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, 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 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 November 8, 2007 there were 1,216,617 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, 2007 and
December 31, 2006 ........................................ 3
Consolidated Statements of Income -
Nine Months Ended September 30, 2007 and 2006 ............ 4
Consolidated Statements of Cash Flows - Nine Months Ended
September 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
Exhibit Index .................................................. 17
2
PART I - FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
September 30, December 31,
2007 2006
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 6,197 $ 8,444
Interest-bearing deposits with other financial
institutions 1,304 --
Federal funds sold 7,900 6,368
-------- --------
Total cash and cash equivalents 15,401 14,812
Securities available for sale 50,412 51,331
Securities held to maturity (market value of $9,189
in 2007 and $4,582 in 2006) 9,139 4,543
Other securities 1,008 1,008
Loans, held for sale 205 --
Loans, net of allowance for loan losses of $1,667
in 2007 and $1,498 in 2006 172,882 165,730
Premises and equipment, net 6,434 6,626
Other assets 8,609 7,850
-------- --------
Total assets $264,090 $251,900
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 41,473 $ 39,620
Interest-bearing 191,877 181,745
-------- --------
Total deposits 233,350 221,365
Other liabilities 5,392 5,537
-------- --------
Total liabilities 238,742 226,902
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; and 1,226,097 and 1,239,512 shares
issued and outstanding in 2007 and 2006 3,065 3,099
Additional paid-in capital 19,972 20,482
Retained earnings 2,941 2,235
Accumulated other comprehensive loss, net of tax (630) (818)
-------- --------
Total shareholders' equity 25,348 24,998
-------- --------
Total liabilities and shareholders' equity $264,090 $251,900
======== ========
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,
------------------ -----------------
2007 2006 2007 2006
------ ----- ------- -------
(Unaudited)
INTEREST INCOME
Loans, including fees $3,334 $3,114 $ 9,720 $ 8,943
Securities
Taxable 569 453 1,501 1,362
Tax exempt 114 121 352 358
Other interest income 144 198 594 358
------ ------ ------- -------
Total interest income 4,161 3,886 12,167 11,021
INTEREST EXPENSE ON DEPOSITS 1,499 1,229 4,485 3,355
------ ------ ------- -------
NET INTEREST INCOME 2,662 2,657 7,682 7,666
Provision for loan losses 68 30 206 90
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,594 2,627 7,476 7,576
------ ------ ------- -------
NONINTEREST INCOME
Service charges and fees 312 296 884 765
Net realized gains from sales of loans 26 31 93 113
Loan servicing fees, net of amortization 33 39 96 98
Gain on sale of premises and equipment -- 8 -- 517
Other income 43 40 179 132
------ ------ ------- -------
Total noninterest income 414 414 1,252 1,625
NONINTEREST EXPENSES
Salaries and employee benefits 937 905 2,750 2,654
Deferred compensation 80 80 240 240
Pension 33 65 100 194
Hospitalization 151 151 400 436
Occupancy 301 275 887 812
Supplies 43 42 156 153
Legal and professional 79 79 296 274
Other expenses 266 338 789 959
------ ------ ------- -------
Total noninterest expense 1,890 1,935 5,618 5,722
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 1,118 1,106 3,110 3,479
Income tax expense 287 312 848 995
------ ------ ------- -------
NET INCOME $ 831 $ 794 $ 2,262 $ 2,484
====== ====== ======= =======
TOTAL COMPREHENSIVE INCOME $ 978 $1,049 $ 2,450 $ 2,821
====== ====== ======= =======
Return on average assets (annualized) 1.29% 1.23% 1.16% 1.30%
Return on average equity (annualized) 12.95% 12.37% 11.91% 13.16%
Basic earnings per share $ 0.67 $ 0.64 $ 1.83 $ 2.01
Diluted earnings per share $ 0.67 $ 0.64 $ 1.83 $ 2.00
Dividends declared per share $ 0.42 $ 0.42 $ 1.26 $ 1.26
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Nine months ended
September 30,
-------------------
2007 2006
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,262 $ 2,484
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net 430 251
Provision for loan losses 206 90
Loans originated for sale (3,535) (5,729)
Proceeds from sales of loans originated for
sale 3,361 4,957
Gain on sales of loans (93) (113)
Gain on sales of premisis and equipment -- (517)
Increase in other assets (233) (114)
Increase in other liabilities 606 912
-------- --------
Total adjustments 742 (263)
-------- --------
