- Quarterly Report (10-Q)

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, 2010


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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of tis chapter) during the preceding 12 months (or for 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 smaller 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 10, 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 — September 30, 2010 and December 31, 2009			3

Consolidated Statements of Income — Three and Nine Months Ended September 30, 2010 and 2009			4

Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010 and 2009			5

Notes to Consolidated Financial Statements			6 — 12

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			13 — 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)

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


	September 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Cash and due from banks	$	3,041		$	4,055
Interest-bearing deposits with other financial institutions		40,833			13,192

Total cash and cash equivalents		43,874			17,247

Time Deposits with other financial institutions		8,756			8,669
Securities available for sale		46,588			45,473
Securities held to maturity (market value of $8,043 in 2010 and $10,837 in 2009)		7,391			10,302
Other securities		1,008			1,008
Loans, held for sale		1,659			—
Loans, net of allowance for loan losses of $1,148 in 2010 and $2,863 in 2009		133,695			148,171
Premises and equipment, net		5,603			5,921
Other assets		12,218			12,711


Total assets	$	260,792		$	249,502


LIABILITIES
Deposits
Noninterest-bearing	$	42,900		$	40,016
Interest-bearing		192,372			184,542

Total deposits		235,272			224,558
Other liabilities		4,283			4,624

Total liabilities		239,555			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		(597	)		(1,456	)
Accumulated other comprehensive loss, net of tax		(694	)		(767	)

Total shareholders’ equity		21,237			20,320


Total liabilities and shareholders’ equity	$	260,792		$	249,502

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,
	2010			2009			2010			2009
	(Unaudited)
INTEREST INCOME
Loans, including fees	$	2,101		$	2,435		$	6,567		$	7,669
Securities
Taxable		232			287			708			1,038
Tax exempt		120			137			398			391
Other interest income		64			59			179			178

Total interest income		2,517			2,918			7,852			9,276

INTEREST EXPENSE ON DEPOSITS		511			868			1,640			2,789


NET INTEREST INCOME		2,006			2,050			6,212			6,487

Provision for loan losses		150			1,225			525			1,725


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,856			825			5,687			4,762


NONINTEREST INCOME
Service charges and fees		283			295			798			837
Net realized gains from sales of loans		120			80			200			352
Loan servicing fees, net of amortization		(6	)		43			39			(32	)
Gains on life insurance proceeds		—			—			189			—
Gain on the sale of investment securities		—			—			5			620
Other income		119			73			289			267

Total noninterest income		516			491			1,520			2,044

NONINTEREST EXPENSES
Salaries and employee benefits		1,016			1,034			2,975			3,110
Deferred compensation		66			81			174			239
Occupancy		247			259			743			805
Legal and professional		191			149			554			417
FDIC Premiums		142			125			404			499
ORE write-downs, losses and carrying costs		391			80			656			368
Other expenses		265			267			746			853

Total noninterest expense		2,318			1,995			6,252			6,291


INCOME (LOSS) BEFORE INCOME TAXES		54			(679	)		955			515

Income tax expense (credit)		(33	)		(297	)		96			(233	)


NET INCOME (LOSS)	$	87		$	(382	)	$	859		$	748


TOTAL COMPREHENSIVE INCOME	$	159		$	287		$	932		$	2,025


Return on average assets (annualized)		0.14	%		-0.58	%		0.46	%		0.38	%
Return on average equity (annualized)		1.64	%		-7.78	%		5.49	%		5.39	%

Basic earnings per share	$	0.07		$	(0.31	)	$	0.71		$	0.62
Diluted earnings per share	$	0.07		$	(0.31	)	$	0.71		$	0.62

Dividends declared per share	$	—		$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).


	Nine months ended
	2010			2009
	(Unaudited)
Cash flows from operating activities
Net Income	$	859		$	748
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net		485			442
Provision for loan losses		525			1,725
Loans originated for sale		(11,501	)		(19,406	)
Proceeds from sales of loans originated for sale		11,025			19,200
Gain on sales of loans		(200	)		(352	)
Gain on sales of other real estate owned properties		(5	)		(3	)
Other real estate owned writedowns/losses		387			201
Net (gains) losses on investment securities		(5	)		620
Increase in deferred tax benefit		(167	)		(658	)
Decrease in other assets		1,510			576
Decrease in other liabilities		(339	)		(310	)

Total adjustments		1,715			2,035

Net cash provided by operating activities		2,574			2,783

Cash flows from investing activities
Proceeds from sales of securities available for sale		420			2,399
Proceeds from maturities of securities available for sale		29,663			22,871
Purchase of securities available for sale		(31,176	)		(39,216	)
Proceeds from maturities of securities held to maturity		3,871			3,116
Purchase of securities held to maturity		(960	)		(4,087	)
Proceeds from maturities of time deposits		1,485			2,720
Purchase of time deposits		(1,572	)		(5,718	)
Net change in portfolio loans		11,699			1,908
Premises and equipment expenditures		(74	)		(296	)

