UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission file number 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)
Registrant's telephone number (231) 627-7111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $2.50 PER SHARE
(Title of Class)
Indicate by check mark if the registrant is a well known seasoned issuer, as
defined in Rule 405 of the Securities Act
Yes No X
----- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
----- -----
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Non- Smaller
accelerated Accelerated accelerated reporting
filer [ ] filer [ ] filer [ ] company [X]
(Do not check if a
smaller reporting
company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes No X
----- -----
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2007 was $ 49,579,880.
As of March 20, 2008 there were outstanding 1,214,419 shares of the registrant's
common stock, $2.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant's annual report to security holders for
fiscal year ended December 31, 2007 are incorporated by reference in Part I and
Part II of this report, and specified portions of the registrant's proxy
statement for its annual meeting of shareholders to be held May 20, 2008 are
incorporated by reference in Part III of this report.
1
PART I
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings involving the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area, and competition, all or some
of which could cause actual results to differ materially from historical
earnings and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as to the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
ITEM 1-BUSINESS
CNB Corporation (the Company) was incorporated in June, 1985 as a business
corporation under the Michigan Business Corporation Act, pursuant to the
authorization and direction of the Board of Directors of the Citizens National
Bank of Cheboygan (the Bank).
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the Federal Reserve Board) under the Bank Holding
Company Act with the Bank as its wholly-owned subsidiary. The Bank was acquired
by the Company effective December 31, 1985. The Company has corporate power to
engage in such activities as permitted to business corporations under the
Michigan Business Corporation Act, subject to the limitations of the Bank
Holding Company Act and regulations of the Federal Reserve Board. In general,
the Bank Holding Company Act and regulations restrict the Company with respect
to its own activities and activities of any subsidiaries to the business of
banking or such other activities which are closely related to the business of
banking.
During 2001, the Company, through its subsidiary, the Bank, formed the CNB
Mortgage Corporation. Residential mortgages were transferred to the new
subsidiary in October, 2001. The change had no impact on our customers who
continue to have their loans serviced locally by our Bank.
2
The Bank offers a full range of banking services to individuals, partnerships,
corporations, and other entities. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers.
The Bank's lending function provides a full range of loan products. These
include real estate mortgages, secured and unsecured commercial and consumer
loans, lines of credit, home equity loans and construction financing. The Bank
also participates in specialty loan programs through the Michigan State Housing
Development Authority, Federal Home Loan Mortgage Corporation, Mortgage Guaranty
Insurance Corporation, Farm Service Agency and Small Business Administration.
Through correspondent relationships, the Bank also makes available credit cards
and student loans.
The Bank's loan portfolio consists of over 48% residential real estate mortgages
on both primary and secondary homes. The residential borrower base is very
diverse and loan to value ratios are generally 80% or less. The Bank does not
practice subprime lending and does not have any loans that it would consider to
be subprime mortgage loans. Commercial loans accounts for approximately 47% of
total loans. Commercial real estate lending, a part of commercial loans, has
grown to represent 40% of total loans. These loans are generally for owner
occupied properties with loan to value ratios of 80% or less. Personal
guarantees are required on most commercial loans. Unsecured lending is very
limited.
The Bank makes first and second mortgage loans to its customers for the purchase
of residential and commercial properties. Historically, the Bank has sold its
long term fixed rate residential mortgage loans qualifying for the secondary
market to the Federal Home Loan Mortgage Corporation (FHLMC). The mortgage loan
portfolio serviced by the Bank for the FHLMC totaled approximately $75 million
at December 31, 2007.
Banking services are delivered through seven full-service banking offices and
two drive-in branches plus eleven automated teller machines in Cheboygan, Emmet
and Presque Isle Counties, Michigan. The business base of the counties is
primarily tourism with light manufacturing. The Bank maintains correspondent
bank relationships with several larger banks, which involve check clearing
operations, transfer of funds, loan participations, and the purchase and sale of
federal funds and other similar services.
We opened our new branch facility just south of Alanson in Littlefield Township
in January 2007. This is our first expansion location since the Indian River
branch opened in 1981. The new Alanson branch includes a full lobby service,
easily accessible drive-thru lanes and a drive up ATM.
Under various agency relationships, the Bank provides trust and discount
brokerage services and mutual fund, annuity and life insurance products to its
customers.
In its primary market, which includes Cheboygan County and parts of Emmet,
Mackinac and Presque Isle Counties, the Bank is one of three principal banking
institutions. One is a member of a multi-bank holding company with substantially
more assets than the Company, while the other is an independent community bank.