Net cash provided by operating
activities 3,004 2,221
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available
for sale 18,696 26,359
Purchase of securities available for sale (17,465) (13,840)
Proceeds from maturities of securities held to
maturity 2,290 1,687
Purchase of securities held to maturity (6,886) (2,439)
Proceeds from maturities of other securities -- 30
Net change in portfolio loans (7,919) (8,187)
Premises and equipment expenditures (265) (1,254)
Proceeds from sale of premises and equipment -- 550
-------- --------
Net cash (used in) provided by
investing activities (11,549) 2,906
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,985 7,529
Dividends paid (2,307) (2,276)
Net proceeds from exercise of stock options -- 44
Purchases of common stock (544) (5)
-------- --------
Net cash provided by financing
activities 9,134 5,292
-------- --------
Net change in cash and cash equivalents 589 10,419
Cash and cash equivalents at beginning of year 14,812 11,943
-------- --------
Cash and cash equivalents at end of period $ 15,401 $ 22,362
======== ========
Cash paid during the period for:
Interest $ 4,415 $ 3,266
Income taxes 713 844
Non-cash transactions:
Transfer from loans to other real estate owned 561 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 September 30, 2007 and 2006.
Due to the plan end date, there are no options available for grant as of
September 30, 2007 and there were no stock options granted during the nine
months ended September 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 September 30, 2007 23,438 $49.00 3.0 years $13,826
======
The aggregate intrinsic value of options exercised for the three and nine months
ended September 30, 2007 was $0. The aggregate intrinsic value of option
exercised for the three and nine months ended September 30, 2006 was
approximately $1,800 and $29,800, respectively. There were no shares vested for
the same periods.
Cash received from option exercises for the three and nine month periods ending
September 30, 2007 was $0 and for the three and nine month periods ending
September 30, 2006 was approximately $7,000 and $44,000, 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 nine month
periods ending September 30, 2007 the weighted average shares outstanding in
calculating basic earnings per share were 1,232,384 and 1,237,107 while the
weighted average number of shares for diluted earnings per share were 1,232,957
and 1,237,879. As of September 30, 2007 there were 19,407 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, 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.
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 nine month period ending
September 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 September 30, 2007 total assets of the company were $264.1 million which
represents an increase of $12.2 million or 4.8% from December 31, 2006. The
Company recognized an increase in the loan portfolio of $7.3 million or 4.4%
while deposits increased $12.0 million or 5.4% since December 31, 2006.
SECURITIES
The total securities portfolio increased $3.7 million since December 31, 2006.
The available for sale portfolio decreased to 83.2% of the investment portfolio
down from 90.2% at year-end. The reason for the 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 $4.6 million and is now 15.1% 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
SEPTEMBER 30, 2007
U.S. Government agency $20,250 $ 81 $ (7)
Mortgage-backed 10,698 15 (52)
State and municipal 5,464 62 (4)
Money market preferred stocks 14,000 -- --
------- ---- -----
$50,412 $158 $ (63)
======= ==== =====
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
Gross Gross
Carrying Unregnized Unrecognized Fair
Amount Gains Losses Value
-------- ---------- ------------ ------
Held to Maturity
SEPTEMBER 30, 2007
State and municipal $9,139 $59 $ (9) $9,189
====== === ==== ======
DECEMBER 31, 2006
State and municipal $4,543 $54 $(15) $4,582
====== === ==== ======
The carrying amount and fair value of securities by contractual maturity at
September 30, 2007 are shown below, in thousands of dollars.
Held to Maturity
Available for sale -----------------
Fair Carrying Fair
Value Amount Value
------------------ -------- ------
Due in one year or less $27,857 $2,191 $2,191
Due from one to five years 21,301 3,242 3,273
Due from five to ten years 554 2,781 2,797
Due after ten years 700 925 928
------- ------ ------
$50,412 $9,139 $9,189
======= ====== ======
LOANS
Net loans at September 30, 2007 increased $7.2 million from December 31, 2006.
