30, 2009 was $491,000 compared to $738,000 for the same period last year. This represents a decrease of $247,000. This change from the same period last year is attributable, mostly, to elevated noninterest income in the third quarter 2008 as the result of gains on the sale of other real state owned.

Noninterest expense for the first nine months of 2009 was $6.3 million, a decrease of $1.7 million compared to 2008 results. This change from the same period last year can largely be attributed to the securities impairment write-down of $1.9 million recorded in 2008 compared to a $37,000 securities impairment write-down in 2009. In additional to the write-down difference, 2009 includes increases in FDIC insurance premiums. The Bank’s FDIC insurance premium increased by $429,000 to $499,000 for the period ending September 30, 2009 compared to $70,000 for the same period last year. The increase in FDIC insurance premiums is largely due to an increased overall assessment rate and also an emergency special assessment announced in March 2009 and was charged to banks due to the large number of bank failures and the need for the insurance fund to be replenished. The special assessment was $119,000 of the year to date premium and was expensed in the second quarter of 2009.

Noninterest expense for the three month period ending September 30, 2009 was $2.0 million compared to $4.2 million for the same period last year. This decrease is primarily due to the securities impairment write-downs as noted above for the year to date period.

The provision for federal income tax was a benefit of ($233,000) or (45.2%) for the nine months ended September 30, 2009. The reason the Company has taxable income yet recorded an income tax benefit is due primarily to the fact that the gains on the investment securities sold this year are not taxable income as this gain is offsetting the prior year investment losses. Excluding this gain from the pretax net income results in a pretax net loss for the Company and the income tax credit.

The provision for federal income tax was $274,000 or 80.1% for the nine months ended September 30, 2008. The reason for the income tax expense is due, in part, to the circumstance surrounding the original impairment loss on the investment securities write-downs reported in 2008. In 2008 the tax effect of the impairment write-down permitted by the Emergency Economic Stabilization Act was signed into law on October 3, 2008. Due to the fact that this act was not signed into law until October 3, 2008 the tax effect of the write-down could not be recorded until the fourth quarter 2008, as the law permitted.

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, 2008 Management Discussion and Analysis appearing in the December 31, 2008 10K.

ITEM 4T-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, 2008. 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, 2008, 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 temporary rules of the Securities and Exchange Commission that permit 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, 2008 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, 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 from July 2006 through March 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.

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-Submission of Matters to a Vote of Security Holders

None

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 September 10, 2009 announcing that no dividend was declared for the third quarter 2009.

A Current Report on Form 8-K was filed on November 6, 2009 announcing the total provision for loan losses for the year to date period ending September 30, 2009.

A Current Report on Form 8-K was filed on November 6, 2009 announcing the sale and related gain on sale of investment securities.

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 the 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)
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CNB (PK) (USOTC:CNBZ)
過去 株価チャート
から 1 2024 まで 1 2025