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 June 30, 2007
Commission file # 033-00737
CNB CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2662386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 North Main Street, Cheboygan MI 49721
(Address of principal executive offices, including Zip Code)
(231) 627-7111
(Registrant's telephone number, including area code)
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 large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 or the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 August 7, 2008 there were 1,230,497 shares of the issuer's common stock
outstanding.
CNB CORPORATION
Index
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Condensed):
Consolidated Balance Sheets - June 30, 2007 and December 31, 2006 .. 3
Consolidated Statements of Income - Six Months Ended June 30, 2007
and 2006 ........................................................ 4
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2007 and 2006 .......................................... 5
Notes to Consolidated Financial Statements ......................... 6 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... 8 - 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 ............................................ 15
Item 6 - Exhibits and Reports on Form 8-K ............................. 15
Signatures ............................................................ 16 - 19
Exhibit Index ......................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
June 30, December 31,
2007 2006
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 6,548 $ 8,444
Interest-bearing deposits with other
financial institutions 1,246 --
Federal funds sold 7,328 6,368
-------- --------
Total cash and cash equivalents 15,122 14,812
Securities available for sale 51,813 51,331
Securities held to maturity (market value of $5,472
in 2007 and $4,582 in 2006) 5,431 4,543
Other securities 1,008 1,008
Loans, held for sale 1,127 --
Loans, net of allowance for loan losses of $1,606
in 2007 and $1,498 in 2006 171,517 165,730
Premises and equipment, net 6,483 6,626
Other assets 8,656 7,850
-------- --------
Total assets $261,157 $251,900
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 41,643 $ 39,620
Interest-bearing 188,907 181,745
-------- --------
Total deposits 230,550 221,365
Other liabilities 5,179 5,537
-------- --------
Total liabilities 235,729 226,902
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; and 1,239,497 and 1,239,512 shares
issued and outstanding in 2007 and 2006 3,099 3,099
Additional paid-in capital 20,482 20,482
Retained earnings 2,624 2,235
Accumulated other comprehensive loss, net of tax (777) (818)
-------- --------
Total shareholders' equity 25,428 24,998
-------- --------
Total liabilities and shareholders' equity $261,157 $251,900
======== ========
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2007 2006 2007 2006
------ ------ ------ ------
(Unaudited)
INTEREST INCOME
Loans, including fees $3,254 $3,007 $6,386 $5,829
Securities
Taxable 505 453 932 909
Tax exempt 111 110 238 237
Other interest income 207 58 450 160
------ ------ ------ ------
Total interest income 4,077 3,628 8,006 7,135
INTEREST EXPENSE ON DEPOSITS 1,518 1,131 2,986 2,126
------ ------ ------ ------
NET INTEREST INCOME 2,559 2,497 5,020 5,009
Provision for loan losses 69 30 138 60
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,490 2,467 4,882 4,949
------ ------ ------ ------
NONINTEREST INCOME
Service charges and fees 299 244 572 469
Net realized gains from sales of loans 36 32 67 82
Loan servicing fees, net of amortization 45 30 63 59
Gain on sale of premises and equipment -- 509 -- 509
Other income 78 52 136 92
------ ------ ------ ------
Total noninterest income 458 867 838 1,211
NONINTEREST EXPENSES
Salaries and employee benefits 899 869 1,813 1,749
Deferred compensation 79 79 160 160
Pension 32 65 67 129
Hospitalization 135 144 249 285
Occupancy 275 268 586 537
Supplies 61 77 113 111
Legal and professional 112 97 217 195
Other expenses 246 298 523 621
------ ------ ------ ------
Total noninterest expense 1,839 1,897 3,728 3,787
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 1,109 1,437 1,992 2,373
Income tax expense 308 441 561 683
------ ------ ------ ------
NET INCOME $ 801 $ 996 $1,431 $1,690
====== ====== ====== ======
TOTAL COMPREHENSIVE INCOME $ 745 $ 985 $1,472 $1,772
====== ====== ====== ======
Return on average assets (annualized) 1.24% 1.60% 1.11% 1.34%
Return on average equity (annualized) 12.56% 15.89% 11.29% 13.57%
Basic earnings per share $ 0.65 $ 0.80 $ 1.15 $ 1.37
Diluted earnings per share $ 0.65 $ 0.80 $ 1.15 $ 1.36
Dividends declared per share $ 0.42 $ 0.42 $ 0.84 $ 0.84
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Six months ended June 30,
-------------------------
2007 2006
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,431 $ 1,690
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net (291) 72
Provision for loan losses 138 60
Loans originated for sale (2,363) (3,867)
Proceeds from sales of loans originated for sale 1,257 3,542
Gain on sales of loans (67) (82)
Gain on sales of premisis and equipment -- (509)
Increase in other assets (248) (297)
