UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2008
Or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period ______ to ______
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, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 or the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a small 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]
As of May 7, 2008 there were 1,213,632 shares of the issuer's common stock
outstanding.
CNB CORPORATION
Index
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Condensed):
Consolidated Balance Sheets - March 31, 2008 and December 31,
2007 ........................................................... 3
Consolidated Statements of Income -
Three Months Ended March 31, 2008 and 2007 ..................... 4
Consolidated Statements of Cash Flows - Three Months Ended March
31, 2008 and 2007 .............................................. 5
Notes to Consolidated Financial Statements ........................ 6 - 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 10 - 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk .. 14
Item 4T - Controls and Procedures .................................... 14 - 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ........................................... 15
Item 1A - Risk Factors ............................................... 15
Item 2 - Unregistered Sales of Equity Securities and Use of
Proceeds .......................................................... 15
Item 3 - Defaults Upon Senior Securities ............................. 16
Item 4 - Submission of Matters to a Vote of Security Holders ......... 16
Item 5 - Other Information ........................................... 16
Item 6 - Exhibits and Reports on Form 8-K ............................ 16
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)
March 31, December 31,
2008 2007
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,660 $ 8,844
Interest-bearing deposits with other
financial institutions 5,020 --
Federal funds sold 19,635 8,428
-------- --------
Total cash and cash equivalents 30,315 17,272
Securities available for sale 33,680 40,493
Securities held to maturity (market value
of $8,630 in 2008 and $8,882 in 2007) 8,463 8,789
Other securities 1,008 1,008
Loans, held for sale
1,156 150
Loans, net of allowance for loan losses
of $1,795 in 2008 and $1,670 in 2007 173,247 172,804
Premises and equipment, net 6,233 6,353
Other assets 8,246 8,324
-------- --------
Total assets $262,348 $255,193
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 34,828 $ 37,984
Interest-bearing 197,904 187,042
-------- --------
Total deposits 232,732 225,026
Other liabilities 5,092 5,767
-------- --------
Total liabilities 237,824 230,793
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; and 1,213,632 shares
issued and outstanding in 2008 and 2007 3,034 3,034
Additional paid-in capital 19,509 19,509
Retained earnings 2,486 2,528
Accumulated other comprehensive loss, net of tax
(505) (671)
-------- --------
Total shareholders' equity 24,524 24,400
-------- --------
Total liabilities and shareholders' equity $262,348 $255,193
======== ========
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended
March 31,
------------------
2008 2007
--------- ------
(Unaudited)
INTEREST INCOME
Loans, including fees $3,122 $3,132
Securities
Taxable 497 427
Tax exempt 132 127
Other interest income 137 243
------ ------
Total interest income 3,888 3,929
INTEREST EXPENSE ON DEPOSITS 1,345 1,468
------ ------
NET INTEREST INCOME 2,543 2,461
Provision for loan losses 431 69
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,112 2,392
------ ------
NONINTEREST INCOME
Service charges and fees 279 273
Net realized gains from sales of loans 37 18
Loan servicing fees, net of amortization 23 31
Other income 61 58
------ ------
Total noninterest income 400 380
NONINTEREST EXPENSES
Salaries and employee benefits 966 914
Deferred compensation 86 81
Pension 29 35
Hospitalization 154 114
Occupancy 292 311
Supplies 41 52
Legal and professional 87 105
Other expenses 288 277
------ ------
Total noninterest expense 1,943 1,889
------ ------
INCOME BEFORE INCOME TAXES 569 883
Income tax expense 102 253
------ ------
NET INCOME $ 467 $ 630
====== ======
TOTAL COMPREHENSIVE INCOME $ 634 $ 728
====== ======
Return on average assets (annualized) 0.72% 0.98%
Return on average equity (annualized) 7.55% 9.97%
Basic earnings per share $ 0.38 $ 0.51
Diluted earnings per share $ 0.38 $ 0.51
Dividends declared per share $ 0.42 $ 0.42
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Three months
ended March 31,
-----------------
2008 2007
------- -------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 467 $ 630
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net 159 212
Provision for loan losses 431 69
Loans originated for sale (3,034) (2,878)
Proceeds from sales of loans originated for sale 1,893 898
Gain on sales of loans (37) (18)
(Increase) decrease in other assets 184 (242)
Increase in other liabilities 49 264
------- -------
Total adjustments (355) (1,695)
------- -------
Net cash (used in) provided by operating activities 112 (1,065)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 8,810 9,742
Purchase of securities available for sale (1,770) (4,994)
Proceeds from maturities of securities held to maturity 415 522
Purchase of securities held to maturity (89) (511)
Net change in portfolio loans (894) 556
Premises and equipment expenditures (14) (111)
------- -------
Net cash provided by investing activities 6,458 5,204
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,706 8,817
Dividends paid (1,233) (1,262)
------- -------
Net cash provided by financing activities 6,473 7,555
------- -------
Net change in cash and cash equivalents 13,043 11,694
Cash and cash equivalents at beginning of year 17,272 14,812
------- -------
Cash and cash equivalents at end of period $30,315 $26,506
======= =======
Cash paid during the period for:
Interest $ 1,328 $ 1,441
Income taxes -- 48
Non-cash transactions:
Transfer from loans to other real estate owned 170 217
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2007.