Net cash provided by (used in) investing activities		13,356			(16,303	)

Cash flows from financing activities
Net increase in deposits		10,714			4,902
Dividends paid		(2	)		(2	)
Purchases of common stock		(15	)		—

Net cash provided by financing activities		10,697			4,900


Net change in cash and cash equivalents		26,627			(8,620	)

Cash and cash equivalents at beginning of year		17,247			23,286


Cash and cash equivalents at end of period	$	43,874		$	14,666


Cash paid during the period for:
Interest	$	1,663		$	2,830
Income taxes		—			286
Non-cash transactions:
Transfer from loans to other real estate owned		1,564			2,176

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 September 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 nine months ended September 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.

Note 2 — 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.

Note 3 — Securities

The securities portfolio decreased $1.8 million since December 31, 2009. The available for sale portfolio increased to 82.9% of the investment portfolio at September 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
September 30, 2010
U.S. Government and agency	$	26,284	$	221	$	—
Mortgage-backed		12,635		180		—
State and municipal		5,618		307		(5	)
Corporate Obligations		1,027		29		—
Auction rate securities		1,000		—		—
Preferred Shares		24		2		—

	$	46,588	$	739	$	(5	)


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
September 30, 2010
State and municipal	$	7,391	$	652	$	—		$	8,043

December 31, 2009
State and municipal	$	10,302	$	556	$	(21	)	$	10,837

The carrying amount and fair value of securities by contractual maturity at September 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	$	6,697	$	491	$	498
Due from one to five years		24,099		3,614		3,932
Due from five to ten years		1,521		2,616		2,835
Due after ten years		612		670		778

Subtotal		32,929		7,391		8,043

Mortgage-backed securities		12,635		—		—
Auction Rate Securities		1,000		—		—
Preferred Shares		24		—		—


	$	46,588	$	7,391	$	8,043

Note 4 — Loans

The table below shows total loans outstanding by type, in thousands of dollars, at September 30, 2010 and December 31, 2009 and their percentages of the total loan portfolio. All loans are domestic.


	September 30, 2010						December 31, 2009
	Balance			% of total			Balance			% of total
Portfolio loans:
Residential real estate	$	70,039			51.86	%	$	77,152			51.02	%
Consumer		6,621			4.90	%		7,002			4.63	%
Commercial real estate		53,109			39.33	%		60,150			39.78	%
Commercial		5,280			3.91	%		6,903			4.57	%

Gross Loans		135,049			100.00	%		151,207			100.00	%

Deferred loan origination fees, net		(206	)					(173	)
Allowance for loan losses		(1,148	)					(2,863	)

Loans, net	$	133,695					$	148,171

Note 5 — Allowance for Loan losses

The following is a summary of transactions in the allowance for loan losses, in thousands of dollars:


	Three Months Ended						Nine Month Ended
	September 30,						September 30,
	2010			2009			2010			2009
Beginning balance	$	1,214		$	2,212		$	2,863		$	1,996
Provision for loan losses		150			1,225			525			1,725
Charge-offs		(234	)		(171	)		(2,365	)		(492	)
Recoveries		18			21			125			58

Ending balance	$	1,148		$	3,287		$	1,148		$	3,287

Note 6 — Fair Value Measurements

The following tables present information about the Company’s assets measured at fair value on a recurring basis at September 30, 2010 and December 31, 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:

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 1)		(Level 2)		(Level 3)		Balance
Assets
September 30, 2010
Investment securities-available-for-sale:
U.S. Government and agency	$	26,284	$	—	$	—	$	26,284
Mortgage-backed		12,635		—		—		12,635
State and municipal		—		—		5,618		5,618
Corporate Obligations		1,027		—		—		1,027
Auction rate securities		—		—		1,000		1,000
Preferred Shares		24		—		—		24

	$	39,970	$	—	$	6,618	$	46,588


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		34
Net purchases, sales, calls and maturities		(2,257	)
Net transfers in/out of Level 3		—

Balance at September 30, 2010	$	6,618

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	Inputs		Total Losses
	Balance		(Level 1)	(Level 2)	(Level 3)		for the Period
Assets
September 30, 2010
Impaired loans	$	2,368			$	2,368	$	900
Other real estate owned		972				972		311

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 the using 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 impaired loans losses for the period ending September 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.

