Exhibit 99
Quarterly Shareholder Brochure of CNB Corporation
February 6, 2009
Dear Shareholders,
The unprecedented financial crisis of 2008 will go down in history as one of the most challenging years on record for the financial markets and, unfortunately, for Citizens National Bank as well. As a subsidiary of CNB Corporation, the bank’s performance directly impacts the performance of the corporation. Although the bank is reporting a large net loss for the year, “core” earnings remained strong. Had it not been for the investment and loan write downs, earnings for 2008 would have been near 2007’s net income of $3.1 million.
As reflected in the accompanying Statement of Condition, net income for the fourth quarter of 2008 includes a “pre-tax” write down on Money Market Preferred (MMP) investment securities in the amount of $5.2 million as a result of an “other-than-temporary” decline in the fair market value. The decline in fair value is due to the overall credit crisis, deterioration within the financial markets and lack of a market for these types of securities. This write down, plus the securities charges incurred in previous quarters, brings the aggregate impairment write-down of available-for-sale MMP securities to $7.1 million for the year ended December 31, 2008. The bank intends to hold the MMP investment securities anticipating the market will eventually return to a reasonable level and in spite of the decline in value the securities have been paying a dividend.
Loan quality remains a major concern and has negatively impacted earnings during 2008. The provision for loan losses in 2008 was $1.8 million compared to $275,000 in 2007; with actual loan losses for 2008 totaling $1.6 million compared to $126,000 for 2007. We continue to be vigilant in the identification and management of problem assets recognizing that borrowers are facing ever-increasing challenges due to the financial crisis. Nonaccrual loans continue to increase, many having already been identified with workout plans in place and actions taken to minimize losses. We will continue to pursue every opportunity to mitigate risk with existing borrowers, while continuing to book new loans, albeit with an increasingly conservative posture.
Further investment losses are expected to be minimal; however, further deterioration of the loan portfolio is likely to occur in the months ahead, although, we believe adherence to loan administration policies and practices will help lessen the economy’s impact on financial results.
Projections for 2009 include continued challenges and efforts remain focused on controlling operations, as we cannot control the external environment. As an example, the FDIC premium in 2009 is expected to be in excess of $500,000 in response to the increase in coverage for depositors. To help offset increased expenses, all officer bonuses for 2008 were suspended and 2009 management salaries and director fees were frozen at 2008 levels.
I have included a further explanation of the investment securities write-down in a question and answer format, and invite additional questions you might have.
I look forward to seeing you at the shareholder meeting on May 19, 2009.
Sincerely,
Susan A. Eno
President & CEO
President & CEO
Questions and Answers:
Write-down of Citizens National Bank’s Investment Securities
Write-down of Citizens National Bank’s Investment Securities
| Q. | Who determines how the bank can invest money? | |
| Citizens National Bank (CNB), like many other financial institutions, has excess funds to invest. Management works within an “Investment Policy” that allows for the investment of excess funds in a conservative manner, while providing for a diverse portfolio of highly rated investments. The investment policy is approved by the board of directors and reviewed by our external auditors and federal regulators. | ||
| Q. | If the bank’s investments are conservative, what happened? | |
| In 2006 and 2007 the bank purchased auction rate securities called Money Market Preferred (MMP) securities. These securities were presented as an option by the bank’s investment advisor and were highly rated at purchase by the investment rating agencies. This was a new type of investment for the bank, but not a new type of investment vehicle. | ||
| Q. | What are MMPs? | |
| MMP securities are auction rate securities that are sold at short term intervals at a dutch auction—where the price starts out high and goes down until someone agrees to purchase the securities. Interest rates are reset on each auction date. The underlying security for the investment is “preferred” stock. In essence, an auction rate security is a long-term debt issue, but it acts as if it were a shorter term issue. | ||
| Q. | Why are there losses? | |
| The value of many investment securities has been adversely affected as a result of the unprecedented financial crisis of the past months. Many auction agents suspended making a market in auction rate securities and this led to failed auctions. When the value of investment securities are deemed to be “other than temporarily impaired” (OTTI), the impairment must be reflected on the balance sheet of the company, thus the losses flow through to the income statement. | ||
| OTTI is an accounting rule under U.S. Generally Accepted Accounting Principles used to determine the value of a security, based on quantitative and qualitative analysis of the performance of the collateral supporting the security. Then an evaluation of the credit enhancement structure and determination of whether or not a principal loss is probable at any time during the life of the security are made. If a probable loss is determined, the security must be marked-to-market, even if the intent is to hold the security to maturity. OTTI losses, based on fair market values, must be recorded immediately. | ||