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.
Fair Value
The following tables present information about the Company's assets measured at
fair value on a recurring basis at March 31, 2008, and the valuation techniques
used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the company has the ability to
access.
Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and other inputs such as
interest rates and yield curves that are observable at commonly quoted
intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
6
In instances where inputs used to measure fair value fall into different levels
in the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company's assessment of the significance of particular inputs to
these fair value measurements required judgment and considers factors specific
to each asset or liability.
Disclosures concerning assets measured at fair value are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31,
2008 (dollars in thousands)
Significant
Quoted Prices in Other
Active Markets for Observable Significant
Identical Assets Inputs Unobservable Balance at
(Level 1) (Level 2) Inputs (Level 3) March 31, 2008
------------------ ----------- ---------------- --------------
ASSETS
Investment securities-available-for-sale $17,132 $-- $16,548 $33,680
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring
Basis (dollars in thousands)
Investment
securities-
available-
for-sale
-----------
BALANCE AT DECEMBER 31, 2007 $17,923
Total realized and unrealized gains (losses)
included in income --
Total unrealized gains (losses) included in
other comprehensive income 65
Net purchases, sales, calls and maturities (1,440)
Net transfers in/out of Level 3 --
-------
BALANCE AT MARCH 31, 2008 $16,548
=======
Available-for-sale investment securities categorized as Level 3 assets primarily
consist of bonds issued by local municipalities and money market preferred
securities. The Company estimates the fair value of these assets based on the
present value of expected future cash flows using management's best estimate of
key assumptions, including forecasted interest yield and payment rates, credit
quality and a discount rate commensurate with the current market and other risks
involved.
Both observable and unobservable inputs may be used to determine the fair value
of positions classified as Level 3 assets and liabilities. As a result, the
unrealized gains and losses for these assets and liabilities presented in the
tables above may include changes in fair value that were attributable to both
observable and unobservable inputs.
7
Assets Measured at Fair Value on a Nonrecurring Basis at March 31, 2008
(dollars in thousands)
Prices in
Active
Markets Significant
for Other Total Losses
Balance Identical Observable Significant for the Period
at March 31, Assets Inputs Unobservable Ended March
2008 (Level 1) (Level 2) Inputs (Level 3) 31, 2008
------------ --------- ----------- ---------------- --------------
ASSETS
Impaired loans accounted for
under FAS 114 $100 $100 $209
Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist
of non-homogeneous loans that are considered impaired. The Company estimates the
fair value of the loans based on the present value of expected future cash flows
using management's best estimate of key assumptions. These assumptions include
future payment ability, timing of payment streams, and estimated realizable
values of available collateral (typically based on outside appraisals). The
losses for the period ending March 31, 2008 represents charge-offs of loan
balances written down through the allowance for loan losses.
Other assets, including bank-owned life insurance and intangible assets are also
subject to periodic impairment assessments under other accounting principles
generally accepted in the United States of America. These assets are not
considered financial instruments. Effective February 12, 2008, the FASB issued a
staff position, FSP FAS 157-2, which delayed the applicability of FAS 157 to
non-financial instruments. Accordingly, these assets have been omitted from the
above disclosures.
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 March 31, 2008 and 2007.
Due to the plan end date, there are no options available for grant as of March
31, 2008 and 2007.