There are also two credit unions, one savings and loan association and a
brokerage firm.
As of December 31, 2007, the Bank employed 80 full-time and 8 part-time
employees. This compares to 75 full-time and 12 part-time employees as of
December 31, 2006. Neither the Company nor CNB Mortgage Corporation has any
full-time employees. Their operation and business are carried out by officers
and employees of the Bank who are not compensated by the Company.
Disclosure relating to the Distribution of Assets, Liabilities and
Stockholders'Equity; Interest rates and Interest differential is presented on
pages 43-44 of Registrant's 2007 Annual Report which is incorporated herein by
reference.
3
SECURITIES
The year end fair values and related gross unrealized gains and losses for
securities available for sale, were as follows:
AVAILABLE FOR SALE
Gross Gross
Fair Unrealized Unrealized
Available for Sale Value Gains Losses
- ------------------ ------- ---------- ----------
(In thousands)
2007
U.S. Government and agency $12,304 $111 $ (1)
Mortgage-backed 10,238 39 (31)
State and municipal 3,951 31 (2)
Money market preferred stock 14,000 -- --
------- ---- -----
$40,493 $181 $ (34)
======= ==== =====
2006
U.S. Government and agency $21,307 $ 8 $(125)
Mortgage-backed 10,491 4 (107)
State and municipal 8,549 59 (13)
Money market preferred stock 10,984 -- (16)
------- ---- -----
$51,331 $ 71 $(261)
------- ---- -----
The year end carrying amount, unrecognized gains and losses, and fair value of
securities held to maturity were as follows:
HELD TO MATURITY
Gross Gross
Carrying Unrecognized Unrecognized Fair
Held to Maturity Amount Gains Losses Value
- ---------------- -------- ------------ ------------ ------
(In thousands)
2007
State and municipal $8,789 $118 $(25) $8,882
====== ==== ==== ======
2006
State and municipal $4,543 $ 54 $(15) $4,582
====== ==== ==== ======
4
Scheduled maturities of the fair value of securities available for sale and the
carrying amount of held to maturity securities at December 31, 2007, were as
follows:
Due in Due from Due from Due
One year One to Five to After ten
Or less Five years Ten years Years Total
-------- ---------- --------- --------- -------
(In thousands)
U.S. Government and
agency $ 5,545 $ 6,759 $ -- $ -- $12,304
Mortgage-backed 864 9,374 -- -- 10,238
State and municipial 4,104 3,825 3,301 1,510 12,740
Money market prefd stock 14,000 -- -- -- 14,000
------- ------- ------ ------ -------
$24,513 $19,958 $3,301 $1,510 $49,282
======= ======= ====== ====== =======
Yield 5.39% 5.18% 6.64% 6.80% 5.43%
======= ======= ====== ====== =======
The Company held securities exceeding 10% of shareholders' equity for the
following states (including its political subdivisions) at December 31, 2007:
Book Fair
Value Value
------ ------
(In thousands)
Michigan $9,392 $9,437
LOANS
The following is a summary of loans at December 31:
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
(In thousands)
Residential real estate $ 83,264 $ 82,842 $ 83,234 $ 83,364 $ 89,042
Consumer 8,709 9,444 9,922 8,699 9,660
Commercial real estate 68,445 61,740 53,133 43,336 35,258
Commercial 14,234 13,208 10,037 9,220 9,540
-------- -------- -------- -------- --------
174,652 167,234 156,326 144,619 143,500
Deferred loan origination fees, net (28) (6) (8) (11) (15)
Allowance for loan losses (1,670) (1,498) (1,456) (1,350) (1,575)
-------- -------- -------- -------- --------
$172,954 $165,730 $154,862 $143,258 $141,910
======== ======== ======== ======== ========
5
Maturity and Rate Sensitivity of Selected Loans
The following table presents the remaining maturity of total loans outstanding
excluding residential real estate and consumer loans at December 31, 2007,
according to scheduled repayments of principal. The amounts due after one year
are classified according to the sensitivity of changes in interest rates.
Total
--------------
(In thousands)
In one year or less $38,861
After one year but within five years:
Interest rates are floating or adjustable --
Interest rates are fixed or predetermined 39,711
After five years:
Interest rates are floating or adjustable --
Interest rates are fixed or predetermined 4,107
-------
$82,679
=======
Summary of loan loss experience is as follows:
Additional information relative to the allowance for loan losses is presented in
the following table. This table summarizes loan balances at the end of each
period and daily average balances, changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off by
loan category, and additions to the allowance for loan losses through provisions
charged to expense.