The table below shows total loans outstanding by type, in thousands of dollars,
at September 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
9
September 30, 2007 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
12.1% of total loans.
September 30, 2007 December 31, 2006
--------------------- ---------------------
Balance % of total Balance % of total
-------- ---------- -------- ----------
Portfolio loans:
Residential real estate $ 82,637 47.34% $ 82,842 49.53%
Consumer 9,379 5.37% 9,444 5.65%
Commercial real estate 69,678 39.92% 61,740 36.92%
Commercial 12,860 7.37% 13,208 7.90%
-------- ------ -------- ------
174,554 100.00% 167,234 100.00%
====== ======
Deferred loan origination fees, net (5) (6)
Allowance for loan losses (1,667) (1,498)
-------- --------
Loans, net $172,882 $165,730
======== ========
Loans held for sale were $205,000 at September 31, 2007 and $0 at December 31,
2006. Loans held for sale include loans closed as of the reporting period, but
not yet sold on the secondary market. The Bank retains all servicing rights for
loans sold.
Since December 31, 2006 commercial real estate mortgages have increased $7.9
million while other loan types remained stable or slightly lower than December
31. This is primarily due to a slow down in residential refinancing and a
stronger emphasis by the bank on commercial lending. There has been no change in
the bank's lending policies. The lending staff continues to be well-trained and
experienced.
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:
2007 2006
------ ------
Beginning balance $1,498 $1,456
Provision for loan losses 206 90
Charge-offs (56) (59)
Recoveries 19 21
------ ------
Ending balance $1,667 $1,508
====== ======
The Company had impaired loans of $784,000 during the first nine months of 2007
and no impaired loans during the first nine months of 2006.
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 $206,000 in the first nine months
of 2007 and $90,000 in the first nine 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
10
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,
2007 2006
------------- ------------
(dollars in thousands)
Nonaccrual $ 784 $ --
Loans past due 90 days or more 612 177
Troubled debt restructurings -- --
------ ----
Total nonperforming loans $1,396 $177
====== ====
Percent of total loans 0.81% 0.11%
At September 30, 2007, total nonperforming assets increased by $1.2 million from
December 31, 2006. The Bank is closely monitoring and managing nonperforming
loans. Nonaccrual loans increased to $784,000 since December 31, 2006. This
amount is from five 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
and two that went on nonaccrual status in September 2007. Management reviews
loans for impairment prior to placing them on nonaccrual status. 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 residential 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 reviewed by
management. Management is also monitoring the trends of delinquent loans. In
addition to nonperforming loans, the Company has Other Real Estate Owned
totaling $1.5 million as of September 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. Due to the increased emphasis in commercial
lending, the bank has outsourced a loan review to occur in the fourth quarter of
2007. The Bank's ability to perform loan review internally has been difficult
to achieve due to compliance with section 404 of Sarbanes Oxley and the
personnel hours devoted to that task.
DEPOSITS
Deposits at September 30, 2007 increased $12.0 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. The bank has also introduced a "Free Checking" product since the
end of the second quarter 2007 in addition to several other demand deposit
products in an effort to attract new customers. Interest-bearing deposits
increased $10.1 million or 5.6% for the nine months ended September 30, 2007,
while noninterest-bearing deposits increased $1.9 million or 4.7%. The Bank
expects to continue this trend of offering deposit promotions as it sees
opportunities to attract new customers.
LIQUIDITY AND FUNDS MANAGEMENT
The Company's balances of cash and cash equivalents increased $589,000 or 4.0%.
During the nine month period ending September 30, 2007, $2.4 million in cash was
provided by operating activities. Investing activities used $11.0 million during
the nine months ended September 30, 2007, primarily due to loan funding and the
purchase of securities and financing activities provided $9.1 million as a
result of deposit growth.
As of September 30, 2007, the Company had $7.9 million in federal funds sold,
$50.4 million in securities available for sale and $2.2 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 25.9% of total deposits as of September 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.
11
Total equity of the Company at September 30, 2007 was $25.3 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.
