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 September 30, 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 Michigan 49721
(Address of principal executive offices) (Zip Code)
(231) 627-7111
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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 the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting 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]
As of November 10, 2008 there were 1,213,598 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, 2008 and December 31, 2007.................... 3
Consolidated Statements of Income - Nine Months Ended September 30, 2008 and 2007 ........ 4
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 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 - 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................ 15 - 16
Item 4T - Controls and Procedures................................................................... 16 - 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings......................................................................... 17
Item 1A - Risk Factors.............................................................................. 17
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds............................... 17
Item 3 - Defaults Upon Senior Securities........................................................... 17
Item 4 - Submission of Matters to a Vote of Security Holders....................................... 17
Item 5 - Other Information......................................................................... 17
Item 6 - Exhibits and Reports on Form 8-K.......................................................... 17
Signatures.......................................................................................... 18
Exhibit Index....................................................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
September 30, December 31,
2008 2007
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,219 $ 8,844
Interest-bearing deposits with other
financial institutions 18,073 --
Federal funds sold 17,908 8,428
-------- --------
Total cash and cash equivalents 41,200 17,272
Securities available for sale 36,269 40,493
Securities held to maturity (market value of $9,027
in 2008 and $8,882 in 2007) 8,797 8,789
Other securities 1,008 1,008
Loans, held for sale 121 150
Loans, net of allowance for loan losses of $1,660
in 2008 and $1,670 in 2007 163,938 172,804
Premises and equipment, net 6,110 6,353
Other assets 8,918 8,324
-------- --------
Total assets $266,361 $255,193
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 38,817 $ 37,984
Interest-bearing 200,742 187,042
-------- --------
Total deposits 239,559 225,026
Other liabilities 4,669 5,767
-------- --------
Total liabilities 244,228 230,793
SHAREHOLDERS' EQUITY
Common stock - $2.50 par value; 2,000,000 shares
authorized; 1,213,598 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 1,038 2,528
Accumulated other comprehensive loss, net of tax (1,448) (671)
-------- --------
Total shareholders' equity 22,133 24,400
-------- --------
Total liabilities and shareholders' equity $266,361 $255,193
======== ========
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,
------------------ -----------------
2008 2007 2008 2007
------- ------ ------- -------
(Unaudited) (Unaudited)
INTEREST INCOME
Loans, including fees $ 2,879 $3,334 $ 8,919 $ 9,720
Securities:
Taxable 417 569 1,344 1,501
Tax exempt 137 114 417 352
Other interest income 139 144 359 594
------- ------ ------- -------
Total interest income 3,572 4,161 11,039 12,167
INTEREST EXPENSE ON DEPOSITS 1,240 1,499 3,796 4,485
------- ------ ------- -------
NET INTEREST INCOME 2,332 2,662 7,243 7,682
Provision for loan losses 400 68 1,131 206
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,932 2,594 6,112 7,476
------- ------ ------- -------
NONINTEREST INCOME
Service charges and fees 313 312 896 884
Net realized gains from sales of loans 12 26 95 93
Loan servicing fees, net of amortization 33 33 93 96
Gain on the sale of other real estate owned 297 -- 304 --
Other income 83 43 196 179
------- ------ ------- -------
Total noninterest income 738 414 1,584 1,252
NONINTEREST EXPENSES
Salaries and employee benefits 900 937 2,719 2,750
Deferred compensation 104 80 282 240
Pension 38 33 104 100
Hospitalization 167 151 480 400
Occupancy 284 301 835 887
Supplies 39 43 128 156
Legal and professional 125 79 327 296
Other expenses 2,500 266 3,163 789
------- ------ ------- -------
Total noninterest expense 4,157 1,890 8,038 5,618
------- ------ ------- -------
INCOME BEFORE INCOME TAXES (1,487) 1,118 (342) 3,110
Income tax expense 58 287 274 848
------- ------ ------- -------
NET INCOME $(1,545) $ 831 $ (616) $ 2,262
======= ====== ======= =======
TOTAL COMPREHENSIVE INCOME $(1,942) $ 978 $(1,393) $ 2,450
======= ====== ======= =======
Return on average assets (annualized) -2.31% 1.29% -0.31% 1.16%
Return on average equity (annualized) -25.64% 12.95% -3.36% 11.91%
Basic earnings per share $ (1.27) $ 0.67 $ (0.51) $ 1.83
