UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
Commission file # 0-28388
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)
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 (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes ( ) No (X)
As of November 6, 2006 there were 1,238,962 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, 2006 and
December 31, 2005........................................... 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2006 and 2005..... 4
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2006 and 2005................................. 5
Notes to Consolidated Financial Statements..................... 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..... 13
Item 4 - Controls and Procedures........................................ 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................. 14
Item 1A - Risk Factors.................................................. 14
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.... 14
Item 3 - Defaults Upon Senior Securities................................ 14
Item 4 - Submission of Matters to a Vote of Security Holders............ 14
Item 5 - Other Information.............................................. 14
Item 6 - Exhibits and Reports on Form 8-K............................... 14
Signatures.............................................................. 15-18
Exhibit Index........................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
September 30, December 31,
2006 2005
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 6,642 $ 6,586
Interest-bearing deposits with other financial institutions 9,065 --
Federal funds sold 6,655 5,357
-------- --------
Total cash and cash equivalents 22,362 11,943
Securities available for sale 57,517 69,315
Securities held to maturity (market value of $4,908 in 2006
and $4,128 in 2005) 4,869 4,117
Other securities 1,023 1,053
Loans, held for sale 873 51
Loans, net of allowance for loan losses of $1,508 in 2006
and $1,456 in 2005 162,873 154,811
Premises and equipment, net 6,204 5,443
Other assets 6,035 5,998
-------- --------
Total assets $261,756 $252,731
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 41,598 $ 38,943
Interest-bearing 189,368 184,494
-------- --------
Total deposits 230,966 223,437
Other liabilities 4,991 4,795
-------- --------
Total liabilities 235,957 228,232
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; and 1,238,962 and 1,237,418 shares
issued and outstanding in 2006 and 2005 3,098 3,094
Additional paid-in capital 20,465 20,430
Retained earnings 2,500 1,576
Accumulated other comprehensive loss, net of tax (264) (601)
-------- --------
Total shareholders' equity 25,799 24,499
-------- --------
Total liabilities and shareholders' equity $261,756 $252,731
======== ========
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- ------
(Unaudited) (Unaudited)
INTEREST INCOME
Loans, including fees $3,114 $2,653 $ 8,943 $7,677
Securities
Taxable 453 528 1,362 1,574
Tax exempt 121 136 358 440
Other interest income 198 82 358 189
------ ------ ------- ------
Total interest income 3,886 3,399 11,021 9,880
INTEREST EXPENSE ON DEPOSITS 1,229 836 3,355 2,215
------ ------ ------- ------
NET INTEREST INCOME 2,657 2,563 7,666 7,665
Provision for loan losses 30 30 90 90
------ ------ ------- ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,627 2,533 7,576 7,575
------ ------ ------- ------
NONINTEREST INCOME
Service charges and fees 296 253 765 710
Net realized gains from sales of loans 31 71 113 183
Loan servicing fees, net of amortization 39 37 98 94
Gain on sale of premises and equipment 8 -- 517 --
Other income 40 40 132 443
------ ------ ------- ------
Total noninterest income 414 401 1,625 1,430
NONINTEREST EXPENSES
Salaries and employee benefits 905 861 2,654 2,475
Deferred compensation 80 110 240 576
Pension 65 54 194 210
Hospitalization 151 137 436 400
Occupancy 275 234 812 653
Supplies 42 33 153 125
Legal and professional 79 117 274 349
Other expenses 338 287 959 805
------ ------ ------- ------
Total noninterest expense 1,935 1,833 5,722 5,593
------ ------ ------- ------
INCOME BEFORE INCOME TAXES 1,106 1,101 3,479 3,412
Income tax expense 312 332 995 906
------ ------ ------- ------
NET INCOME $ 794 $ 769 $ 2,484 $2,506
====== ====== ======= ======
TOTAL COMPREHENSIVE INCOME $1,049 $ 726 $ 2,821 $2,392
====== ====== ======= ======
Return on average assets (annualized) 1.23% 1.16% 1.30% 1.29%
Return on average equity (annualized) 12.37% 12.36% 13.16% 13.52%
Basic earnings per share $ 0.64 $ 0.62 $ 2.01 $ 2.03
Diluted earnings per share $ 0.64 $ 0.62 $ 2.00 $ 2.02
Dividends declared per share $ 0.42 $ 0.40 $ 1.26 $ 1.20
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Nine months ended
September 30,
-------------------
2006 2005
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,484 $ 2,506
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net 251 379
Provision for loan losses 90 90
Loans originated for sale (5,729) (8,781)
Proceeds from sales of loans originated for sale 4,957 8,688
Gain on sales of loans (113) (183)
Gain on sales of premises and equipment (517) --
