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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
Or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 033-00737
CNB CORPORATION
(Exact name of registrant as specified in its charter)
| Michigan (State or other jurisdiction of incorporation or organization) | 38-2662386 (I.R.S. Employer Identification No.) |
303 North Main Street, Cheboygan, MI 49721
(Address of principal executive offices, including Zip code)
(Address of principal executive offices, including Zip code)
Registrant’s telephone number, including area code (231) 627-7111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50 per share
(Title of Class)
Common Stock, par value $2.50 per share
(Title of Class)
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act
| Yeso | Noþ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
| Yeso | Noþ |
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.
| Yesþ | Noo |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| Yeso | Noo |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ
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 the definitions of “large accelerated filer. “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filero | Accelerated Filero | Non-Accelerated Filero(Do not check if a smaller reporting company) | Smaller reporting companyþ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yeso | Noþ |
As of June 30, 2010, the aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day the registrant’s most recently completed second fiscal quarter as reported by the Over the Counter Bulletin Board, was $11,514,931. The Registrant does not have any non-voting common equity.
As of March 18, 2011 there were outstanding 1,212,098 shares of the registrant’s common stock, $2.50 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s annual report to security holders for fiscal year ended December 31, 2010 are incorporated by reference in Part I and Part II of this report, and specified portions of the registrant’s proxy statement for its annual meeting of shareholders to be held May 17, 2011 are incorporated by reference in Part III of this report.
PART I
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 advises 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.
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ITEM 1-Business
CNB Corporation (the Company) was incorporated in June, 1985 as a business corporation under the Michigan Business Corporation Act, pursuant to the authorization and direction of the Board of Directors of the Citizens National Bank of Cheboygan (the Bank).
The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act with the Bank as its wholly-owned subsidiary. The Bank was acquired by the Company effective December 31, 1985. The Company has corporate power to engage in such activities as permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve Board. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or such other activities which are closely related to the business of banking.
During 2001, the Company, through its subsidiary, the Bank, formed the CNB Mortgage Corporation. Residential mortgages were transferred to the new subsidiary in October, 2001. The change had no impact on our customers who continue to have their loans serviced locally by our Bank. In November 2009, Citizens National Bank of Cheboygan and CNB Mortgage Corporation merged leaving Citizens National Bank of Cheboygan as the survivor.
The Bank offers a full range of banking services to individuals, partnerships, corporations, and other entities. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers.
The Bank’s lending function provides a full range of loan products. These include real estate mortgages, secured and unsecured commercial and consumer loans, lines of credit, home equity loans and construction financing. The Bank also participates in specialty loan programs through the Michigan State Housing Development Authority, Federal Home Loan Mortgage Corporation, Mortgage Guaranty Insurance Corporation, Farm Service Agency and Small Business Administration. Through correspondent relationships, the Bank also makes available credit cards.
The Bank’s loan portfolio consists of over 51% residential real estate mortgages on both primary and secondary homes. The residential borrower base is very diverse and loan to value ratios are generally 80% or less. The Bank does not engage in subprime lending and has not originated any loans that it would consider to be subprime mortgage loans. Commercial loans accounts for approximately 44% of total loans. Commercial real estate lending, a part of commercial loans, remained constant and represented 40% of total loans. These loans are generally for owner occupied properties with loan to value ratios of 80% or less. Personal guarantees are required on most commercial loans. Unsecured lending is very limited.
The Bank makes first and second mortgage loans to its customers for the purchase of residential and commercial properties. Historically, the Bank has sold its long term fixed rate residential mortgage loans qualifying for the secondary market to the Federal Home Loan Mortgage Corporation (FHLMC). The mortgage loan portfolio serviced by the Bank for the FHLMC totaled approximately $75 million at December 31, 2010.