Diluted earnings per share $ (1.27) $ 0.67 $ (0.51) $ 1.83
Dividends declared per share $ -- $ 0.42 $ 0.72 $ 1.26
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Nine months ended
September 30,
-------------------
2008 2007
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ (616) $ 2,262
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net 516 430
Provision for loan losses 1,131 206
Loans originated for sale (4,367) (3,535)
Proceeds from sales of loans originated for sale 4,288 3,361
Gain on sales of loans (95) (93)
Gain on sales of other real estate owned properties (304) --
Other real estate owned writedowns/losses 220 --
Net losses on impairment of investment securities 1,936 --
(Increase) decrease in other assets 907 (233)
Increase in other liabilities 434 606
-------- --------
Total adjustments 4,666 742
-------- --------
Net cash provided by operating activities 4,050 3,004
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 17,087 18,696
Purchase of securities available for sale (16,091) (17,465)
Proceeds from maturities of securities held to maturity 4,069 2,290
Purchase of securities held to maturity (4,077) (6,886)
Net change in portfolio loans 6,635 (7,919)
Premises and equipment expenditures (159) (265)
-------- --------
Net cash (used in) provided by investing activities 7,464 (11,549)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 14,533 11,985
Dividends paid (2,119) (2,307)
Purchases of common stock -- (544)
-------- --------
Net cash provided by financing activities 12,414 9,134
-------- --------
Net change in cash and cash equivalents 23,928 589
Cash and cash equivalents at beginning of year 17,272 14,812
-------- --------
Cash and cash equivalents at end of period $ 41,200 $ 15,401
======== ========
Cash paid during the period for:
Interest $ 3,846 $ 4,415
Income taxes 169 713
Non-cash transactions:
Transfer from loans to other real estate owned 1,884 561
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 September 30, 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 September 30, 2008
(dollars in thousands)
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable Balance at
Identical Assets Inputs Inputs September
(Level 1) (Level 2) (Level 3) 30, 2008
------------------ ----------- ------------ ----------
ASSETS
Investment securities-available-for-sale $21,265 $-- $15,004 $36,269
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 $17,951
Total realized and unrealized gains (losses) included in income (1,936)
Total unrealized gains (losses) included in other comprehensive income (1,119)
Net purchases, sales, calls and maturities 148
Net transfers in/out of Level 3 --
-------
BALANCE AT SEPTEMBER 30, 2008 $15,044
=======
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 September 30, 2008
(dollars in thousands)
Prices in
Active Significant Total Losses
Markets for Other Significant for the Period
Balance at Identical Observable Unobservable Ended
September 30, Assets Inputs Inputs September
2008 (Level 1) (Level 2) (Level 3) 30, 2008
------------- ----------- ----------- ------------ --------------
ASSETS
Impaired loans accounted for
under FAS 114 $531 $531 $(175)
Other real estate owned 483 -- -- 483 (146)
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 September 30, 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 September 30, 2008 and 2007.
Due to the plan end date, there are no options available for grant as of
September 30, 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 (9,939) 43.83
------
Balance at September 30, 2008 13,499 $52.82 3.2 years $--
======
8
There were no options exercised during the three months ended September 30, 2008
and 2007 therefore the aggregate intrinsic value of options exercised was $0 for
both periods. There were no shares vested for the 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 and nine month
periods ending September 30, 2008 the weighted average shares outstanding in
calculating basic earnings per share were 1,213,606 and 1,213,625 while the
weighted average number of shares for diluted earnings per share were 1,213,606
and 1,213,625. As of September 30, 2008 there were 13,499 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, 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.
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
September 30, 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 September 30, 2008 total assets of the company were $266.4 million which
represents an increase of $11.2 million or 4.4% from December 31, 2007. The
Company recognized a decrease in the loan portfolio of $8.9 million or 5.1%
while deposits increased $14.5 million.
SECURITIES
The securities portfolio decreased $4.2 million since December 31, 2007. The
available for sale portfolio decreased to 78.7% of the investment portfolio down
from 80.5% at year-end. This decrease since December 31, 2007 can be attributed
to three reasons. One, securities that have matured may not have been replaced
with the purchase of new securities. Two, the securities are reported at fair
value and the reportable fair value has decreased since December 31, 2007.