Increase in other assets (114) (1,653)
Increase in other liabilities 912 727
-------- --------
Total adjustments (263) (733)
-------- --------
Net cash provided by operating activities 2,221 1,773
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 26,359 15,884
Purchase of securities available for sale (13,840) (14,458)
Proceeds from maturities of securities held to maturity 1,687 1,814
Purchase of securities held to maturity (2,439) (1,450)
Proceeds from maturities of other securities 30 2,350
Purchase of other securities -- (58)
Net change in portfolio loans (8,187) (7,547)
Premises and equipment expenditures (1,254) (767)
Proceeds from sale of premises and equipment 550 --
-------- --------
Net cash provided by (used in) investing activities 2,906 (4,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,529 5,794
Dividends paid (2,276) (2,216)
Net proceeds from exercise of stock options 44 21
Purchases of common stock (5) (97)
-------- --------
Net cash provided by financing activities 5,292 3,502
-------- --------
Net change in cash and cash equivalents 10,419 1,043
Cash and cash equivalents at beginning of year 11,943 12,695
-------- --------
Cash and cash equivalents at end of period $ 22,362 $ 13,738
======== ========
Cash paid during the period for:
Interest $ 3,266 $ 2,177
Income taxes 844 1,017
Non-cash transactions:
Transfer from loans to other real estate owned 35 590
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Basis of Presentation
The consolidated financial statements include the accounts of CNB Corporation
("Company") and its wholly owned subsidiary, Citizens National Bank of Cheboygan
("Bank") and the Bank's wholly owned subsidiary CNB Mortgage Corporation. All
significant intercompany accounts and transactions are eliminated in the
consolidation process. The statements have been prepared by management without
an audit by independent certified public accountants. However, these statements
reflect all adjustments (consisting of normal recurring accruals) and
disclosures which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented and should be read
in conjunction with the notes to the consolidated financial statements included
in the CNB Corporation's Form 10-K for the year ended December 31, 2005.
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.
Stock Compensation: Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment, which
requires companies to record compensation expense for stock options provided to
employees in return for employee service. The cost is measured at the fair value
of the options when granted, and this cost is expensed over the employee's
service period, which is normally the vesting period of the options. This will
apply to awards granted or modified after adoption and for prior grants that
vest after the date of adoption. As of and for the nine months ended September
30, 2006 there was no unrecognized compensation expense or recorded compensation
expense as there were no options granted or modified during this period and all
previously granted options were fully vested prior to 2006. The effect on future
results of operations will depend on the level of future option grants and the
calculation of the fair value of the options granted at such future date, as
well as the vesting periods provided, and so cannot currently be predicted.
Prior to December 31, 2005 stock-based compensation was accounted for using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost of stock options was measured as the excess, if
any, of the fair value of our stock at the date of grant over the grant price
and no stock-based employee compensation cost was reflected in the income
statements for the periods ended prior to December 31, 2005. The effect on net
income and earnings per share if expense was measured using the fair value
recognition provisions of FASB Statement No. 123, was less than $.01 per share
for the three and nine months ended September 30, 2005.
There were no stock options granted during the nine months ended September 30,
2006 and 2005.
The Company adopted a stock option plan in May 1996 under which the options may
be issued at market prices to employees. Stock options are used to reward
certain officers and provide them with an additional equity interest. Options
are 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.
6
Information about options available for grant, options outstanding and options
exercisable follows:
Weighted
Weighted Average
Average Remaining Aggregate
Available Options Exercise Contractual Intrinsic
For Grant Outstanding Price Term Value
--------- ----------- -------- ----------- ---------
Balance at January 1, 2006 9,952 25,932 $47.35
Options exercised -- (1,644) 26.66
----- ------
Balance at September 30, 2006 9,952 24,288 $48.76 4.0 years $41,000
===== ======
The aggregate intrinsic value of options exercised for the three and nine months
ended September 30, 2006 was approximately $1,800 and $29,800 respectively. The
aggregate intrinsic value of options exercised for the three and nine months
ended September 30, 2005 was approximately $200 and $3,600. There were no shares
vested for the same periods.