Increase in other liabilities 372 867
-------- --------
Total adjustments (1,202) (214)
-------- --------
Net cash provided by operating activities 229 1,476
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 17,647 16,360
Purchase of securities available for sale (17,465) (4,697)
Proceeds from maturities of securities held to maturity 1,273 709
Purchase of securities held to maturity (2,161) (1,435)
Net change in portfolio loans (6,458) (8,683)
Premises and equipment expenditures (168) (609)
Proceeds from sale of premises and equipment -- 542
-------- --------
Net cash (used in) provided by investing activities (7,332) 2,187
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits 9,185 (2,016)
Dividends paid (1,772) (1,756)
Net proceeds from exercise of stock options -- 37
Purchases of common stock -- (5)
-------- --------
Net cash provided by (used in) financing activities 7,413 (3,740)
-------- --------
Net change in cash and cash equivalents 310 (77)
Cash and cash equivalents at beginning of year 14,812 11,943
-------- --------
Cash and cash equivalents at end of period $ 15,122 $ 11,866
======== ========
Cash paid during the period for:
Interest $ 2,949 $ 2,079
Income taxes 623 186
Non-cash transactions:
Transfer from loans to other real estate owned 533 35
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, 2006.
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 Options
The Company adopted a stock option plan in May 1996 under which the stock
options may be issued at market prices to employees. The plan states that no
grant or award shall be made under the plan more than ten years from the date of
adoption of the plan and therefore the plan ended in 2006. Stock options were
used to reward certain officers and provide them with an additional equity
interest. Options were issued for 10 year periods and have varying vesting
schedules. The exercise price of options granted is equivalent to the market
value of underlying stock at the grant date. The Company has a policy of issuing
new shares to satisfy option exercises. There were no modification of awards
during the periods ended June 30, 2007 and 2006.
Due to the plan end date, there are no options available for grant as of June
30, 2007 and there were no stock options granted during the six months ended
June 30, 2006.
Information about options outstanding and options exercisable follows:
Weighted
Weighted Average
Average Remaining Aggregate
Options Exercise Contractual Intrinsic
Outstanding Price Term Value
----------- -------- ----------- ---------
Balance at January 1, 2007 23,438 $49.00
Options exercised -- --
Balance at June 30, 2007 23,438 $49.00 3.5 years $25,718
======
The aggregate intrinsic value of options exercised for the three and six months
ended June 30, 2007 was $0. The aggregate intrinsic value of option exercised
for the three and six months ended June 30, 2006 was approximately $24,000 and
$28,000, respectively. There were no shares vested for the same periods.
Cash received from option exercises for the three and six month periods ending
June 30, 2007 was $0 and for the three and six month periods ending June 30,
2006 was approximately $29,000 and $37,000, 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, 2006.
6
Note 2-Earnings Per Share
Basic earnings per share are calculated solely on weighted-average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. For the three and six month
periods ending June 30, 2007 the weighted average shares outstanding in
calculating basic earnings per share were 1,239,504 and 1,239,507 while the
weighted average number of shares for diluted earnings per share were 1,239,876
and 1,240,371. As of June 30, 2007 there were 19,407 options not considered in
the three and six month earnings per share calculations because they were
antidilutive. For the three and six month periods ending June 30, 2006 the
weighted average shares outstanding in calculating basic earnings per share were
1,238,088 and 1,237,763 while the weighted average number of shares for diluted
earnings per share were 1,239,378 and 1,239,601. As of June 30, 2006 there were
19,707 options not considered in the three and six month earnings per share
calculations because they were antidilutive.
7
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 six month period ending June
30, 2007.
CRITICAL ACCOUNTING POLICIES
Certain of the Company's accounting policies are important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in fact and
circumstances. Facts and circumstances which could affect these judgments
include, but without limitation, changes in interest rates, in the performance
of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan
losses and determining the fair value of securities. The Company's critical
accounting policies are described in the Management Discussion and Analysis
section of its 2006 Annual Report.
FINANCIAL CONDITION
As of June 30, 2007 total assets of the company were $261.2 million which
represents an increase of $9.3 million or 3.7% from December 31, 2006. The
Company recognized an increase in the loan portfolio of $5.9 million or 3.5%
while deposits increased $9.2 million or 4.1% since December 31, 2006.