Banking services are delivered through seven full-service banking offices and one drive-in branch plus nine automated teller machines in Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the counties is primarily tourism with light manufacturing. The Bank maintains correspondent bank relationships with several larger banks, which involve check clearing operations, transfer of funds, loan participations, and the purchase and sale of federal funds and other similar services.
Under various agency relationships, the Bank provides trust and discount brokerage services and mutual fund, annuity and life insurance products to its customers.
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In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac and Presque Isle Counties, the Bank is one of three principal banking institutions. One is a member of a multi-bank holding company with substantially more assets than the Company, while the other is an independent community bank. There are also three credit unions, one savings and loan association and a brokerage firm.
As of December 31, 2010, the Bank employed 73 full-time and 5 part-time employees. This compares to 72 full-time and 6 part-time employees as of December 31, 2009. The Company does not have any full-time employees. Its operations and business are carried out by officers and employees of the Bank who are not compensated by the Company.
Disclosure relating to the Distribution of Assets, Liabilities and Stockholders’Equity; Interest rates and Interest differential is presented on pages 51-52 of Registrant’s 2010 Annual Report which is incorporated herein by reference.
Securities
The year end fair values and related gross unrealized gains and losses for securities available for sale, were as follows:
Available for sale
| Gross | Gross | |||||||||||
| Fair | Unrealized | Unrealized | ||||||||||
| Value | Gains | Losses | ||||||||||
| (In thousands) | ||||||||||||
| 2010 | ||||||||||||
| U.S. Government and agency | $ | 38,100 | $ | 133 | $ | (123 | ) | |||||
| Mortgage-backed | 15,902 | 139 | (24 | ) | ||||||||
| State and municipal | 10,527 | 216 | (32 | ) | ||||||||
| Corporate obligations | 1,023 | 24 | — | |||||||||
| Auction rate securities | 1,000 | — | — | |||||||||
| Preferred shares | 36 | 14 | — | |||||||||
| $ | 66,588 | $ | 526 | $ | (179 | ) | ||||||
| 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 | ) | ||||||
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The year end carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
Held to Maturity
| Gross | Gross | |||||||||||||||
| Carrying | Unrecognized | Unrecognized | Fair | |||||||||||||
| Amount | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| 2010 | ||||||||||||||||
| State and municipal | $ | 8,442 | $ | 285 | $ | — | $ | 8,727 | ||||||||
| 2009 | ||||||||||||||||
| State and municipal | $ | 10,302 | $ | 556 | $ | (21 | ) | $ | 10,837 | |||||||
Scheduled maturities of the fair value of securities available for sale and the carrying amount of held to maturity securities at December 31, 2010, were as follows:
| Due in | Due from | Due from | Due | |||||||||||||||||
| One year | One to | Five to | After ten | |||||||||||||||||
| Or less | Five years | Ten years | Years | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| U.S. Government and agency | $ | 8,075 | $ | 29,061 | $ | 964 | $ | — | $ | 38,100 | ||||||||||
| Mortgage-backed | 865 | 828 | 1,552 | 12,657 | 15,902 | |||||||||||||||
| State and municipal | 2,771 | 10,674 | 4,294 | 1,230 | 18,969 | |||||||||||||||
| Corporate obligations | — | 1,023 | — | — | 1,023 | |||||||||||||||
| Aucton rate securities | — | — | — | 1,000 | 1,000 | |||||||||||||||
| Preferred shares | — | — | — | 36 | 36 | |||||||||||||||