Three, a $2 million security investment held at December 31, 2007 has since been
written down as a loss to a value of $65,000 due to an "other than temporary
impairment".
A security is presumed to have an "other-than-temporary-impairment" if it is
probable that the investor will be unable to collect all amounts due in
accordance to the contractual terms of a security. If the decline in fair value
is judged to be other than temporary, the cost basis of the individual security
shall be written down to fair value as a new cost basis and the amount of the
write-down shall be included in earnings
10
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
------- ---------- ----------
(dollars in thousands)
Available for Sale
SEPTEMBER 30, 2008
U.S. Government agency $10,821 $ 67 $ (2)
Mortgage-backed 10,444 64 (17)
State and municipal 6,227 64 (19)
Money market preferred stocks 8,777 -- (1,188)
------- ---- -------
$36,269 $195 $(1,226)
======= ==== =======
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:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
-------- ------------ ------------ ------
(dollars in thousands)
Held to Maturity
SEPTEMBER 30, 2008
State and municipal $8,797 $238 $ (8) $9,027
====== ==== ==== ======
DECEMBER 31, 2007
State and municipal $8,789 $118 $(25) $8,882
====== ==== ==== ======
The carrying amount and fair value of securities by contractual maturity at
September 30, 2008 are shown below, in thousands of dollars.
Available for sale Held to Maturity
------------------ -----------------
Fair Carrying Fair
(dollars in thousands) Value Amount Value
------- -------- ------
Due in one year or less $13,091 $ 244 $ 246
Due from one to five years 21,574 4,928 5,094
Due from five to ten years 1,010 2,535 2,602
Due after ten years 594 1,090 1,085
------- ------ ------
$36,269 $8,797 $9,027
======= ====== ======
11
LOANS
Net loans at September 30, 2008 decreased $8.9 million from December 31, 2007.
The table below shows total loans outstanding by type, in thousands of dollars,
at September 30, 2008 and December 31, 2007 and their percentages of the total
loan portfolio. The decrease in net loans can largely be attributed to the
current economic environment. The loan portfolio has recognized $1.2 million of
loans charged-off against the allowance for loan losses. In additional to the
charged-off loans, $1.9 million of loans have been transferred to other real
estate owned as the Bank collects collateral through the foreclosure process.
The current economic environment has also placed a strain on the Bank customer's
personal income, which in turn decreased the ability for customers to qualify
for new loans. At September 30, 2008, commercial real estate mortgages have
remained relatively unchanged with a decrease of 0.62% since December 31, 2007
while consumer mortgages have decreased $4.22 million. This change is primarily
due to in house mortgages being refinanced with mortgages that are sold in the
secondary market. All loans are domestic. A quarterly review of loan
concentrations at September 30, 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 12.4% of total loans.
September 30, 2008 December 31, 2007
--------------------- ---------------------
Balance % of total Balance % of total
-------- ---------- -------- ----------
(dollars in thousands)
Portfolio loans:
Residential real estate $ 78,904 47.63% $ 83,114 47.63%
Consumer 8,038 4.85% 8,709 4.99%
Commercial real estate 68,018 41.05% 68,445 39.22%
Commercial 10,718 6.47% 14,234 8.16%
-------- ------ -------- ------
Gross Loans 165,678 100.00% 174,502 100.00%
====== ======
Deferred loan origination fees, net (80) (28)
Allowance for loan losses (1,660) (1,670)
-------- --------
Loans, net $163,938 $172,804
======== ========
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:
2008 2007
------- ------
(dollars in thousands)
Beginning balance $ 1,670 $1,498
Provision for loan losses 1,131 206
Charge-offs (1,170) (56)
Recoveries 29 19
------- ------
Ending balance $ 1,660 $1,667
======= ======
In response to the change in portfolio composition and change in asset quality
and other general economic factors management substantially increased its loan
loss provision to $1.1 million in the first nine months of 2008 compared to
$206,000 in the first nine 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
12
experienced. The Company has experienced a continued decrease in the quality of
its loan portfolio as a result of persisting deterioration of the Michigan
economy and the results of recognizing and working out of problem commercial
real estate credits. 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.