SECURITIES
The total securities portfolio increased $1.4 million since December 31, 2006.
The available for sale portfolio decreased marginally to 88.9% of the investment
portfolio down from 90.2% at year-end even though the total amount of the
available for sale portfolio increased $482,000. The reason for the marginal
decrease of the available for sale portfolio in relation to the total investment
portfolio is due to the increase in the held to maturity securities. Held to
maturity securities increased $888,000 and is now 9.3% of the investment
portfolio up from 8.0% at year-end. The remaining small percentage of the
investment portfolio is the Other Securities category made up of Federal Home
Loan Bank and Federal Reserve Bank Stock which are required holds to have a
correspondent bank relationship with these entities.
The fair values and related unrealized gains and losses for securities available
for sale were as follows, in thousands of dollars:
8
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------- ---------- ----------
Available for Sale
JUNE 30, 2007
U.S. Government agency $20,834 $ 0 $ (74)
Mortgage-backed 11,458 0 (102)
State and municipal 5,521 65 (17)
Money market preferred stocks 14,000 -- --
------- --- -----
$51,813 $65 $(193)
======= === =====
DECEMBER 31, 2006
U.S. Government agency $21,307 $ 8 $(125)
Mortgage-backed 10,491 4 (107)
State and municipal 8,549 59 (13)
Money market preferred stocks 10,984 -- (16)
------- --- -----
$51,331 $71 $(261)
======= === =====
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
JUNE 30, 2007
State and municipal $5,431 $51 $(10) $5,472
====== === ==== ======
DECEMBER 31, 2006
State and municipal $4,543 $54 $(15) $4,582
====== === ==== ======
The carrying amount and fair value of securities by contractual maturity at June
30, 2007 are shown below, in thousands of dollars.
Available Held to Maturity
for sale -----------------
Fair Carrying Fair
Value Amount Value
------- -------- ------
Due in one year or less $25,950 $ 690 $ 691
Due from one to five years 24,608 2,315 2,348
Due from five to ten years 555 1,556 1,563
Due after ten years 700 870 870
------- ------ ------
$51,813 $5,431 $5,472
======= ====== ======
LOANS
Net loans at June 30, 2007 increased $5.8 million from December 31, 2006. The
table below shows total loans outstanding by type, in thousands of dollars, at
June 30, 2007 and December 31, 2006 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
June 30, 2007
9
indicates the pattern of loans in the portfolio has not changed significantly.
There is no individual industry with more than a 10% concentration. However, all
tourism related businesses, when combined, total 13.0% of total loans.
June 30, 2007 December 31, 2006
--------------------- ---------------------
Balance % of total Balance % of total
-------- ---------- -------- ----------
Portfolio loans:
Residential real estate $ 82,027 47.38% $ 82,842 49.53%
Consumer 9,111 5.26% 9,444 5.65%
Commercial real estate 67,705 39.11% 61,740 36.92%
Commercial 14,284 8.25% 13,208 7.90%
-------- ------ -------- ------
173,127 100.00% 167,234 100.00%
====== ======
Deferred loan origination fees, net (4) (6)
Allowance for loan losses (1,606) (1,498)
-------- --------
Loans, net $171,517 $165,730
======== ========
ALLOWANCE AND PROVISION FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended June 30, follows:
2007 2006
------ ------
Beginning balance $1,498 $1,456
Provision for loan losses 138 60
Charge-offs (43) (47)
Recoveries 13 18
------ ------
Ending balance $1,606 $1,487
====== ======
The Company had impaired loans of $636,000 during the first six months of 2007
and no impaired loans during the first six months of 2006.
Since December 31, 2006 commercial real estate mortgages have increased $6.0
million while consumer mortgages have decreased $815,000. This is primarily due
to a slow down in residential refinancing and a stronger emphasis on commercial
lending. There has been no change in 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 $138,000 in the first six months of 2007 and $60,000 in
the first six months of 2006.
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.
10
June 30, December 31,
2007 2006
-------- ------------
(dollars in thousands)
Nonaccrual $ 636 $ --
Loans past due 90 days or more 191 177
Troubled debt restructurings -- --
----- -----
Total nonperforming loans $ 827 $ 177
===== =====
Percent of total loans 0.48% 0.11%
At June 30, 2007, total nonperforming assets increased by $650,000 from December
31, 2006. The Bank is closely monitoring and managing nonperforming loans.