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $1,498 $1,456 $1,350 $1,575 $1,669
Less charge-offs:
Residential real estate 57 2 -- 33 8
Consumer 59 63 28 43 98
Commercial real estate -- -- -- -- --
Commercial 10 39 -- 166 --
------ ------ ------ ------ ------
Total charge-offs: 126 104 28 242 106
Recoveries:
Residential real estate 5 6 7 1 1
Consumer 16 19 7 8 11
Commercial real estate -- -- -- -- --
Commercial 2 1 -- 8 --
------ ------ ------ ------ ------
Total recoveries 23 26 14 17 12
------ ------ ------ ------ ------
Net charge-offs 103 78 14 225 94
------ ------ ------ ------ ------
Provision charged to expense 275 120 120 -- --
------ ------ ------ ------ ------
Allowance for loan losses,
end of period $1,670 $1,498 $1,456 $1,350 $1,575
====== ====== ====== ====== ======
6
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
(Dollars in thousands)
Total loans outstanding at end
of period $174,652 $167,234 $156,326 $144,619 $143,500
Average loans outstanding for
the year $172,144 $163,146 $149,681 $143,800 $146,330
Ratio of net charge-offs to daily
average loans outstanding 0.06% 0.05% 0.01% 0.16% 0.06%
Ratio of net charge-offs to total
loans outstanding 0.06% 0.05% 0.01% 0.16% 0.07%
The allocation of the allowance for loan losses for the years ended December 31
is:
Residential Commercial
Real Estate Consumer Real Estate Commercial Unallocated Total
----------- -------- ----------- ---------- ----------- ------
(Dollars in thousands)
2007 Allowance amount $ 446 $ 97 $ 814 $268 $ 45 $1,670
% of Total loans 47.7% 5.0% 39.2% 8.1% 100.0%
2006 Allowance amount $ 437 $ 98 $ 655 $228 $ 80 $1,498
% of Total loans 49.5% 5.7% 36.9% 7.9% 100.0%
2005 Allowance amount $ 299 $ 35 $ 829 $163 $ 130 $1,456
% of Total loans 53.2% 6.3% 34.0% 6.5% 100.0%
2004 Allowance amount $ 223 $ 39 $ 118 $ 74 $ 896 $1,350
% of Total loans 57.6% 6.0% 30.0% 6.4% 100.0%
2003 Allowance amount $ 258 $ 48 $ 88 $ 49 $1,132 $1,575
% of Total loans 62.1% 6.7% 24.6% 6.6% 100.0%
The amount of the unallocated allowance decreased significantly from $896,000 in
2004 to $130,000 in 2005. This was primarily due to a revision of the allowance
for loan losses methodology during 2005. During 2005 management enhanced their
assessment of inherent risks in the loan portfolio which resulted in increased
allowance allocations in the commercial real estate and commercial loan
categories during 2005. Management feels the new methodology better allocates
the allowance into the appropriate loan categories.
The review of the loan portfolio revealed no undue concentrations of credit,
however, the portfolio continues to be concentrated in residential real estate
mortgages and highly dependent upon the tourist industry for the source of
repayment. Because the reliance on tourism is both primary, (i.e. loans to
motels, hotels, and restaurants, etc.) and secondary (i.e. loans to employees of
tourist related businesses), it is difficult to assess a specific dollar amount
of inherent loss potential. Likewise, the residential real estate market has
been stable or increasing, so inherent loss potential in this concentration is
also difficult to reasonably assess. Therefore, the tourism industry and
residential real estate mortgage concentrations are considered in establishing
the allowance for loan loss.
7
The following is a summary of nonaccrual, past due and restructured loans as of
December 31:
2007 2006 2005 2004 2003
------ ---- ---- ---- -----
(In thousands)
Nonaccrual loans $ 831 $ -- $ -- $ -- $ --
Loans past due 90 days or more 387 177 255 674 408
Troubled debt restructurings -- -- -- -- --
------ ---- ---- ---- ----
$1,218 $177 $255 $674 $408
====== ==== ==== ==== ====
DEPOSITS
The following table presents the remaining maturity of time deposits
individually exceeding $100,000 at December 31, 2007. Dollars are reported in
thousands.