| $ | 11,711 | $ | 41,586 | $ | 6,810 | $ | 14,923 | $ | 75,030 | |||||||||||
| Yield | 2.00 | % | 1.76 | % | 3.54 | % | 3.04 | % | 2.21 | % | ||||||||||
The Company held securities exceeding 10% of shareholders’ equity for the following states (including its political subdivisions) at December 31, 2010:
| Book | Fair | |||||||
| Value | Value | |||||||
| (In thousands) | ||||||||
| Michigan | $ | 13,686 | $ | 14,317 | ||||
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Loans
The following is a summary of loans at December 31:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Residential real estate | $ | 67,695 | $ | 77,152 | $ | 77,734 | $ | 83,264 | $ | 82,842 | ||||||||||
| Consumer | 6,016 | 7,002 | 7,518 | 8,709 | 9,444 | |||||||||||||||
| Commercial real estate | 52,654 | 60,150 | 67,282 | 68,445 | 61,740 | |||||||||||||||
| Commercial | 5,375 | 6,903 | 9,314 | 14,234 | 13,208 | |||||||||||||||
| 131,740 | 151,207 | 161,848 | 174,652 | 167,234 | ||||||||||||||||
| Deferred loan origination fees, net | (224 | ) | (173 | ) | (82 | ) | (28 | ) | (6 | ) | ||||||||||
| Allowance for loan losses | (2,354 | ) | (2,863 | ) | (1,996 | ) | (1,670 | ) | (1,498 | ) | ||||||||||
| $ | 129,162 | $ | 148,171 | $ | 159,770 | $ | 172,954 | $ | 165,730 | |||||||||||
Maturity and Rate Sensitivity of Selected Loans
The following table presents the remaining maturity of total loans outstanding excluding residential real estate and consumer loans at December 31, 2010, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity of changes in interest rates.
| Total | ||||
| (In thousands) | ||||
| In one year or less | $ | 25,305 | ||
| After one year but within five years: | ||||
| Interest rates are floating or adjustable | — | |||
| Interest rates are fixed or predetermined | 30,069 | |||
| After five years: | ||||
| Interest rates are floating or adjustable | — | |||
| Interest rates are fixed or predetermined | 2,655 | |||
| $ | 58,029 | |||
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Summary of loan loss experience is as follows:
Additional information relative to the allowance for loan losses is presented in the following table. This table summarizes loan balances at the end of each period and daily average balances, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense.
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Balance at beginning of period | $ | 2,863 | $ | 1,996 | $ | 1,670 | $ | 1,498 | $ | 1,456 | ||||||||||
| Less charge-offs: | ||||||||||||||||||||
| Residential real estate | 98 | 310 | 373 | 57 | 2 | |||||||||||||||
| Consumer | 111 | 82 | 214 | 59 | 63 | |||||||||||||||
| Commercial real estate | 2,221 | 442 | 836 | — | — | |||||||||||||||
| Commercial | 20 | 124 | 128 | 10 | 39 | |||||||||||||||
| Total charge-offs: | 2,450 | 958 | 1,551 | 126 | 104 | |||||||||||||||
| Recoveries: | ||||||||||||||||||||
| Residential real estate | 41 | 14 | 3 | 5 | 6 | |||||||||||||||
| Consumer | 28 | 23 | 25 | 16 | 19 | |||||||||||||||
| Commercial real estate | 93 | 53 | 13 | — | — | |||||||||||||||
| Commercial | 13 | 10 | 5 | 2 | 1 | |||||||||||||||
| Total recoveries | 175 | 100 | 46 | 23 | 26 | |||||||||||||||
| Net charge-offs | 2,275 | 858 | 1,505 | 103 | 78 | |||||||||||||||
| Provision charged to expense | 1,766 | 1,725 | 1,831 | 275 | 120 | |||||||||||||||
| Allowance for loan losses, end of period | $ | 2,354 | $ | 2,863 | $ | 1,996 | $ | 1,670 | $ | 1,498 | ||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Total loans outstanding at end of period | $ | 131,740 | $ | 151,207 | $ | 161,848 | $ | 174,652 | $ | 167,234 | ||||||||||
| Average loans outstanding for the year | $ | 142,404 | $ | 161,400 | $ | 170,355 | $ | 172,144 | $ | 163,146 | ||||||||||