Nonaccrual loans increased to $636,000 since December 31, 2006. This amount is
from three loans and is a combination of one that went on nonaccrual status in
March 2007 and two loans that went on nonaccrual status in June 2007. Loans past
due 90 days and still accruing are loans that management considers to be
collectable including accrued interest. The increase in nonperforming loans was
primarily in construction and commercial loans and management believes the Bank
is adequately reserved on these loans. Management fully expects that diligent
servicing of these loans will minimize losses. Although uncertain overall
economic conditions have negatively affected Michigan, the Company's marketplace
remains relatively stable. The Company expects the amount of nonperforming loans
to remain elevated into the foreseeable future, as the Bank works with these few
customers who have felt the economic pressures of the overall Michigan economy.
The Bank maintains an active loan collection process to mitigate loan losses.
Loan quality is continually and systematically monitored and review by
management. In addition to nonperforming loans, the Company has Other Real
Estate Owned totaling $1.4 million as of June 30, 2007 as compared to $1 million
at December 31, 2006. The Company has acquired these properties due to
foreclosures or deeds in lieu of payment.
DEPOSITS
Deposits at June 30, 2007 increased $9.2 million since December 31, 2006. This
increase is due, in part, to a deposit promotion the bank offered in the first
quarter of 2007 and in part to the new branch location that opened in January
2007. Interest-bearing deposits increased $7.2 million or 3.9% for the six
months ended June 30, 2007, while noninterest-bearing deposits increased $2.0
million or 5.1%. The Bank expects to continue this trend of offering deposit
promotions as it see opportunities to attract new customers.
LIQUIDITY AND FUNDS MANAGEMENT
The Company's balances of cash and cash equivalents increased $310,000 or 2.1%.
During the six month period ending June 30, 2007, $229,000 in cash was provided
by operating activities. Investing activities used $7.3 million during the six
months ended June 30, 2007, primarily due to the purchase of securities and
financing activities provided $7.4 million.
As of June 30, 2007, the Company had $7.3 million in federal funds sold, $51.8
million in securities available for sale and $690,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 26.0% of total deposits as of June 30, 2007. The Company's liquidity
position is adequate to respond to extensions of credit, short-term demand for
funds caused by withdrawals from deposit accounts and for the payment of
operating expenses.
Total equity of the Company at June 30, 2007 was $25.4 million compared to $25.0
million at December 31, 2006. The Company's equity including Risk Based Capital
and Leverage Ratio are above the "Well Capitalized" status for regulatory
guidelines.
11
RESULTS OF OPERATIONS
CNB Corporation's 2007 net income for the first six months was $1.4 million, a
decrease of $259,000 compared to 2006 results. This decrease in 2007 net income
can be attributed to a one time gain on sale of $509,000 that occurred in June
2006. Basic and diluted earnings per share were $1.15 for 2007 compared to Basic
and diluted earnings per share of $1.37 and $1.36 for 2006. The return on assets
was 1.11% for the first six months of the year versus 1.34% for the same period
in 2006. The return on equity was 11.29% compared to 13.57% for the same period
last year.
Net income for the three months ending June 30, 2007 was $801,000 compared to
$996,000 for 2006. This was a decrease of $195,000 or 19.6%. Basic and diluted
earnings per share were $0.65 compared to $0.80 for 2006. The return on average
assets was 1.24% compared to 1.60% for 2006. The return on average equity was
12.56% compared to 15.89% for 2006.
Interest income for the first six months of 2007 was $8.0 million, an increase
of $871,000 or 12.2% compared to 2006 results. The majority of this increase can
be attributed to the Company's loan growth.
Interest income for the quarter ending June 30, 2007 was $4.1 million compared
to $3.6 million from the same period last year.
Interest expense for the first six months of 2007 was $3.0 million, an increase
of $860,000 or 40.5% compared to 2006 results. This increase is attributable to
not only growth in total deposits, but also the change in deposit mix as
customer transfer money from their lower yielding savings account into higher
yielding certificates of deposit. The Bank has also offered a few higher than
average rate deposit promotions in the first six months of 2007 in order to draw
attention to our new branch location and to attract new customers.
Interest expense for the quarter ending June 30, 2007 was $1.5 million compared
to $1.1 million for the same period last year. This increase is attributable to
the same reasons as noted above for the year to date time period.