3 Months or less $ 5,926
Over 3 Months to 6 Months 3,451
Over 7 Months through 12 Months 5,457
Over 12 Months 10,669
-------
$25,503
=======
Various ratios required by this section and other ratios commonly used in
analyzing bank holding company financial statements are included in page 1 of
Registrant's 2007 Annual Report, which is incorporated herein by reference.
SUPERVISION AND REGULATION
As a bank holding company within the meaning of the Bank Holding Company Act,
the Company is required to file quarterly and annual reports of its operations
and such additional information as the Federal Reserve Board may require and is
subject, along with its subsidiary, to examination by the Federal Reserve Board.
The Federal Reserve Board is the primary regulator of the Company.
The Bank Holding Company Act requires every bank holding company to obtain prior
approval of the Federal Reserve Board before it may merge with or consolidate
into another bank holding company, acquire substantially all the assets of any
bank, or acquire ownership or control of any voting shares of any bank if after
such acquisition it would own or control, directly or indirectly, more than 5%
of the voting shares of such bank holding company or bank. The Bank Holding
Company Act also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing and controlling banks or furnishing
services to banks and their subsidiaries. However, holding companies may engage
in, and may own shares of companies engaged in, certain businesses found by the
Federal Reserve Board to be so closely related to banking or the management or
control of banks as to be a proper incident thereto.
Under current regulations of the Federal Reserve Board, a holding company and
its nonbank subsidiaries are permitted, among other activities, to engage,
subject to certain specified limitations, in such banking related business as
consumer finance, equipment leasing, computer service bureau and software
operations, data processing, discount securities brokerage, mortgage banking and
brokerage, sale and leaseback, and other forms of real estate banking. The Bank
Holding Company Act does not place territorial restrictions on the activities of
nonbank subsidiaries of bank holding companies.
8
In addition, Federal legislation prohibits acquisition of "control" of a bank or
bank holding company without prior notice to certain federal bank regulators.
"Control" in certain cases may include the acquisition of as little as 10% of
the outstanding shares of capital stock.
The Company's cash revenues are derived primarily from dividends paid by the
Bank. Without prior approval, a national bank may not declare a dividend if the
total amount of all dividends declared by the bank in any calendar year exceeds
the total bank's retained net income for the current year and retained net
income for the preceding two years. Under federal law, the Bank cannot pay a
dividend if, after paying the dividend, the Bank will be "undercapitalized."
The Bank is a national banking association and as such is subject to the
regulations of, and supervision and regular examination by, the Office of the
Comptroller of the Currency ("OCC"). Deposit accounts of the bank are insured by
the Federal Deposit Insurance Corporation ("FDIC"). Requirements and
restrictions under the laws of the State of Michigan and Title 12 of the United
States Code include the requirements that banks maintain reserves against
deposits, restrictions on the nature and amount of loans which may be made by a
bank, and the interest that may be charged thereon, restrictions on the payment
of interest on certain deposits, and restrictions relating to investments and
other activities of a bank. The Federal Reserve Board has established guidelines
for risk based capital by bank holding companies. These guidelines establish a
risk adjusted ratio relating capital to risk-weighted assets and off-balance
sheet exposures. These capital guidelines primarily define the components of
capital, categorize assets into different risk classes, and include certain
off-balance sheet items in the calculation of capital requirements.
An analysis of the Bank's regulatory capital requirements at December 31, 2007
is presented on page 29 of the Registrant's 2007 Annual Report in Note 14
Regulatory Capital to the Company's consolidated financial statements, which is
incorporated herein by reference.
ITEM 1A-RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
shareholders or prospective investors should carefully consider the following
risk factors:
WE FACE INTENSE COMPETITION IN ALL PHASES OF OUR BUSINESS FROM OTHER BANKS AND
FINANCIAL INSTITUTIONS.
We face substantial competition in all phases of our operations from a variety
of different competitors. Our future growth and success will depend on our
ability to compete effectively in this highly competitive environment. We
compete for deposits, loans and other financial services with numerous
Michigan-based and out-of-state banks, thrifts, credit unions and other
financial institutions as well as other entities which provide financial
services. Some of these competitors are not subject to the same regulatory
restrictions, have advantages of scale due to their size, or have cost
advantages due to their tax status.
INTEREST RATES AND OTHER CONDITIONS IMPACT OUR RESULTS OF OPERATIONS.