Note 7 — 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, 2010						December 31, 2009
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
	(In thousands)
Assets
Cash and cash equivalents	$	43,874		$	43,874		$	17,247		$	17,247
Time Deposits with other financial institutions		8,756			8,756			8,669			8,669
Securities available for sale		46,588			46,588			45,473			45,473
Securities held to maturity		7,391			8,043			10,302			10,837
Other securities		1,008			1,008			1,008			1,008
Loans held for sale		1,659			1,683			—			—
Loans, net		133,695			135,367			148,171			148,376
Accrued interest receivable on loans		462			462			544			544

Liabilities
Deposits:
Noninterest-bearing	$	(42,900	)	$	(42,900	)	$	(40,016	)	$	(40,016	)
Interest bearing		(192,372	)		(192,616	)		(184,542	)		(185,023	)
Accrued interest payable on deposits		(63	)		(63	)		(87	)		(87	)

Note 8 — 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, 2010 and 2009.

Due to the plan end date, there are no options available for grant as of September 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 September 30, 2010		4,462	$	48.57	3.5 years	$	—


Exercisable at September 30, 2010		4,462	$	48.57

There were no options exercised during the nine months ended September 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 9 — 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, 2010 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,212,098 and 1,212,900. As of September 30, 2010 there were 4,462 options 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, 2009 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,213,598. As of September 30, 2009 there were 10,231 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 three month period ending September 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 September 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 September 30, 2010 total assets of the company were $260.8 million which represents an increase of $11.3 million or 4.5% from December 31, 2009. The Company recognized a decrease in the loan portfolio of $16.2 million or 10.7% while deposits increased $10.7 million and total cash and cash equivalents increased $26.6 million.

Loans

Net loans at September 30, 2010 decreased $14.5 million from December 31, 2009. A quarterly review of loan concentrations at September 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 13.4% of total loans.

Since December 31, 2009 commercial real estate mortgages have decreased $7.0 million while consumer mortgages have decreased $7.1 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

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


	Three Months Ended				Nine Month Ended
	September 30,				September 30,
	2010		2009		2010		2009
Beginning balance	$	1,214	$	2,212	$	2,863	$	1,996
Charge-offs:
Residential real estate		31		51		68		150
Consumer		33		12		95		54
Commercial real estate		150		95		1,897		185
Commercial		20		13		305		103

Total charge-offs		234		171		2,365		492

Recoveries:
Residential real estate		2		8		51		15
Consumer		3		5		25		18
Commercial real estate		5		7		41		22
Commercial		8		1		8		3

Total recoveries		18		21		125		58

Net charge-offs		216		150		2,240		434
Provision for loan losses		150		1,225		525		1,725

Ending balance	$	1,148	$	3,287	$	1,148	$	3,287

Net charge-offs for the year to date period totaled $2.2 million as of September 30, 2010 compared to $434,000 at September 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 expected losses on these 5 loans.

The balance of the allowance for loan loss at September 30, 2010 is $1.1 million compared to $3.3 million at September 30, 2009. Management performs an analysis of the adequacy of the allowance on a regular basis. The difference in the loan loss balance between the two periods is due to the specific allocations that were included in the loan loss balance at September 20, 2009 and was subsequently charged off in 2010. 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 in 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 $525,000 for the first nine months of 2010 compared to the prior year amount of $1.7 million in the first nine 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.


	September 30,			December 31,
	2010			2009
Nonaccrual	$	4,773		$	8,095
Loans past due 90 days or more		62			83
Troubled debt restructurings		—			260
Other real estate owned		3,108			2,660

Total nonperforming assets	$	7,943		$	11,098


Percent of total assets		3.05	%		4.45	%

At September 30, 2010, total nonperforming assets decreased by $3.2 million from December 31, 2009. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans decreased to $4.8 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 increased to $3.1 million since December 31, 2009. On September 23, 2010 Citizens National Bank held a bank-owned property auction. Due to the results of the auction, the Bank sold $530,000 of real estate. The closings for these purchase transactions will be completed in October and November 2010.

The decrease in non-performing assets can be attributed to the beginning of a leveling off from the multiple periods of continued deteriorating credit quality. Decreases are also due to loan charge-offs and the foreclosure of certain nonperforming loans and the underlying collateral being transferred to other real estate owned. Uncertainty in the local economic conditions continues and could result in continued weakness in credit quality.

The Company had 20 problem commercial loans totaling $5.0 million that were reviewed for impairment as of September 30, 2010. 7 of the 20 loans have a valuation allowance against loss potential. The balance of these 7 loans at September 30, 2010 totaled $1.6 million and the valuation allowance was $337,000.

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 September 30, 2010 increased $10.7 million since December 31, 2009. This increase is due primarily to regular deposit seasonality. Interest-bearing deposits increased $7.8 million or 4.2% for the nine months ended September 30, 2010, while noninterest-bearing deposits increased $2.9 million or 7.2%. As stated above, this increase in deposits is due for the most part to regular seasonal activity in 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, 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 $26.6 million to $43.9 million at September 30, 2010 . During the nine month period ending September 30, 2010, $2.6 million in cash was provided by operating activities . Investing activities provided $13.4 million during the nine months ended September 30, 2010, primarily due to the net decrease in portfolio loans and financing activities provided $10.7 million due to decreased deposits.