Cash received from option exercises for the three and nine month periods ending
September 30, 2006 was approximately $7,000 and $44,000 and for the three and
nine month periods ending September 30, 2005 was approximately $10,000 and
$21,000, respectively. There was no tax benefit realized from option exercises
during the same periods.
There have been no significant changes in the Company's critical accounting
policies since December 31, 2005.
Note 2-New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109." FIN 48 requires that realization of
an uncertain income tax position be "more likely than not" before it can be
recognized in the financial statements. Further, FIN 48 prescribes the benefit
to be recorded in the financial statements as the amount most likely to be
realized assuming a review by tax authorities having all relevant information
and applying current conventions. FIN 48 also clarifies the financial statement
classification of tax-related penalties and interest and sets forth new
disclosures regarding unrecognized tax benefits. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
requirements of FIN 48 and the impact this interpretation may have on its
financial statements.
In September 2006, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) 108. This SAB provides detailed guidance to
registrants in the determination of what is material to their financial
statements. This SAB is required to be applied to financial statements issued
after November 15, 2006. Upon adoption, the cumulative effect of applying the
new guidance is to be reflected as an adjustment to opening retained earnings as
of the beginning of the current fiscal year. The Corporation has not completed
its evaluation of the impact of SAB 108.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 158 (SFAS No. 158), "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R)." SFAS No. 158 requires
the recognition of the funded status of a benefit plan in the statement of
financial position. The Statement also requires recognition in other
comprehensive income of certain gains and losses that arise during the period
but are deferred under current pension accounting rules, as well as modifies the
timing of reporting. SFAS No. 158 provides recognition and disclosure elements
to be effective as of the end of the fiscal year after December 15, 2006 and
measurement elements to be effective for fiscal years ending after December 15,
2008. The Company is currently assessing the potential impact that the adoption
of SFAS No. 158 will have on its financial statements; the impact is not
expected to be material.
7
Note 3-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, 2006 the weighted average shares outstanding in
calculating basic earnings per share were 1,238,797 and 1,238,111 while the
weighted average number of shares for diluted earnings per share were 1,239,842
and 1,239,680. As of September 30, 2006 there were 19,707 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, 2005 the
weighted average shares outstanding in calculating basic earnings per share were
1,237,305 and 1,236,562 while the weighted average number of shares for diluted
earnings per share were 1,240,083 and 1,239,223. As of September 30, 2005 there
were 8,340 options not considered in the three and nine month earnings per share
calculations because they were antidilutive.
8
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 and nine month periods
ending September 30, 2006.
FINANCIAL CONDITION
The Company's balances of cash and cash equivalents increased $10,419,000 or
87.2%. During the nine month period ending September 30, 2006, $2.2 million in
cash was provided by operating activities. Investing activities provided $2.9
million during the nine months ended September 30, 2006, primarily due to
proceeds of maturing securities and financing activities provided $5.3 million.
SECURITIES
The securities portfolio decreased $11.1 million since December 31, 2005. The
available for sale portfolio decreased to 90.7% of the investment portfolio down
from 93.1% at year-end.
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, 2006
U.S. Government agency $34,185 $ 5 $(265)
Mortgage-backed 8,786 -- (181)
State and municipal 8,550 63 (17)
Other securities 5,996 0 (4)
------- --- -----
$57,517 $68 $(467)
======= === =====
DECEMBER 31, 2005
U.S. Government agency $49,099 $-- $(717)
Mortgage-backed 8,140 -- (180)
State and municipal 12,076 38 (52)
------- --- -----
$69,315 $38 $(949)
======= === =====
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, 2006
State and municipal $4,869 $55 $(16) $4,908
====== === ==== ======
DECEMBER 31, 2005
State and municipal $4,117 $37 $(26) $4,128
====== === ==== ======
9
The carrying amount and fair value of securities by contractual maturity at
September 30, 2006 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 $27,760 $1,133 $1,134
Due from one to five years 22,350 2,054 2,091
Due from five to ten years 638 1,682 1,683
Due after ten years 6,769 -- --
------- ------ ------
$57,517 $4,869 $4,908
======= ====== ======
LOANS
Net loans at September 30, 2006 increased $8.1 million from December 31, 2005.
The table below shows total loans outstanding by type, in thousands of dollars,
at September 30, 2006 and December 31, 2005 and their percentages of the total
loan portfolio. All loans are domestic. A quarterly review of loan
concentrations at September 30, 2006 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 12.6% of total loans.