| Ratio of net charge-offs to daily average loans outstanding | 1.60 | % | 0.53 | % | 0.88 | % | 0.06 | % | 0.05 | % | ||||||||||
| Ratio of net charge-offs to total loans outstanding | 1.73 | % | 0.57 | % | 0.93 | % | 0.06 | % | 0.05 | % | ||||||||||
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The allocation of the allowance for loan losses for the years ended December 31 is:
| Residential | Commercial | |||||||||||||||||||||||
| Real Estate | Consumer | Real Estate | Commercial | Unallocated | Total | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| 2010 Allowance amount | $ | 186 | $ | 107 | $ | 2,000 | $ | 43 | $ | 18 | $ | 2,354 | ||||||||||||
| % of Total loans | 51.4 | % | 4.6 | % | 40.0 | % | 4.1 | % | 100.0 | % | ||||||||||||||
| 2009 Allowance amount | $ | 340 | $ | 107 | $ | 1,996 | $ | 386 | $ | 34 | $ | 2,863 | ||||||||||||
| % of Total loans | 51.0 | % | 4.6 | % | 39.8 | % | 4.6 | % | 100.0 | % | ||||||||||||||
| 2008 Allowance amount | $ | 169 | $ | 52 | $ | 1,311 | $ | 379 | $ | 85 | $ | 1,996 | ||||||||||||
| % of Total loans | 48.0 | % | 4.6 | % | 41.6 | % | 5.8 | % | 100.0 | % | ||||||||||||||
| 2007 Allowance amount | $ | 446 | $ | 97 | $ | 814 | $ | 268 | $ | 45 | $ | 1,670 | ||||||||||||
| % of Total loans | 47.7 | % | 5.1 | % | 39.2 | % | 8.1 | % | 100.0 | % | ||||||||||||||
| 2006 Allowance amount | $ | 437 | $ | 98 | $ | 655 | $ | 228 | $ | 80 | $ | 1,498 | ||||||||||||
| % of Total loans | 49.5 | % | 5.6 | % | 36.9 | % | 8.0 | % | 100.0 | % | ||||||||||||||
The review of the loan portfolio revealed no undue concentrations of credit, however, the portfolio continues to be concentrated in residential real estate mortgages and highly dependent upon the tourist industry for the source of repayment. Because the reliance on tourism is both primary, (i.e. loans to motels, hotels, and restaurants, etc.) and secondary (i.e. loans to employees of tourist related businesses), it is difficult to assess a specific dollar amount of inherent loss potential. Likewise, the residential real estate market has been decreasing, so inherent loss potential in this concentration is also difficult to reasonably assess. Therefore, the tourism industry and residential real estate mortgage concentrations are considered in establishing the allowance for loan loss.
The following is a summary of nonaccrual, past due and restructured loans as of December 31:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Nonaccrual loans | $ | 6,892 | $ | 8,095 | $ | 5,356 | $ | 831 | $ | — | ||||||||||
| Loans past due 90 days or more | 99 | 83 | 295 | 387 | 177 | |||||||||||||||
| Troubled debt restructurings | 233 | 260 | 393 | — | — | |||||||||||||||
| $ | 7,224 | $ | 8,438 | $ | 6,044 | $ | 1,218 | $ | 177 | |||||||||||
Deposits
The following table presents the remaining maturity of time deposits individually exceeding $100,000 at December 31, 2010. Dollars are reported in thousands.
| 3 Months or less | $ | 4,143 | ||
| Over 3 Months to 6 Months | 2,043 | |||
| Over 7 Months through 12 Months | 5,862 | |||
| Over 12 Months | 13,119 | |||
| $ | 25,167 | |||
Various ratios required by this section and other ratios commonly used in analyzing bank holding company financial statements are included in page 1 of Registrant’s 2010 Annual Report, which is incorporated herein by reference.
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Supervision and Regulation
As a bank holding company within the meaning of the Bank Holding Company Act, the Company is required to file quarterly and annual reports of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiary, to examination by the Federal Reserve Board. The Federal Reserve Board is the primary regulator of the Company.