For the first six months of 2007, net interest income was $5.0 million
representing an increase of 0.2% from the same period in 2006. The fully taxable
equivalent net interest margin increased to 4.38% for the six month period
ending June 30, 2007 compared to 4.35% for the same period ending June 30, 2006.
This marginal change can be attributable to a flat interest rate environment
during 2006 and so far in 2007.
In response to the change in the loan portfolio composition and loan growth,
management recorded a provision expense of $138,000 in the first six months in
2007 and $60,000 in the first six months in 2006.
Noninterest income for the six months ending June 30, 2007 was $838,000, a
decrease of $373,000 or 30.8% from the same period last year. This change
between the two periods is attributed, in part, due to a gain on the sale of
premises and equipment in the amount of $509,000 in 2006 and in 2007 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 2006.
Noninterest income for the quarter ending June 30, 2007 was $458,000 compared to
$867,000 from the same period last year. This represents a decrease of $409,000
or 47.2% from the same period last year. This change between the two periods is
for the same reasons as noted above for the six month period. Noninterest income
for the second quarter of 2006 includes $509,000 as a gain on the sale of
property as mentioned above.
Noninterest expense for the first six months of 2007 and 2006 was $3.7 million
and $3.8 million, respectively. Although the noninterest expense remained at
relatively the same level during the two periods, the expense mix did change
slightly between the periods. The increase in occupancy expense can largely be
attributed to increases in depreciation expense due to the purchase of new
processing equipment in the second quarter of 2006 and a new branch facility in
Alanson opened in January 2007. Hospitalization expense decreased due to a
change in benefit coverage. Also, other expenses for 2006, includes $51,000 of
expense due to the recognition of loss on sale or write-down of other real
estate properties owned.
12
The provision for federal income tax was 28.2% of pretax income for the six
months ended June 30, 2007 as compared to 28.8% for the same period in 2006. 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. The effect of the future Michigan Business Tax as the
replacement for the Michigan Single Business Tax has been calculation based on
preliminary guidance to date. The effect of the new tax appears to provide the
Company with similar tax level as the outgoing Single Business Tax.
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, 2006 Management
Discussion and Analysis appearing in the December 31, 2006 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.
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 2006 10K.
ITEM 2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
PERIOD
Approximate
Total number dollar value
of shares of shares
Total Average purchased that may
number of price as part of publicly be purchased
shares paid per announced under the plans
purchased share plans or programs or programs
--------- -------- ------------------- ---------------
June, 2007 None
Total $1,000,00
The Company adopted a Stock Redemption Plan on June 14, 2007 with the provision
that it would remain in effect until $1 million had been expended on the
purchase of common stock. As of June 30, 2007, the Company has not repurchased
any stock under the plan.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of CNB Corporation was held on May 15, 2007.
Elected as Directors for one year term were Steven J. Baker; James C. Conboy,
Jr.; Kathleen M. Darrow; Thomas J. Ellenberger; Vincent J. Hillesheim; Kathleen
A. Lieder; John L. Ormsbee; R. Jeffery Swadling; and Francis J. VanAntwerp Jr..
Votes cast for: 833,574
Votes cast against: 7,360
Votes withheld: 2,150
Votes cast for were for all nine directors listed above with the exception of
the votes cast against as noted. Votes cast against were 300 for Steven J.
Baker, 467 for Kathleen M. Darrow and 6,593 for John L. Ormsbee. Votes withheld
were for all nine directors listed above.
14
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
A Current Report on Form 8-K was filed on June 14, 2007 announcing the approval
of a stock repurchase plan.
A Current Report on Form 8-K was filed on July 10, 2007 announcing the
Corporations dividend declared.
A Current Report on Form 8-K was filed on July 19, 2007, with an accompanying
letter to shareholders, disclosing the Corporation's financial performance for
the first six months of 2007 and the retirement of the President & Chief
Executive Officer effective December 31, 2007.
A Current Report on Form 8-K was filed on July 30, 2007 announcing shares
repurchased under the Corporations stock repurchase plan.
A Current Report on Form 8-K was filed on July 31, 2007 announcing the second
share repurchase under the Corporations stock repurchase plan.
A Current Report of Form 8-K was filed on August 10, 2007 announcing the third
share repurchase under the Corporations stock repurchase plan.
15
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: August 14, 2007 /s/ James C. Conboy, Jr.
----------------------------------------
James C. Conboy, Jr.
President and Chief Executive Officer
Date: August 14, 2007 /s/ Susan A. Eno
----------------------------------------
Susan A. Eno
Executive Vice President
16
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
20