September 30, 2006 December 31, 2005
--------------------- ---------------------
Balance % of total Balance % of total
-------- ---------- -------- ----------
Portfolio loans:
Residential real estate $ 83,324 50.69% $ 83,183 53.23%
Consumer 9,541 5.80% 9,922 6.35%
Commercial real estate 58,674 35.69% 53,133 34.00%
Commercial 12,849 7.82% 10,037 6.42%
-------- ------ -------- ------
164,388 100.00% 156,275 100.00%
====== ======
Deferred loan origination fees, net (7) (8)
Allowance for loan losses (1,508) (1,456)
-------- --------
Loans, net $162,873 $154,811
======== ========
ALLOWANCE AND PROVISION FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, follows:
2006 2005
------ ------
Beginning balance $1,456 $1,350
Provision for loan losses 90 90
Charge-offs (59) (12)
Recoveries 21 12
------ ------
Ending balance $1,508 $1,440
====== ======
The Company had no impaired loans during the first nine months of 2006 or 2005.
Since December 31, 2005 commercial mortgages have increased $5.5 million and
commercial business loans have increased $2.8 million while consumer mortgages
have remained level. This is primarily due to a slow down in residential
refinancing and a stronger emphasis on commercial lending. There has been no
change in
10
the bank's lending policies. The lending staff continues to be well-trained and
experienced. The trend and volume of past due loans continues to be
well-controlled and in line with peer averages. In response to the change in
portfolio composition and loan growth management recorded a provision of $90,000
in the first nine months of 2006 and 2005.
CREDIT QUALITY
The Company maintains a high 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 loans 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); and (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).
The aggregate amount of nonperforming loans is shown in the table below.
September 30, December 31,
2006 2005
------------- ------------
(dollars in thousands)
Nonaccrual $ -- $ --
Loans past due 90 days or more 367 255
Troubled debt restructurings -- --
----- -----
Total nonperforming loans $ 367 $ 255
===== =====
Percent of total loans 0.23% 0.16%
DEPOSITS
Deposits at September 30, 2006 increased $7.5 million since December 31, 2005.
Interest-bearing deposits increased $4.9 million or 2.6% for the nine months
ended September 30, 2006, while noninterest-bearing deposits increased $2.6
million or 6.8%. This change in the deposit mix can be attributed to seasonal
activity.
LIQUIDITY AND FUNDS MANAGEMENT
As of September 30, 2006, the Company had $6.7 million in federal funds sold,
$9.1 million in interest-bearing deposits with other financial institutions,
$57.5 million in securities available for sale and $1.1 million 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 32.2% of total deposits as of September 30, 2006.
Total equity of the Company at September 30, 2006 was $25.8 million compared to
$24.5 million at December 31, 2005.
RESULTS OF OPERATIONS
CNB Corporation's 2006 net income for the first nine months was $2,484,000, a
decrease of $22,000 compared to 2005 results. Basic earnings per share were
$2.01 and diluted earnings per share were $2.00 for the first nine months of
2006 compared to basic earnings per share of $2.03 and diluted earnings per
share of $2.02 for the same period of 2005. The return on assets was 1.30% for
the first nine months of the year versus 1.29% for the same period in 2005. The
return on equity was 13.16% compared to 13.52% for the same period last year.
Net income for the three months ending September 30, 2006 was $794,000 compared
to $769,000 for 2005. This was an increase of $25,000 or 3.3%. Basic and diluted
earnings per share were $0.64 compared to $0.62
11
for the third quarter of 2005. The return on average assets was 1.23% compared
to 1.16% for the third quarter of 2005. The return on average equity was 12.37%
compared to 12.36% for the third quarter of 2005.
For the first nine months of 2006, net interest income was $7.7 million which is
the same results from the same period in 2005. The fully taxable equivalent net
interest margin increased to 4.40% for the nine month period ending September
30, 2006 compared to 4.31% for the same period ending September 30, 2005.
Although net interest income is the same for the same period as last year, the
fully taxable equivalent (FTE) net interest margin has increased. The FTE net
interest margin is calculated by dividing the FTE net interest income by the
year to date average earning assets. The calculated increase in the FTE net
interest margin is due to a decrease in average earning assets compared to the
same period last year. Average earning assets have decreased, but a change in
the asset mix has aided in continuing a level interest income. As the loan
portfolio has grown, maturities of lower yielding investment securities have
been used to fund loan growth at higher yields.