The Bank Holding Company Act requires every bank holding company to obtain prior approval of the Federal Reserve Board before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. However, holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be so closely related to banking or the management or control of banks as to be a proper incident thereto.
Under current regulations of the Federal Reserve Board, a holding company and its nonbank subsidiaries are permitted, among other activities, to engage, subject to certain specified limitations, in such banking related business as consumer finance, equipment leasing, computer service bureau and software operations, data processing, discount securities brokerage, mortgage banking and brokerage, sale and leaseback, and other forms of real estate banking. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies.
In addition, Federal legislation prohibits acquisition of “control” of a bank or bank holding company without prior notice to certain federal bank regulators. “Control” in certain cases may include the acquisition of as little as 10% of the outstanding shares of capital stock.
The Company’s cash revenues are derived primarily from dividends paid by the Bank. Without prior approval, a national bank may not declare a dividend if the total amount of all dividends declared by the bank in any calendar year exceeds the total bank’s retained net income for the current year and retained net income for the preceding two years. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be “undercapitalized.”
The Bank is a national banking association and as such is subject to the regulations of, and supervision and regular examination by, the Office of the Comptroller of the Currency (“OCC”). Deposit accounts of the bank are insured by the Federal Deposit Insurance Corporation (“FDIC”). Requirements and restrictions under the laws of the State of Michigan and Title 12 of the United States Code include the requirements that banks maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by a bank, and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits, and restrictions relating to investments and other activities of a bank. The Federal Reserve Board has established guidelines for risk based capital by bank holding companies. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance sheet items in the calculation of capital requirements.
An analysis of the Bank’s regulatory capital requirements at December 31, 2010 is presented on pages 39-40 of the Registrant’s 2010 Annual Report in Note 16 Regulatory Capital to the Company’s consolidated financial statements, which is incorporated herein by reference.
The Bank participated in the FDIC’s Transaction Account Guarantee Program (TAGP), which originally provided FDIC insurance coverage for all non-interest and certain interest bearing transaction accounts through December 31, 2009.
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FDIC coverage on interest bearing transaction accounts had included those paying rates no higher than 0.50%. The initial increase in FDIC insurance coverage was limited to savings accounts with maximum coverage of $250,000; TAGP effectively provided 100% FDIC coverage of all funds on deposit in covered transaction accounts through December 31, 2009. Prior to the original December 31, 2009 TAGP expiration date, the insurance coverage under the TAGP was extended, effectively providing coverage through June 30, 2010. Prior to the June 30, 2010 extended expiration date, the TAGP was extended for a second time through December 31, 2010. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), adopted July 21, 2010, extended coverage similar to that provided under the TAGP through December 31, 2012 for only non-interest bearing transaction accounts. This coverage applies to all insured depository institutions and there is no separate FDIC assessment for the insurance. Furthermore, this unlimited coverage is separate from, and in addition to, the coverage provided to depositors with respect to other accounts held at an insured depositry institution.
The Dodd-Frank is an expansive federal law affecting many areas of the financial services industry. This law includes, among other things:
| • | The creation of a new Consumer Financial Protection bureau with power to promulgate and, with respect to financial institutions with assets of more than $10 billion, enforce financial consumer protection laws; | ||
| • | The creation of the Financial Stability Oversight Council chaired by the Secretary of Treasury with the authority to identify institutions and practices that might pose a systemic risk to the U.S. economy; | ||
| • | Provisions effecting corporate governance and executive compensation of all companies whose securities are registered with the SEC; | ||
| • | Provisions changing the assessment base and procedures for making FDIC deposit insurance assessments and permanently increasing FDIC deposit insurance limit to $250,000; | ||
| • | Provisions that will require bank regulators to set minimum capital levels for bank holding companies that are at least as strong as those required for their insured depository institution subsidiaries; | ||
| • | New restrictions on how mortgage brokers and loan originators may be compensated; and | ||
| • | Provisions imposing risk retention requirements on originators of certain non-qualified residential mortgage loans. |
When implemented, these provisions may impact our business operations and may negatively affect our earnings and financial condition by affecting our ability to offer certain products or earn certain fees and by exposing us to increased compliance and other costs. Many aspects of this new law are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers or the financial services industry generally.