Our profitability is in part a function of the spread between the interest rates
earned on loans and investments and the interest rates paid on deposits. Like
most banking institutions, our net interest spread and margin will be affected
by general economic conditions and other factors, including fiscal and monetary
policies of the federal government, that influences market interest rates and
our ability to respond to changes in such rates. At any given time, our assets
and liabilities (deposits) will be such that they are affected differently by a
given change in interest rates. Although we believe our current level of
interest rate sensitivity is reasonable and effectively managed, significant
fluctuations in interest rates, changes in the U.S. Treasury yield curve and
other similar factors may have an adverse effect our business, financial
condition and results of operations.
9
OUR LOCAL ECONOMY MAY AFFECT OUR FUTURE GROWTH POSSIBILITIES.
Our current market area is principally located in Northern Michigan. Our future
growth opportunities depend on the growth and stability of our regional economy
and our ability to expand our market area and market share. A downturn in our
local economy may limit funds available for deposit and may negatively affect
our borrowers' ability to repay their loans on a timely basis, both of which
could have an impact on our profitability.
WE RELY HEAVILY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF ANY
OF THEM MAY ADVERSELY EFFECT OUR OPERATIONS.
We are and will continue to be dependent upon the services of our management
team, including our President and Chief Executive Officer, our Senior Vice
President, and our other senior managers and commercial lenders. Losing one or
more key members of the management team could adversely affect our operations.
WE MUST EFFECTIVELY MANAGE OUR CREDIT RISK.
These are risks inherent in making any loan, including risks inherent in dealing
with individual borrowers, risk of nonpayment, risks resulting from
uncertainties as to the future value of collateral and risks resulting from
changes in economic and industry conditions. We attempt to minimize our credit
risk through prudent loan application approval procedures. We have a formal
lending policy that is approved by the Board of Directors of the Bank. However
prudent these procedures may be they do not eliminate credit risk.
OUR CREDIT LOSSES COULD INCREASE AND OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE
ADEQUATE TO COVER ACTUAL LOAN LOSSES.
The risk of nonpayment of loans is inherent in all lending activities and
nonpayment, if it occurs, may have a material adverse affect on our earnings and
overall financial condition as well as the value of our common stock. We make
various assumptions and judgments about the collectibility of our loan portfolio
and provide an allowance for potential losses based on a number of factors. If
our assumptions were wrong, our allowance for loan losses may not be sufficient
to cover our losses, thereby having an adverse affect on our operating results,
and may cause us to increase the allowance in the future. The actual amount of
future provisions for loan losses cannot now be determined and may exceed the
amounts of past provisions. Additionally, federal banking regulators, as an
integral part of their supervisory function, periodically review our allowance
for credit losses. These regulatory agencies may require us to increase our
provision for credit losses or to recognize further loan charge-offs based upon
their judgments, which may be different from ours. Any increase in the allowance
for credit losses could have a negative effect on our net income, financial
condition and results of operations.
THE COMPANY CONTINUES TO BE SUBJECT TO INCREASED REGULATORY REQUIREMENTS IMPOSED
BY THE SARBANES-OXLEY ACT OF 2002, INCLUDING A REQUIREMENT THAT MANAGEMENT
ATTEST TO THE COMPANY'S INTERNAL CONTROLS OVER FINANCIAL REPORTING, WHICH
ATTESTATION WILL BE REVIEWED BY THE COMPANY'S EXTERNAL AUDITORS. THESE
REQUIREMENTS REPRESENT INCREASED COSTS TO THE COMPANY OVER PAST PERIODS.
The Company is required to comply with various corporate governance and
financial reporting requirements under the Sarbanes-Oxley Act of 2002 as well as
new rules and regulations adopted by the Commission and the Public Company
Accounting Oversight Board. In particular, unless extended, the Company will be
required to include external auditor reports on the effectiveness of internal
controls over financial reporting as part of its annual report on Form 10-K for
the year ended December 31, 2008, pursuant to Section 404 of the Sarbanes-Oxley
Act. Management is already required to report on the effectiveness of internal
controls for the year ended December 31, 2007. The Company expects to continue
to spend significant amounts of time and money on compliance with these rules.
10
WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE, AND WE MAY HAVE FEWER RESOURCES
THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS.