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, 2008 23,438 $49.00
Options exercised -- --
Options forfeited (6,294) 40.62
------
Balance at March 31, 2008 17,144 $52.09 3.0 years $--
======
There were no options exercised during the three months ended March 31, 2008 and
2007 therefore the aggregate intrinsic value of options exercised was $0 for
both periods. There were no shares vested for the
8
same periods. Also, there was no cash received or tax benefits realized from
option exercises during the same periods
There have been no significant changes in the Company's critical accounting
policies since December 31, 2007.
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 month period
ending March 31, 2008 the weighted average shares outstanding in calculating
basic and diluted earnings per share was 1,213,632. As of March 31, 2008 all of
the 17,144 outstanding share options were not considered in the earnings per
share calculation because they were antidilutive. For the three month period
ending March 31, 2007 the weighted average shares outstanding in calculating
basic earnings per share were 1,239,511 while the weighted average number of
shares for diluted earnings per share was 1,240,485.
9
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of CNB Corporation ("Company") and its wholly owned
subsidiary, Citizens National Bank of Cheboygan ("Bank") and the Bank's wholly
owned subsidiary CNB Mortgage Corporation for the three month period ending
March 31, 2008.
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 2007 Annual Report.
FINANCIAL CONDITION
As of March 31, 2008 total assets of the company were $262.3 million which
represents an increase of $7.2 million or 2.8% from December 31, 2007. The
Company recognized a marginal increase in the loan portfolio of $1.6 million or
0.9% while deposits increased $7.7 million.
SECURITIES
The securities portfolio decreased $7.1 million since December 31, 2007. The
available for sale portfolio decreased to 78.1% of the investment portfolio down
from 80.5% at year-end.
The fair values and related unrealized gains and losses for securities available
for sale were as follows, in thousands of dollars:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------- ---------- ----------
Available for Sale
MARCH 31, 2008
U.S. Government agency $ 6,230 $150 $ --
Mortgage-backed 10,902 183 --
State and municipal 4,648 67 (1)
Money market preferred stocks 11,900 -- --
------- ---- ----
$33,680 $400 $ (1)
======= ==== ====
DECEMBER 31, 2007
U.S. Government agency $12,304 $111 $ (1)
Mortgage-backed 10,238 39 (31)
State and municipal 3,951 31 (2)
Money market preferred stocks 14,000 -- --
------- ---- ----
$40,493 $181 $(34)
======= ==== ====
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows, in thousand of dollars:
10
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
-------- ------------ ------------ ------
Held to Maturity
MARCH 31, 2008
State and municipal $8,463 $179 $(12) $8,630
====== ==== ==== ======
DECEMBER 31, 2007
State and municipal $8,789 $118 $(25) $8,882
====== ==== ==== ======
The carrying amount and fair value of securities by contractual maturity at
March 31, 2008 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 $ 5,801 $2,502 $2,516
Due from one to five years 26,649 2,319 2,417
Due from five to ten years 556 2,712 2,775
Due after ten years 674 930 922
------- ------ ------
$33,680 $8,463 $8,630
======= ====== ======
LOANS
Net loans at March 31, 2008 increased $293,000 from December 31, 2007. The table
below shows total loans outstanding by type, in thousands of dollars, at March
31, 2008 and December 31, 2007 and their percentages of the total loan
portfolio. All loans are domestic. A quarterly review of loan concentrations at
March 31, 2008 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
12.9% of total loans.
March 31, 2008 December 31, 2007
--------------------- ---------------------
Balance % of total Balance % of total
-------- ---------- -------- ----------
Portfolio loans:
Residential real estate $ 81,862 46.75% $ 83,264 47.67%
Consumer 8,369 4.78% 8,709 4.99%
Commercial real estate 71,276 40.71% 68,445 39.19%
Commercial 13,581 7.76% 14,234 8.15%
-------- ------ -------- ------
175,088 100.00% 174,652 100.00%
====== ======
Deferred loan origination fees, net (46) (28)
Allowance for loan losses (1,795) (1,670)
-------- --------
Loans, net $173,247 $172,954
======== ========
11
ALLOWANCE AND PROVISION FOR LOAN LOSSES
An analysis of the allowance for loan losses, in thousands of dollars, for the
three months ended March 31, follows:
2008 2007
------ ------
Beginning balance $1,670 $1,498
Provision for loan losses 431 69
Charge-offs (316) (24)
Recoveries 10 8
------ ------
Ending balance $1,795 $1,551
====== ======
Since December 31, 2007 commercial real estate mortgages have increased $2.8
million while consumer mortgages have decreased $1.4 million. This is primarily
due to in house mortgages being refinanced with mortgages that are sold in the
secondary market and the Bank's continued stronger emphasis on commercial
lending. In response to the change in portfolio composition, loan growth, change
in asset quality and other general economic factors management substantially
increased the recording of its loan loss provision compared to previous years to
$431,000 in the first three months of 2008 and $69,000 in the first three months
of 2007. The amount of provisions for loan losses recognized by the Company is
based on management's evaluation as to the amounts required to maintain an
allowance adequate to provide for potential losses inherent in the loan
portfolio.