Additionally, under its Debt Guarantee Program (DGP), the FDIC will guarantee the payment of newly issued senior unsecured debt of a financial institution based on the earlier of the maturity date of the debt or June 30, 2012. As there is no cost until the FDIC-guarantee is accessed, the Bank is participating in the DGP although it has no debt and does not anticipate incurring any debt.
In light of current conditions in the U.S. and global financial markets, regulators have increased their focus on regulation of the financial services industry. Proposals that could intensify the regulation of the financial services industry are being or are expected to be introduced in the U.S. Congress, in state legislatures and from applicable regulatory authorities. These proposals may change banking statutes and regulations and, as a result, our operating environment. We cannot forecast whether any of these proposals or regulations will be enacted and, if enacted, the effect that they would have on our business, results of operation or financial condition.
ITEM 1A-Risk Factors
Not applicable.
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ITEM 1B-Unresolved Staff Comments
Not applicable.
ITEM 2-Properties
The Company and the Bank have their primary office at 303 North Main Street, Cheboygan, Michigan. In addition, the Bank owns and operates the following facilities: Cheboygan South, 10854 North Straits Highway; Onaway Office, 20581 W. State Street, Onaway; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw City; Pellston Office, 200 Stimpson, Pellston; Indian River Office, 3990 Straits Highway, Indian River, Alanson Office, 8011 S. US 31, Alanson and Downtown drive-in, 414 Division Street, Cheboygan. All properties are owned by the Bank free of any mortgages or encumbrances but for the Alanson Office property upon which there is a purchase money mortgage which was entered into to accommodate the seller.
ITEM 3-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 was the consequence of losses incurred by the Bank as a result of its purchase of money market preferred (MMP) securities (also known as auction rate securities) beginning in 2006 and ending in 2007 on the advice of Mr. Williams. Upon subsequent review and investigation the Bank 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 were: (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 4-Reserved.
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PART II
ITEM 5-Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is listed on the OTC Bulletin Board under the symbol “CNBZ”. All trades are handled on a direct basis between buyer and seller. The Bank acts as the Company’s transfer agent. The principal market for the Company’s stock consists of existing shareholders, family members of existing shareholders and individuals in the service area.
The information detailing the range of high and low selling prices of known transactions for the Company’s common stock and cash dividends declared for each full quarterly period within the two most recent fiscal years can be found under the caption “Financial Highlights” on page 1 of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, which is hereby incorporated by reference.
The information which indicates the amount of common stock that is subject to outstanding options or warrants to purchase, or securities convertible into, common equity of the registrant can be found in Note 9 on page 30 of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, which is hereby incorporated by reference.
There are approximately 976 shareholders of record of common stock of the Company as of February 28, 2011.
During 2010 the Company did not declare any dividends. The information detailing the cash dividends declared within the two most recent fiscal years can be found on page 62 of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, which is hereby incorporated by reference. The dividend payout ratio has averaged 5.57% for the three year period ended December 31, 2010.
The Federal Reserve Board’s policy of Cash Dividends by Bank Holding Companies restricts the payment of cash dividends based on the following criteria: (1) the Company’s net income from operations over the past year must be sufficient to fully fund the dividend and (2) the prospective rate of earnings retention must be consistent with the Company’s capital needs, asset quality and overall financial condition.
ITEM 6-Selected Financial Data
The information required by this item is included on Page 1 under the caption “Financial Highlights” of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, which is hereby incorporated by reference.
ITEM 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is included on pages 45 through 58 of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, which is hereby incorporated by reference.