| Q. | Are there other investments that will be affected by OTTI? | |
| Each security is evaluated for OTTI and only those securities determined to be impaired will be marked-to-market. We believe the MMP securities are the only investments requiring the adjustment at this time. | ||
| Q. | Does the bank plan to sell the investments? If not, why? | |
| The bank does not plan to sell the investments at this time. The loss at this point is considered a non-cash loss, since we have not sold the security. When the market returns to a reasonable level, the bank will then determine when the investment is to be sold. The gain, if any, on the sale will be recorded as income. |
| Q. | What effect will this have on CNB? | |
| In spite of this write down CNB’s strong capital position remains intact and this write down does not have an effect on the strength of the bank. The bank continues to provide a strong base of core earnings and anticipates income for 2009 will return to a positive position. However, CNB Corporation shareholders are affected because this write down adversely affected dividends for 2008. | ||
| Q. | Can you provide a breakdown of how you arrived at core earnings? |
| Net Income (Deficit) for 2008 was | ($5.2 | million) | ||||||
| Add Back: | ||||||||
| Securities Write Downs | 7.1 | million | ||||||
| Loan Loss Provision | 1.8 | million | ||||||
| Expenses related to Bank ORE | .6 | million | (includes legal fees, home | |||||
| (Other Real Estate) | maintenance, taxes and insurance) | |||||||
| Deduct: | ||||||||
| Income Tax benefit of expenses | (1.5 | million) | ||||||
| Net Income from core earnings | $ | 2.8 | million | |||||
| Q. | What are CNB’s Capital Ratios compared to regulatory minimums? |
| CNB as of 12/31/2008 | Regulatory Minimum | |||||||
| Tier 1 Capital | 11.03 | % | 6.00 | % | ||||
| Leverage Ratio | 7.26 | % | 5.00 | % | ||||
| Total Risk Based Capital | 12.20 | % | 10.00 | % | ||||
FORWARD-LOOKING STATEMENTS:When used in this shareholder communication 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,” “intends” 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, changes in policies by regulatory agencies, fluctuations in interest rates, the risks of lending and investing activities, and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
Consolidated Balance Sheets
(UNAUDITED)
in thousands of dollars
(UNAUDITED)
in thousands of dollars
| December 31, 2008 | ||||||||
| 2008 | 2007 | |||||||
ASSETS | ||||||||
| Cash and due from banks | $ | 5,188 | $ | 8,844 | ||||
| Interest-bearing deposits with other financial institutions | 5,757 | 0 | ||||||
| Federal funds sold | 18,098 | 8,428 | ||||||
| Total cash and cash equivalents | 29,043 | 17,272 | ||||||
| Securities available for sale | 37,438 | 40,493 | ||||||
| Securities held to maturity (market value of $11,119 in 2008 and $8,882 in 2007) | 10,883 | 8,789 | ||||||
| Other securities | 1,008 | 1,008 | ||||||
| Total investment securities | 49,329 | 50,290 | ||||||
| Loans | 161,766 | 174,624 | ||||||
| Less allowance for loan losses | (1,996 | ) | (1,670 | ) | ||||
| Loans, Net | 159,770 | 172,954 | ||||||
| Premises and equipment, net | 6,019 | 6,353 | ||||||
| Other assets | 9,755 | 8,324 | ||||||
| Total assets | $ | 253,916 | $ | 255,193 | ||||
LIABILITIES | ||||||||
| Deposits | ||||||||
| Noninterest-bearing demand | $ | 37,163 | $ | 37,984 | ||||
| Interest-bearing deposits | 193,380 | 187,042 | ||||||
| Total deposits | 230,543 | 225,026 | ||||||
| Other liabilities | 5,833 | 5,767 | ||||||
| Total liabilities | 236,376 | 230,793 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
| Common Stock | 3,034 | 3,034 | ||||||
| Surplus | 19,509 | 19,509 | ||||||
| Retained Earnings and Accumulated other Comprehensive Loss | (5,003 | ) | 1,857 | |||||
| Total shareholders’ equity | 17,540 | 24,400 | ||||||
| Total liabilities and shareholders’ equity | $ | 253,916 | $ | 255,193 | ||||
Consolidated Statement of Income
(Unaudited)
(Unaudited)
in thousands of dollars
Twelve months ended December 31,
Twelve months ended December 31,
| INTEREST INCOME | 2008 | 2007 | 2006 | |||||||||
| Interest and fees on loans | $ | 11,653 | $ | 12,977 | $ | 12,149 | ||||||
| Interest on securities: | ||||||||||||
| Taxable | 1,718 | 2,054 | 1,861 | |||||||||
| Tax exempt | 553 | 489 | 482 | |||||||||
| Other interest income | 433 | 660 | 477 | |||||||||
| Total interest income | 14,357 | 16,180 | 14,969 | |||||||||
INTEREST EXPENSE ON DEPOSITS | 4,871 | 5,858 | 4,672 | |||||||||
NET INTEREST INCOME | 9,486 | 10,322 | 10,297 | |||||||||
| Provision for loan losses | 1,831 | 275 | 120 | |||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 7,655 | 10,047 | 10,177 | |||||||||
NON-INTEREST INCOME | ||||||||||||
| Service charges and fees | 1,200 | 1,194 | 1,049 | |||||||||
| Net realized gains from sale of loans | 128 | 154 | 166 | |||||||||
| Loan servicing fees, net of amortization | 117 | 127 | 119 | |||||||||
| Gain on the sale of othr real estate owned | 304 | 0 | 0 | |||||||||
| Gain on sale of premises and equipment | 0 | 12 | 521 | |||||||||
| Other income | 283 | 217 | 171 | |||||||||
| Total noninterest income | 2,032 | 1,704 | 2,026 | |||||||||
NONINTEREST EXPENSE | ||||||||||||
| Salaries and benefits | 4,398 | 4,397 | 4,365 | |||||||||
| Deferred compensation | 344 | 311 | 317 | |||||||||
| Occupancy | 1,098 | 1,152 | 1,053 | |||||||||
| Supplies | 170 | 220 | 222 | |||||||||
| Securities impairment write-down | 7,107 | 0 | 0 | |||||||||
| Other expenses | 2,313 | 1,501 | 1,597 | |||||||||
| Total noninterest expense | 15,430 | 7,581 | 7,554 | |||||||||
INCOME BEFORE INCOME TAXES | (5,743 | ) | 4,170 | 4,649 | ||||||||
| Income tax expense | (518 | ) | 1,082 | 1,326 | ||||||||
NET INCOME | ($5,225 | ) | $ | 3,088 | $ | 3,323 | ||||||
BASIC NET INCOME PER SHARE | ($4.31 | ) | $ | 2.51 | $ | 2.68 | ||||||