September 30, December 31,
2008 2007
------------- ------------
(dollars in thousands)
Nonaccrual $3,437 $ 831
Loans past due 90 days or more 192 387
Troubled debt restructurings 1,756 --
------ ------
Total nonperforming loans $5,385 $1,218
====== ======
Percent of gross loans 3.25% 0.70%
At September 30, 2008, total nonperforming assets increased by $4.2 million from
December 31, 2007. The Bank is closely monitoring and managing nonperforming
loans. Nonaccrual loans increased to $3.4 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.
The Company had 38 problem loans that were reviewed for impairment totaling $6.7
million as of September 30, 2008. 17 of the 38 loans were considered impaired
and have a valuation allowance against loss potential. The balance of these 17
loans at September 30, 2008 totaled $1.4 million and the valuation allowance was
$328,000.
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 September 30, 2008 increased $14.5 million since December 31, 2007.
This increase is due, in part, to regular deposit seasonality. The Bank
continues to grow deposits in its new Alanson market with a branch that opened
in January 2007. Interest-bearing deposits increased $13.7 million or 7.3% for
the nine months ended September 30, 2008, while noninterest-bearing deposits
increased $833,000 or 2.2%.
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. 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
13
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 $23.9 million or
138%. During the nine month period ending September 30, 2008, $4.1 million in
cash was provided by operating activities. Investing activities provided $7.5
million during the nine months ended September 30, 2008 and financing activities
provided $12.4 million.
As of September 30, 2008, the Company had $17.9 million in federal funds sold,
$36.3 million in securities available for sale and $244,000 in held to maturity
securities maturing within one year. These sources of liquidity are supplemented
by new deposits and loan payments received by customers. These short-term assets
represent 22.7% of total deposits as of September 30, 2008.
Total equity of the Company at September 30, 2008 was $22.1 million compared to
$24.4 million at December 31, 2007. The decrease in total equity can be
attributed to the decreased retained earnings due, in part, to the investment
write-down as mentioned above and also to additional unrealized loss on
securities reported in the accumulated other comprehensive loss section of total
equity.
RESULTS OF OPERATIONS
CNB Corporation's 2008 net income/(loss) for the first nine months was
($616,000), a decrease of $2.9 million compared to 2007 results. This decrease
in net income can be attributed mostly to additional expense in the provision
for loan loss and a loss due to the "other than temporary impairment" of a
security investment. As credit quality has decreased and the local economy has
seen a downturn, the Company is taking actions to make sure it has an adequate
allowance for loan losses. Basic and diluted earnings/(losses) per share were
$(0.51) for 2008 compared to $1.83 for 2007. The return on assets was (0.31%)
for the first nine months of the year versus 1.83% for the same period in 2007.
The return on equity was (3.36%) compared to 11.91% for the same period last
year.
Net income/(loss) for the three months ending September 30, 2008 was ($1.5
million) compared to $831,000 for 2007. This was a decrease of $2.4 million.
Basic and diluted earnings/(losses) per share were $(1.27) compared to $0.67 for
2007. The return on average assets was (2.31)% compared to 1.29% for 2007. The
return on average equity was (25.64)% compared to 12.95% for 2007. This decrease
in quarterly earnings is largely due to the impairment loss of an investment
security as mentioned above and also due in part to the increase in provision
for loan loss as mentioned above in addition to increased Other real estate
owned expenses discussed later in the noninterest expense part of this "Results
of Operations" section.
Interest income for the first nine months of 2008 was $11.0 million, a decrease
of $1.1 million or 9.3% compared to the 2007 results. This decrease in interest
income can be attributed to a decreasing rate environment as loan customers
refinance their loans to take advantage of the decreased rates, interest income
earned on those loans also decreases. In addition to the decreasing rate
environment, interest income is affected by the reversal of accrued interest for
loans that are placed on nonaccrual status. The Bank's loan portfolio has
decreased also contributing to the decreased interest income. Decreases in the
loan portfolio are a result of decreasing loan demand, loans being sold to the
secondary market, loan charge-offs and loan balances being transferred to Other
Assets as collateral is collected on loans through the foreclosure process.
Interest income for the quarter ending September 30, 2008 was $3.6 million
compared to $4.2 million for the same period last year. This decreased is
primarily for the same reasons as noted above for the year to date period.