RESULTS OF OPERATIONS
CNB Corporation's 2007 net income for the first nine months was $2.3 million, a
decrease of $222,000 compared to 2006 results. This decrease in 2007 net income
can be attributed to a one time gain on sale of a closed branch site to
Walgreen's for $517,000 that occurred in June 2006. Basic and diluted earnings
per share were $1.83 for 2007 compared to Basic and diluted earnings per share
of $2.01 and $2.00 for 2006. Taking the one time event out of the calculations
for 2006 basis and diluted earnings per share would have been $1.73. The Bank
maintains a strong income by continuing to control costs as it closely monitors
noninterest expenses. The Bank is also able to maintain a level net interest
margin in a flat yield curve rate environment due to its core deposit base in
addition to offering new noninterest bearing deposit account products. These low
cost core deposits help control the Bank's interest expense.
The return on assets was 1.16% for the first nine months of the year versus
1.30% for the same period in 2006. The return on equity was 11.91% compared to
13.16% for the same period last year.
Net income for the three months ending September 30, 2007 was $831,000 compared
to $794,000 for 2006. This was an increase of $37,000 or 4.7%. Basic and diluted
earnings per share were $0.67 compared to $0.64 for 2006. The return on average
assets was 1.29% compared to 1.23% for 2006. The return on average equity was
12.95% compared to 12.37% for 2006.
Interest income for the first nine months of 2007 was $12.2 million, an increase
of $1.1 million or 10.4% compared to 2006 results. The majority of this increase
can be attributed to the Company's loan growth.
Interest income for the quarter ending September 30, 2007 was $4.2 million
compared to $3.9 million from the same period last year.
Interest expense for the first nine months of 2007 was $4.5 million, an increase
of $1.1 million or 33.7% 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 had also offered several 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 September 30, 2007 was $1.5 million
compared to $1.2 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 nine months of 2007, net interest income was $7.7 million
representing an increase of 0.2% from the same period in 2006. The fully taxable
equivalent net interest margin increased to 4.41% for the nine month period
ending September 30, 2007 compared to 4.40% for the same period ending September
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 $206,000 in the first nine months in
2007 and $90,000 in the first nine months in 2006.
Noninterest income for the nine months ending September 30, 2007 was $1.3
million, a decrease of $373,000 or 23.0% 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 $517,000 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 September 30, 2007 and 2006 was
$414,000. The noninterest income was the same amount and a similar mix for the
two periods.
12
Noninterest expense for the first nine months of 2007 and 2006 was $5.6 million
and $5.7 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.
Noninterest expense for the quarter ending September 31, 2007 and 2006 were $1.9
million. Although the noninterest expense for the two periods was similar, the
mix of the expense had some differences. The other expenses category in the
third quarter of 2006 included $25,000 due to losses from Other Real Estate
Owned properties. While the same period in 2007 saw a credit of $30,000 to other
expenses due to a signing bonus paid for switching ATM/Debit card processing
companies. The third quarter of 2007 also had increased occupancy expense due to
additional expenses for property taxes with the completion of our new Alanson
Branch and increased building, equipment and software maintenance expenses due
to new facilities and equipment. The Bank continues to closely monitor
noninterest expenses.
The provision for federal income tax was 27.2% of pretax income for the nine
months ended September 30, 2007 as compared to 28.6% 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
Total Approximate
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
PERIOD purchased share plans or programs or programs
- ------ --------- -------- ------------------- -----------------
$1,000,000
July, 2007 9,000 $40.65 9,000 $ 634,150
August, 2007 4,400 $40.40 13,400 $ 456,390
September, 2007 None 13,400 $ 456,390
Total $ 456,390
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 September 30, 2007, the Company has $456,390
remaining to purchase stock.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5-OTHER INFORMATION
None
14
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 October 10, 2007, with an accompanying
letter to shareholders, disclosing the Corporation's financial performance for
the first nine months of 2007 and announcing the Corporations dividend declared.
A Current Report on Form 8-K was filed on October 17, 2007 announcing the fourth
share repurchase under the Corporations stock repurchase plan.
A Current Report on Form 8-k was filed on October 23, 2007 announcing the firth
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: November 8, 2007 /s/ James C. Conboy, Jr.
----------------------------------------
James C. Conboy, Jr.
President and Chief Executive Officer
Date: November 8, 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
17