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In additional to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend, in part, on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in
technological improvements.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT, AND CHANGES IN LAWS AND
REGULATIONS TO WHICH WE ARE SUBJECT MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
We operate in a highly regulated environment and are subject to supervision and
regulation by a number of governmental regulatory agencies, including the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, Securities and Exchange Commission, and the Comptroller of the
Currency. Regulations adopted by these agencies govern a comprehensive range of
matters relating to our permissible activities for us to engage in, maintenance
of adequate capital levels, matters of internal control over financial reporting
and other aspects of our operations. The regulators possess broad authority to
prevent or remedy unsafe or unsound practices or violations of law or
regulation. The laws and regulations applicable to the Company could change at
any time and we cannot predict the effects of these changes on our business and
profitability. Increased regulation could increase our cost of compliance and
adversely affect profitability. For example, new legislation or regulation may
limit the manner in which we may conduct our business, including our ability to
offer new products, attract deposits, make loans and achieve satisfactory
spreads.
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON SHARES, AND THUS YOUR ABILITY
TO SELL OR PURCHASE OUR COMMON SHARES MAY BE LIMITED.
Your ability to sell our common shares or purchase additional common shares
largely depends upon the existence or an active market for our common shares.
Although our common shares are quoted on the OTC Bulletin Board, they are not
listed on any securities exchange and the volume of trading has been
historically limited. As a result, you may not be able to sell or purchase our
common shares at the volume, time and price that you desire. In addition, a fair
valuation of the purchases or sales price of our common shares also depends upon
an active trading market, and thus the price you receive for a thinly traded
stock, such as our common shares, may not reflect its true value.
WE MAY NOT BE ABLE TO PAY DIVIDENDS IN THE FUTURE IN ACCORDANCE WITH PAST
PRACTICE.
We pay a quarterly dividend to shareholders. However, we are dependent primarily
upon the Bank for our earnings and funds to pay dividends on our common stock.
The payment of dividends also is subject to legal and regulatory restrictions.
Any payment of dividends in the future will depend, in large part, on the Bank's
earnings, capital requirements, financial condition and other factors considered
by our Board of Directors.
ITEM 1B-UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2-PROPERTIES
The Company and the Bank have their primary office at 303 North Main Street,
Cheboygan, Michigan. In addition, the Bank owns and operates the following
facilities: Cheboygan South, 10854 North Straits Highway; Onaway Office, 20581
W. State Street, Onaway; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw
City; Pellston Office, 200 Stimpson, Pellston; Indian River Office, 3990 Straits
Highway, Indian River; Downtown drive-in, 414 Division Street, Cheboygan;
11
and East Side drive-in, 816 East State Street, Cheboygan. During 2006 the Bank
constructed a new facility in Littlefield Township just south of Alanson, Emmet
County. The new facility was opened in January 2007 and is located at 8011 S. US
31, Alanson. All properties are owned by the Bank free of any mortgages or
encumbrances but for the Littlefield Township property upon which there is a
purchase money mortgage which was entered into to accommodate the seller.
ITEM 3-LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any pending legal proceedings
other than the routine litigation that is incidental to the business of banking.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during the
fourth quarter of 2007.
PART II
ITEM 5-MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is listed on the Over-the-counter Bulletin Board
under the symbol "CNBZ". All trades are handled on a direct basis between buyer
and seller. The Bank acts as the Company's transfer agent. The principal market
for the Company's stock consists of existing shareholders, family members of
existing shareholders and individuals in the service area.
The information detailing the range of high and low selling prices of known
transactions for the Company's common stock and cash dividends declared for each
full quarterly period within the two most recent fiscal years can be found under
the caption "Financial Highlights" on page 1 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 2007, which is hereby
incorporated by reference.
The information which indicates the amount of common stock that is subject to
outstanding options or warrants to purchase, or securities convertible into,
common equity of the registrant can be found in Note 8 on page 23 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
2007, which is hereby incorporated by reference.
There are approximately 1,017 shareholders of record of common stock of the
Company as of January 31, 2008.
During 2007 and 2006, the Company declared regular dividends of $1.68 per share
plus a special dividend of $0.60 per share. The information detailing the cash
dividends declared within the two most recent fiscal years can be found under
the caption "Financial Highlights" on page 1 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 2007, which is hereby
incorporated by reference. These have resulted in a dividend payout ratio
averaging 86.1% for the past three years.
The Federal Reserve Board's policy of Cash Dividends by Bank Holding Companies
restricts the payment of cash dividends based on the following criteria: (1) the
Company's net income from operations over the past year must be sufficient to
fully fund the dividend and (2) the prospective rate of earnings retention must
be consistent with the Company's capital needs, asset quality and overall
financial condition.
12
ITEM 6-SELECTED FINANCIAL DATA
The information required by this item is included on Page 1 under the caption
"Financial Highlights" of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 2007, which is hereby incorporated by reference.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included on pages 35 through 47 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
2007, which is hereby incorporated by reference.
ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included on pages 40 through 41 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
2007, which is hereby incorporated by reference.
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is included on pages 2 through 32 of the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 2007, which is
hereby incorporated by reference.
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
In February 2007, the Company announced that the Board of Directors, upon
recommendation of its Audit Committee, dismissed Crowe Chizek and Company LLC
the Company's independent auditors, and engaged Plante & Moran, PLLC to serve as
the Company's independent auditors for the fiscal year ending December 31, 2007.
For more information, see the Company's current report on Form 8-K/A, filed with
the SEC on March 1, 2007.
ITEM 9A (T) -CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the "Evaluation Date") an
evaluation was carried out under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and Treasurer
who serves as our Chief Financial and Accounting Officer, of the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on
their evaluation, our Chief Executive Officer and Treasurer have concluded that
as of the Evaluation Date, the Company's disclosure controls and procedures are,
to the best of their knowledge, effective to ensure that material information
relating to the Company known to others within the Company required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
The management of CNB Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. CNB
Corporation's internal control system was designed to provide reasonable
assurance to the Company's management and board of directors regarding the
preparation and fair presentation of its financial statements.
Management of CNB Corporation assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007. In making
this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control--Integrated
Framework. Based on our
13
assessment we believe that, as of December 31, 2007, the Company's internal
control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report
The Board of Directors, acting through its Audit Committee, is responsible for
the oversight of the Company's accounting policies, financial reporting and
internal control. The Audit Committee of the Board of Directors is comprised
entirely of outside directors who are independent of management. It meets
quarterly with management and the internal auditor and periodically with the
independent auditors to ensure that they are carrying out their
responsibilities. The independent auditors and the internal auditor have full
and unlimited access to the Audit Committee, with or without management, to
discuss the adequacy of internal control over financial reporting, and any other
matter which they believe should be brought to the attention of the Audit
Committee.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2007 that
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
LIMITATIONS OF THE EFFECTIVENESS OF INTERNAL CONTROLS
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective, provide
only reasonable assurance with respect to financial statement preparation and
presentation.
ITEM 9B-OTHER INFORMATION
None.
PART III
ITEM 10-DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information required by this item is included under the captions
"Information about Director Nominees," "Committees and Meetings of the Board of
Directors," "Code of Ethics," and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's proxy statement for the annual meeting of
shareholders scheduled for May 20, 2008, which is hereby incorporated by
reference.
Information about the executive officers of the Corporation is set forth below.
Name and Age Position
- ------------ --------
Vincent J. Hillesheim, 57 Chairman of the Corporation and Citizens National
Bank of Cheboygan. Mr. Hillesheim was elected
Chairman in 2006.
14
Susan A. Eno, 53 Chief Executive Officer and President of the
Corporation and Citizens National Bank of Cheboygan.
Ms. Eno has been an officer of the Corporation since
1996 and an employee of the Bank since 1971. She has
been in her current position since January 1, 2008
and was in her previous position as Executive Vice
President and Secretary of the Corporation and
Executive Vice President and Cashier of Citizens
National Bank of Cheboygan for more than 11 years.
Douglas W. Damm, 54 Senior Vice President of the Corporation and
Citizens National Bank of Cheboygan. Mr. Damm has
been an officer of the Corporation since 2003 and an
employee of the Bank since 1987. He has been in his
current position for more than 20 years and has 29
years experience in the banking business.
Shanna L. Hanley, 30 Treasurer of the Corporation; Vice President and
Senior Controller of Citizens National Bank of
Cheboygan. Ms. Hanley joined the Bank during 2005.
ITEM 11-EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Compensation Discussion and Analysis" of the Company's proxy statement for the
annual meeting of shareholders scheduled for May 20, 2008, which is hereby
incorporated by reference.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is included under the caption "Ownership
of Common Stock" of the Company's proxy statement for the annual meeting of
shareholders scheduled for May 20, 2008, which is hereby incorporated by
reference.
The information required by this item is included under the caption "Securities
Authorized for Issuance Under Equity Compensation Plan Information" in the
Company's proxy statement for the annual meeting of shareholders scheduled for
May 20, 2008, which is hereby incorporated by reference.
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is included under the caption "Certain
Relationships and Related Transactions" in the Company's proxy statement for the
annual meeting of shareholders scheduled for May 20, 2008, which is hereby
incorporated by reference.