As of September 30, 2010, the Company had no federal funds sold, $39.7 million on deposit at the Federal Reserve, $46.6 million in securities available for sale and $491,000 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 36.9% of total deposits as of September 30, 2010 compared to 27.6% at December 31, 2009.

Total equity of the Company at September 30, 2010 was $21.2 million compared to $20.3 million at December 31, 2009. The increase in equity for the nine months ended September 30, 2010 is due to an increase in retained earnings from net income. The Board of Directors of CNB Corporation voted at its September 9, 2010 meeting that no dividend will be paid for the third quarter of 2010.

RESULTS OF OPERATIONS

CNB Corporations 2010 net income for the first nine months was $859,000, an increase of $111,000 compared to 2009 results. The change in net income can be attributed to multiple differences between the two nine month periods. 2010 net interest income was $275,000 behind 2009 results. Also contributing to the decrease in net income was a decrease in gains on sales of loans due to decreased mortgage activity. Additionally decreases 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. Offsetting the decreases in net income was a lower provision for loan losses at $525,000 in 2010 compared to $1.7 million in 2009. Also in 2010, the Company recorded $189,000 in gains on life insurance proceeds due to the death of a retired director. The return on assets was 0.46% for the first nine months of the year versus 0.38% for the same period in 2009. The return on equity was 5.49% compared to 5.39% for the same period last year.

Net income for the three months ending September 30, 2010 was $87,000 compared to a net loss of ($382,000) for 2009. This was an increase of $469,000. The return on average assets was 0.14% compared to (0.58)% for 2009. The return on average equity was 1.64% compared to (7.78%) for 2009. The increase in quarterly earnings is due for the most part to the lower provision from $1.2 million recorded in 2009 to $150,000 recorded in 2010. This difference was somewhat offset by additional write-downs and expenses related to the Banks ownership in foreclosed properties.

Interest income for the first nine months of 2010 was $7.9 million, a decrease of $1.4 million or 15.3% compared to the 2009 results. This decrease in interest income can be attributed to a continuing low rate environment coupled with loan payoffs and decreased loan volume. 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 September 30, 2010 was $2.5 million compared to $2.9 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 nine months of 2010 was $1.6 million, a decrease of $1.1 million or 41.2% compared to 2009 results. This decrease can be attributed to the decreasing rate environment.

Interest expense for the quarter ending September 30, 2010 was $511,000 compared to $868,000 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 nine months of 2010, net interest income was $6.2 million representing a decrease of 4.2% from the same period in 2009. The fully taxable equivalent net interest margin decreased to 3.73% for the nine month period ending September 30, 2010 compared to 3.77% for the same period ending September 30, 2009.

Year to date net charge-offs recorded in the allowance for loan losses were $2.2 million for 2010 compared to $434,000 for the same period in 2009. A provision expense of $525,000 was recorded in the first nine months of 2010 compared to $1.7 million in the first nine 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 nine months ending September 30, 2010 was $1.5 million, a decrease of $524,000 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. 2010 noninterest income included gains on life insurance proceeds of $189,000.

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. Gains on the sales of loans totaled $200,000 in 2010 and $352,000 in 2009. There have been fewer mortgage refinances in 2010 and therefore fewer gains realized from the sales of mortgages.

Noninterest income for the three month period ending September 30, 2010 was $516,000 compared to $491,000 for the same period last year. This represents an increase of $25,000.

Noninterest expense remained relatively unchanged for the first nine months of 2010 compared to 2009 results. Noninterest expense was $6.3 million, a decrease of $39,000 from the same period last year. 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 76 full-time equivalent employees as of September 30, 2009 to 74 full-time equivalent employees as of September 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 a $95,000 decrease in FDIC premiums for the first nine 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 September 30, 2010 was $2.3 million, an increase of $323,000 or 16.2% compared to 2009 results. This increase is primarily the result of write-downs from a bank owned property auction held by the Bank and the associated write-downs from the sales of those.

The provision for federal income tax was 10.1% of pretax income for the nine months ended September 30, 2010 as compared to a tax benefit of (45.2%) 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 Bank, HFW and Williams entered into a confidential settlement agreement dated as of August 1, 2010 on mutually acceptable terms, and this matter is now resolved.

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 September 9, 2010 announcing that no dividend was declared for the third quarter 2010.

A Current Report on Form 8-K was filed on November 12, 2010 updating the current status of legal proceedings

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CNB Corporation
	(Registrant)
Date: November 15, 2010	/s/ Susan A. Eno
	Susan A. Eno
	President and Chief Executive Officer


Date: November 15, 2010	/s/ Douglas W. Damm
	Douglas W. Damm
	Executive Vice President

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