Net interest income for the three months ending September 30, 2006 was $2.7
million compared to $2.6 million for the same period in 2005 representing and
increase of 3.7%. This increase can be attributed to increased rates paid on
earning assets increasing slightly faster than rates paid on deposits.
In response to the change in the loan portfolio composition and loan growth,
management recorded provision expense of $90,000 in the first nine months in
2006 and 2005.
Noninterest income for the nine months ending September 30, 2006 was $1.6
million, an increase of $195,000 or 13.6% from the same period last year. The
majority of this increase can be attributed to the recording of a $517,000 gain
on the sale of property where our old south branch was located. This increase
was offset in part by a decline in other income from the prior year period.
Other income for the nine months ending September 30, 2005 included life
insurance proceeds of $300,000 due to the death of a director.
Noninterest income for the quarter ending September 30, 2006 was $414,000
compared to $401,000 from the same period last year. This represents an increase
of $13,000 or 3.2% from the same period last year. This change between the two
periods is attributed, in part, due to an increase in our per item NSF fee
effective June 2006 and an Overdraft Privilege program that was introduced to
our customers in the beginning of August. Our NSF fee income increased $40,000
for the third quarter 2006 compared to the same period last year. This increase
was offset by a decrease in the gain from the sale of loans due to decreased
consumer mortgage activity. Net realized gains from sales of loans decreased
$40,000 for the third quarter 2006 compared to the same period last year.
Noninterest income for the third quarter of 2006 includes $8,000 from a residual
entry as a gain on the sale of property as mentioned above.
Noninterest expense for the first nine months of 2006 was $5.7 million compared
to $5.6 million from the same period last year. Occupancy expense increased
$159,000 which can largely be attributed to increases in depreciation expense
due to the purchase of new processing equipment and new branch facilities in
Cheboygan and Indian River. Salary and benefit expenses increased $179,000 as
the Company increased its number of employees from 77 full-time equivalent
employees at September 30, 2005 to 81 full-time equivalent employees at
September 30, 2006. This increase in employees is due to increased branch hours
and a new branch facility, both of which require additional staffing. Other
expenses increased $154,000 primarily due to $77,000 of expense due to the loss
on sale or write-down of other real estate properties owned. These increases
were offset by a decrease in deferred compensation expense, as 2005 expense
included $315,000 of additional expense to recognize the amount payable to a
director upon death under the deferred compensation plan.
For the three months ended September 30, 2006, noninterest expense increased
$102,000 to $1.9 million as compared to $1.8 million from the same period in
2005. The majority of this increase can be attributed to increases in salaries
and occupancy expenses for the same reasons as noted above, as well as a $51,000
increase in other expenses primarily due to a $25,000 expense recognized during
the quarter due to the loss on the sale of an other real estate owned property.
The provision for federal income tax was 28.2% and 28.6% of pretax income for
the three and nine month periods ended September 30, 2006 as compared to 30.2%
and 26.6% for the same periods in 2005. The difference between the tax rates for
the two three month periods is due to an increase in tax-exempt loan income in
2006 and the difference between the tax rates for the two nine month periods is
due to the non-taxable
12
character of the income from insurance proceeds received during 2005.
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, 2005 Management
Discussion and Analysis appearing in the December 31, 2005 10K.
ITEM 4-CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These
rules refer to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed summarized and
reported within required time periods. Our Chief Executive Officer and
Treasurer, who serves as the Company's CFO have evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report (the "Evaluation Date"), and have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective in
providing them with material information relating to the Corporation which is
required to be included in our periodic reports filed under the Exchange Act.
There have been no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect internal
controls over financial reporting.
13
PART II-OTHER INFORMATION
ITEM 1-LEGAL PROCEEDINGS
None
ITEM 1A.-RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A
Part I of the Company's 2005 10K.
ITEM 2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5-OTHER INFORMATION
None
ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K
a.) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
b.) Reports on Form 8-K
None
14
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 9, 2006 /s/ James C. Conboy, Jr.
----------------------------------------
James C. Conboy, Jr.
President and Chief Executive Officer
Date: November 9, 2006 /s/ Susan A. Eno
----------------------------------------
Susan A. Eno
Executive Vice President
15
EXHIBIT INDEX
Number Exhibit
- ------ -------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
19