ITEM 14-PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is included under the caption "Independent
Auditors" in the Company's proxy statement for the annual meeting of
shareholders scheduled for May 20, 2008, which is hereby incorporated by
reference.
PART IV
ITEM 15-EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements. The following financial statements, notes to
financial statements and independent
15
report of CNB Corporation and its subsidiary are referenced in Item 8 of
this report and are hereby incorporated by reference:
Consolidated Balance Sheets-December 31, 2007 and 2006.
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 2007, 2006 and 2005.
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 2007, 2006 and 2005.
Consolidated Statements of Cash Flows for the years ended December 31,
2007, 2006 and 2005.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm dated March 28,
2008.
(2) Financial Statement Schedules. Not applicable
(3) Exhibits.
(3a) Articles of Incorporation. Previously filed as exhibit to the
registrant's Form 10-KSB filed April 26, 1996, and hereby incorporated
by reference.
(3b) By-Laws as amended through March 25, 2004. Previously filed as
Exhibit 3b to the Company's Form 10-K for the fiscal year ended
December 31, 2003 filed December 27, 2004, and hereby incorporated by
reference.
(10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the
Company's Form 10-Q for the quarter ended September 30, 1996 and
hereby incorporated by reference.
(11) Statement regarding computation of per share earnings. This
information is disclosed in Note 10 to the Company's Financial
Statements for the year ended December 31, 2007, which are included in
the annual report to shareholders for the year ended December 31, 2007
which is filed as Exhibit 13 to the Company's Form 10-K for the fiscal
year ended December 31, 2007, and hereby incorporated by reference.
(13) Annual report to shareholders for the year ended December 31,
2007. (filed herewith).
(21) Subsidiaries of the Company. (filed herewith).
(23) Consent of Independent Registered Public Accounting Firm. (filed
herewith).
(31.1) Certification of Chief Executive Officer.
(31.2) Certification of Chief Financial Officer.
(32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) See Item 15(a) (3) above.
(c) Financial Statement Schedules. Not applicable.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CNB CORPORATION
(Registrant)
Date: March 27, 2008
/s/ Susan A. Eno
- ----------------------------------------
Susan A. Eno
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 27, 2008.
/s/ Steven J. Baker /s/ Kathleen A. Lieder /s/ Douglas W. Damm
- ------------------------------ ------------------------------ ------------------------------
Steven J. Baker Kathleen A. Lieder Douglas W. Damm
Director Director Senior Vice President
/s/ James C. Conboy, Jr. /s/ John L. Ormsbee /s/ Shanna L. Hanley
- ------------------------------ ------------------------------ ------------------------------
James C. Conboy, Jr. John L. Ormsbee Shanna L. Hanley
Director Director Treasurer (Principal Financial
Officer)
/s/ Kathleen M. Darrow /s/ R. Jeffery Swadling
- ------------------------------ ------------------------------
Kathleen M. Darrow R. Jeffery Swadling
Director Director
/s/ Thomas J. Ellenberger /s/ Francis J. VanAntwerp, Jr.
- ------------------------------ ------------------------------
Thomas J. Ellenberger Francis J. VanAntwerp, Jr.
Director Director
/s/ Vincent J. Hillesheim /s/ Susan A. Eno
- ------------------------------ ------------------------------
Vincent J. Hillesheim Susan A. Eno
Director Director (Bank Only)
Chairman President and Chief Executive
Officer
17
EXHIBIT INDEX
(3a) Articles of Incorporation. Previously filed as an exhibit to the
registrant's Form 10-KSB filed April 26, 1996 and hereby incorporated by
reference.
(3b) By-Laws as amended through March 25, 2004. Previously filed as Exhibit 3b
to the Company's Form 10-K for the fiscal year ended December 31, 2003 filed
December 27, 2004, and hereby incorporated by reference.
(10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the Company's
Form 10-Q for the quarter ended September 30, 1996 and hereby incorporated by
reference.
(11) Statement regarding computation per share earnings. This information is
disclosed in Note 10 to the Company's Financial Statements for the year ended
December 31, 2007 contained in is annual report to shareholders for the year
ended December 31, 2007. (filed herewith)
(13) Annual report to shareholders for the year ended December 31, 2007. (filed
herewith)
(21) Subsidiaries of the Company. (filed herewith)
(23) Consent of Independent Registered Public Accounting firm. (filed herewith)
(31.1) Certification of Chief Executive Officer. (filed herewith)
(31.2) Certification of Chief Financial Officer. (filed herewith)
(32.1) Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
(filed herewith)
18