CREDIT QUALITY
At the May 8, 2008 Board of Directors meeting, the Board approved changes to the
Bank's loan policy to improve and clarify the Bank's lending practices. The
lending staff continues to be well-trained and experienced. The Company has
experienced a continued decrease in the quality of its loan portfolio as a
result of continued deterioration of the Michigan economy. The Company maintains
an acceptable 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.
March 31, December 31,
2008 2007
--------- ------------
(dollars in thousands)
Nonaccrual $1,851 $ 831
Loans past due 90 days or more 171 387
Troubled debt restructurings 1,470 --
------ ------
Total nonperforming loans $3,492 $1,218
====== ======
Percent of total loans 2.02% 0.70%
At March 31, 2008, total nonperforming assets increased by $2.3 million from
December 31, 2007. The Bank is closely monitoring and managing nonperforming
loans. Nonaccrual loans increased to $1.0 million since December 31, 2007. Loans
past due 90 days and still accruing are loans that management considers to be
collectable including accrued interest. The increase in non-performing loans was
due to deteriorating credit quality, more effective problem loan identification
and tightening credit management practices. Uncertain local economic conditions
also contributed to the weakness in credit quality.
12
The Company had 46 problem loans that were reviewed for impairment totaling $8.4
million as of March 31, 2008. 25 of the 46 loans were considered impaired and
have a valuation allowance against loss potential. The balance of these 25 loans
at March 31, 2008 totaled $3.7 million and the valuation allowance was $756,000.
Because of the continuing efforts to identify and analyze the overall amount of
credit risk in the Company's loan portfolio, the Company expects the level of
non-performing loans to remain at current levels or increase throughout the
remainder of 2008. The Bank believes it is adequately reserved on these loans.
DEPOSITS
Deposits at March 31, 2008 increased $7.7 million since December 31, 2007. This
increase is due, in part, to the new branch location that opened in January 2007
and regular deposit seasonality. The Bank continues to grow deposits in its new
Alanson market. Interest-bearing deposits increased $10.9 million or 5.8% for
the three months ended March 31, 2008, while noninterest-bearing deposits
decreased $3.2 million or 8.3%. This change in the deposit mix can be attributed
to the changing rate environment as customer's withdrawal non-interest bearing
money for deposit into certificates of deposit.
LIQUIDITY AND FUNDS MANAGEMENT
The Company maintains an adequate liquidity position in order to respond to
extensions of credit, the short-term demand for funds caused by withdrawals from
deposit accounts, and for the payment of operating expenses. Maintaining
adequate liquidity is accomplished through the management of a combination of
liquid assets - those which can be converted into cash - and access to
additional sources of funds. If necessary, additional sources of funds include
Federal Home Loan Bank advances and lines of credit with correspondent banks.
Primary liquid assets of the Company are cash and due from banks, federal funds
sold, investments held as "available for sale" and maturing loans. The company
does not rely on borrowings for sources of liquidity. Liquidity management is
both a daily and long-term function of business management. Maturities in the
Company's loan and investment portfolios are monitored regularly to avoid
matching short-term deposits with long-term investments and loans. Other assets
and liabilities are also monitored to provide the proper balance between
liquidity, safety, and profitability. This monitoring process must be continuous
due to the constant flow of cash that is inherent in a financial institution.
The Company's balances of cash and cash equivalents increased $13.0 million or
75.5%. During the three month period ending March 31, 2008, $112,000 in cash was
provided by operating activities. Investing activities provided $6.5 million
during the three months ended March 31, 2008, primarily due to proceeds of
maturing securities and financing activities provided $6.5 million.