ITEM 7A-Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is included on pages 51 through 52 of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, which is hereby incorporated by reference.
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ITEM 8-Financial Statements and Supplementary Data
This information included on pages 2 through 43 of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2010, is hereby incorporated by reference.
ITEM 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A-Controls and Procedures
Disclosure on Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, that are designed to cause the material information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.
As of the end of the period covered by this report, the Company performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.
Report on Management’s Assessment of Internal Control over Financial Reporting
The management of CNB Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined under applicable Securities and Exchange Commission rules as a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
| • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2010, management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2010.
| /s/ Susan A. Eno | /s/ Shanna L. Hanley | |
| Susan A. Eno | Shanna L. Hanley | |
| President and Chief Executive Officer | Treasurer (Principal Financial and Accounting Officer) |
Changes in Internal Control over Financial Reporting
No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B-Other Information
None.
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PART III
ITEM 10-Directors, Executive Officers and Corporate Governance
Certain information required by this item is included under the captions “Information about Director Nominees,” “Committees and Meetings of the Board of Directors,” “Code of Ethics,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s proxy statement for the annual meeting of shareholders scheduled for May 17, 2011, which is hereby incorporated by reference.
Information about the executive officers of the Corporation is set forth below.
| Name and Age | Position | |
| Vincent J. Hillesheim, 60 | Chairman of the Corporation and Citizens National Bank of Cheboygan. Mr. Hillesheim was elected Chairman in 2006. | |
| Susan A. Eno, 56 | Chief Executive Officer and President of the Corporation and Citizens National Bank of Cheboygan. Ms. Eno has been an officer of the Corporation since 1996 and an employee of the Bank since 1971. She has been in her current position since January 1, 2008 and was in her previous position as Executive Vice President and Secretary of the Corporation and Executive Vice President and Cashier of Citizens National Bank of Cheboygan for more than 11 years. | |
| Douglas W. Damm, 57 | Senior Vice President of the Corporation and Citizens National Bank of Cheboygan. Mr. Damm has been an officer of the Corporation since 2003 and an employee of the Bank since 1987. He has been in his current position for more than 23 years and has 32 years experience in the banking business. | |
| Shanna L. Hanley, 33 | Treasurer of the Corporation; Vice President and Senior Controller of Citizens National Bank of Cheboygan. Ms. Hanley joined the Bank during 2005. |
Item 11-Executive Compensation
The information required by this item is included under the caption “Compensation Discussion and Analysis” and “Executive Compensation” of the Company’s proxy statement for the annual meeting of shareholders scheduled for May 17, 2011, which is hereby incorporated by reference.
Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is included under the caption “Ownership of Common Stock” of the Company’s proxy statement for the annual meeting of shareholders scheduled for May 17, 2011, which is hereby incorporated by reference.
The Company did not have any securities authorized for issuance under equity compensation plans as of December 31, 2010.
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Item 13-Certain Relationships and Related Transactions, and Director Independence
The information required by this item is included under the caption “Certain Relationships and Related Transactions” in the Company’s proxy statement for the annual meeting of shareholders scheduled for May 17, 2011, which is hereby incorporated by reference.
Item 14-Principal Accountant Fees and Services
The information required by this item is included under the caption “Independent Auditors” in the Company’s proxy statement for the annual meeting of shareholders scheduled for May 17, 2011, which is hereby incorporated by reference.
PART IV
Item 15-Exhibits and Financial Statement Schedules
| (a) | (1) Financial Statements. The following financial statements, notes to financial statements and Report of Independent Registered Public Accounting Firm are referenced in Item 8 of this report and are hereby incorporated by reference: | ||
| Consolidated Balance Sheets-December 31, 2010 and 2009. | |||
| Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008. | |||
| Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008. | |||
| Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008. | |||
| Notes to Consolidated Financial Statements. | |||
| Report of Independent Registered Public Accounting Firm dated March 30, 2011. | |||
| (2) Financial Statement Schedules. Not applicable | |||
| (3) Exhibits. |
(3a) Articles of Incorporation. Previously filed as exhibit to the registrant’s Form 10-KSB filed April 26, 1996, and hereby incorporated by reference.