Interest expense for the first nine months of 2008 was $3.8 million, a decrease
of $689,000 or 15.4% compared to 2007 results. This decrease can be attributed
to the decreasing rate environment. As rates have decreased, the Bank's variable
rate certificates of deposit have repriced weekly in addition to rate decreased
for regularly scheduled certificate of deposit maturities, thus decreasing
interest expense.
14
Interest expense for the quarter ending September 30, 2008 was $1.2 million
compared to $1.5 million for the same period last year. This decrease is
attributed to the same reasons as noted above for the year to date period.
For the first nine months of 2008, net interest income was $7.2 million
representing a decrease of 5.7% from the same period in 2007. The fully taxable
equivalent net interest margin decreased to 4.11% for the nine month period
ending September 30, 2008 compared to 4.41% for the same period ending September
30, 2007. This change can be attributed to the Bank's increased level of
nonaccrual loans.
Year to date net charge-offs recorded in the allowance for loan losses were $1.2
million for 2008 compared to $56,000 for the same period in 2007. In response to
this increased charge off activity, management recorded a provision expense of
$1.1 million in the first nine months of 2008 compared to $206,000 in the first
nine months in 2007 in order to maintain an acceptable allowance for loan loss
level.
Noninterest income for the nine months ending September 30, 2008 was $1.6
million, an increase of $332,000 or 26.5% from the same period last year. This
change between the two periods is attributed, in part, to gains on the sale of
other real estate owned properties the Bank has received through the foreclosure
process.
Noninterest income for the three month period ending September 30, 2008 was
$738,000 compared to $414,000 for the same period last year. This represents an
increase of $324,000 or 78.3%. This increase is attributable to the same reason
as noted above for the year to date period
Noninterest expense for the first nine months of 2008 was $8.0 million an
increase of $2.4 million or 43.1% compared to 2007 results. The increase in
noninterest expense can largely be attributable to the loss due to the "other
than temporary impairment" of security investments as previously mentioned.
Noninterest expenses have also increased in 2008 due to Other real estate owned
expenses. Other real estate owned is included in the Other assets section of the
balance sheet. When the collateral supporting a borrowing is relinquished by
customers through the collection process (including a deed in lieu of
foreclosure); the assets are written down to market value based on a
professional appraisal or other common means of valuation and held until they
can be sold. The Bank held 14 properties on September 30, 2008 with a balance
sheet value totaling $1.5 million. If any relinquished asset is sold for less
than it is being held or experiences a decline in market value during the
holding period, further losses could result. The Other real estate owned
expenses are monies paid for the expenses related to these properties include
property taxes, insurance, utilities and other related expenses. Other real
estate owned expenses included in Other expenses totaled $217,000 year to date.
Also included in Other expense, during 2008, the Company recognized $220,000 of
expense due to the write-down of other real estate owned properties.
Noninterest expense for the three month period ending September 30, 2008 was
$4.2 million an increase of $2.3 million compared to 2007 results. This increase
is primarily form the write down on investment and the same reasons as noted
above for the year to date period.
The provision for federal income tax was 80.1% of the pretax loss for the nine
months ended September 30, 2008 as compared to 27.3% for the same period in
2007. The difference between the 2008 effective tax rate and the federal
corporate tax rate of 34% is due to the circumstance surrounding the impairment
loss on the security investment reported in the income statement and the tax
effect of that write-down permitted by the Emergency Economic Stabilization Act
signed into law on October 3, 2008. Due to the fact that this act was not signed
into law until October 3, 2008 the tax effect of the write-down cannot be
recorded until the fourth quarter, as the law permits. The difference between
the 2007 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.
15
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 Principal 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 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.
16
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
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 pursuant to section 302 of the Sarbanes-Oxley Act of
2002 by the Chief Executive Officer
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Financial Officer
32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by the Chief Executive Officer
32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by the Principal Financial Officer
b.) Reports on Form 8-K
A Current Report on Form 8-K was filed on September 22, 2008 announcing a loss
due to the "other-than-temporary" impairment of an investment security.
17
SIGNATURES
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: November 14, 2008 Susan A. Eno
President and Chief Executive Officer
/s/ Douglas W. Damm
-----------------------------------------
Date: November 14, 2008 Douglas W. Damm
Senior Vice President
18
EXHIBIT INDEX
Number Exhibit
- ------ -------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
19