As of March 31, 2008, the Company had $19.6 million in federal funds sold, $33.7
million in securities available for sale and $2.5 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 24.0% of total deposits as of March 31, 2008.
Total equity of the Company at March 31, 2008 was $24.5 million compared to
$24.4 million at December 31, 2007.
RESULTS OF OPERATIONS
CNB Corporation's 2008 net income for the first three months was $467,000, a
decrease of $163,000 compared to 2007 results. This decrease in net income can
be attributed mostly to additional expense in the provision for loan loss. As
credit quality has decreased and the local economy has seen a downturn, the
Company is taking actions to make sure it is adequately reserved against future
possible losses. Basic and diluted earnings per share were $0.38 for 2008
compared to $0.51 for 2007. The return on assets was .72% for the first three
months of the year versus .98% for the same period in 2007. The return on equity
was 7.55% compared to 9.97% for the same period last year.
13
For the first three months of 2008, net interest income was $2.5 million
representing an increase of 3.3% from the same period in 2007. The fully taxable
equivalent net interest margin increased to 4.37% for the three month period
ending March 31, 2008 compared to 4.33% for the same period ending March 31,
2007. This change can be attributable to the interest rate environment which has
caused a decrease in interest expense as rates paid on deposit accounts decrease
due to the fact that they reprice faster than our interest earning assets.
In response to the change in the loan portfolio composition, loan growth and
change in asset quality, management recorded a provision expense of $431,000 in
the first three months in 2008 and $69,000 in the first three months in 2007.
Noninterest income for the three months ending March 31, 2008 was $400,000, an
increase of $20,000 or 5.3% from the same period last year. This change between
the two periods is attributed, in part, due to an increase in mortgage loan
activity that is sold in the secondary market thus increasing our gains on the
sales of these loans as compared to the same period last year.
Noninterest expense for the first three months of 2008 and 2007 was $1.9
million. Although the noninterest expense remained at the same level during the
two periods, the expense mix did change between the periods. Salaries and
employee benefits increased due to the addition of officer level employees and
hospitalization increased due to increased premiums. The decrease in occupancy
expense can largely be attributed to seasoned assets becoming fully depreciated
and not requiring additional deprecation expense.
The provision for federal income tax was 17.9% of pretax income for the three
months ended March 31, 2007 as compared to 28.7% for the same period in 2007.
The difference between the tax rates for the two periods is due, in part, to an
increased concentration of tax favorable investments. The difference between the
effective tax rate and the federal corporate tax rate of 34% is generally due to
tax-exempt interest earned on investments and loans and other tax-related items.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary source of market risk for the financial instruments held by the
Company is interest rate risk. That is, the risk that a change in market rates
will adversely affect the market value of the instruments. Generally, the longer
the maturity, the higher the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of
normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of the Company's
net interest margin to swings in interest rates, to assuring sufficient capital
and liquidity to support future balance sheet growth. The Company manages
interest rate risk through the Asset Liability Committee. The Asset Liability
Committee is comprised of bank officers from various disciplines. The Committee
reviews policies and establishes rates which lead to prudent investment of
resources, the effective management of risks associated with changing interest
rates, the maintenance of adequate liquidity, and the earning of an adequate
return of shareholders' equity.
Management believes that there has been no significant changes to the interest
rate sensitivity since the presentation in the December 31, 2007 Management
Discussion and Analysis appearing in the December 31, 2007 10K.
ITEM 4 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
14
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 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.
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 2007 10K.
ITEM 2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
15
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5-OTHER INFORMATION
None
ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K
a.) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002
b.) Reports on Form 8-K
A Current Report on Form 8-K was filed on April 10, 2008, with an accompanying
letter to shareholders, disclosing the Corporation's financial performance for
the first three months of 2008 and board approved dividend.
A Current Report of Form 8-K was filed on May 15, 2008 with an accompanying
letter to shareholders, disclosing the Corporation's restated financial
performance for the first three months of 2008.
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)
/s/ Susan A. Eno
Date: May 15, 2008 ----------------------------------------
Susan A. Eno
President and Chief Executive Officer
/s/ Douglas W. Damm
Date: May 15, 2008 ----------------------------------------
Douglas W. Damm
Senior 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