(3b) By-Laws as amended through March 25, 2004. Previously filed as Exhibit 3b to the Company’s Form 10-K for the fiscal year ended December 31, 2003 filed December 27, 2004, and hereby incorporated by reference.
(10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the Company’s Form 10-Q for the quarter ended September 30, 1996 and hereby incorporated by reference.
(11) Statement regarding computation of per share earnings. This information is disclosed in Note 11 to the Company’s Financial Statements for the year ended December 31, 2010, which are included in the annual report to shareholders for the year ended December 31, 2010 which is filed as Exhibit 13 to the
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Company’s Form 10-K for the fiscal year ended December 31, 2010, and hereby incorporated by reference.
(13) Annual report to shareholders for the year ended December 31, 2010. (filed herewith).
(21) Subsidiaries of the Company. (filed herewith).
(23) Consent of Independent Registered Public Accounting Firm. (filed herewith).
(31.1) Certification of Chief Executive Officer. (filed herewith).
(31.2) Certification of Chief Financial Officer. (filed herewith).
(32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith).
(32.2) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith).
(b) See Item 15(a) (3) above.
(c) Financial Statement Schedules. Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
(Registrant)
Date: March 24, 2011
| /s/ Susan A. Eno | ||||
| Susan A. Eno | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 2011.
| /s/ Steven J. Baker | /s/ Kathleen A. Lieder | /s/ Shanna L. Hanley | ||
| Steven J. Baker | Kathleen A. Lieder | Shanna L. Hanley | ||
| Director | Director | Treasurer (Principal Financial and Accounting Officer) | ||
| /s/ James C. Conboy, Jr. | /s/ R. Jeffery Swadling | |||
| James C. Conboy, Jr. | R. Jeffery Swadling | |||
| Director | Director | |||
| /s/ Kathleen M. Darrow | /s/ Francis J. VanAntwerp, Jr. | |||
| Kathleen M. Darrow | Francis J. VanAntwerp, Jr. | |||
| Director | Director | |||
| /s/ Thomas J. Ellenberger | /s/ Susan A. Eno. | |||
| Thomas J. Ellenberger | Susan A. Eno. | |||
| Director | Director | |||
| President and Chief Executive Officer | ||||
/s/ Vincent J. Hillesheim | ||||
| Vincent J. Hillesheim | ||||
| Director | ||||
| Chairman |
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EXHIBIT INDEX
(3a) Articles of Incorporation. Previously filed as an exhibit to the registrant’s Form 10-KSB filed April 26, 1996 and hereby incorporated by reference.
(3b) By-Laws as amended through March 25, 2004. Previously filed as Exhibit 3b to the Company’s Form 10-K for the fiscal year ended December 31, 2003 filed December 27, 2004, and hereby incorporated by reference.
(10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the Company’s Form 10-Q for the quarter ended September 30, 1996 and hereby incorporated by reference.
(11) Statement regarding computation per share earnings. This information is disclosed in Note 11 to the Company’s Financial Statements for the year ended December 31, 2010 which are included in the annual report to shareholders for the year ended December 31, 2010 which is filed as Exhibit 13 to the Company’s Form 10-K for the fiscal year ended December 31, 2010, and hereby incorporated by reference.
(13) Annual report to shareholders for the year ended December 31, 2010. (filed herewith)
(21) Subsidiaries of the Company. (filed herewith)
(23) Consent of Independent Registered Public Accounting firm. (filed herewith)
(31.1) Certification of Chief Executive Officer. (filed herewith)
(31.2) Certification of Chief Financial Officer. (filed herewith)
(32.1) Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (filed herewith)
(32.2) Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (filed herewith)
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