Attached files
file | filename |
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EX-32.2 - EX-32.2 - CNB CORP /MI/ | k49254exv32w2.htm |
EX-32.1 - EX-32.1 - CNB CORP /MI/ | k49254exv32w1.htm |
EX-31.2 - EX-31.2 - CNB CORP /MI/ | k49254exv31w2.htm |
EX-31.1 - EX-31.1 - CNB CORP /MI/ | k49254exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
Or
o | 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 (State or other jurisdiction of incorporation or organization) |
38-2662386 (I.R.S. Employer Identification No.) |
303 North Main Street, Cheboygan MI 49721
(Address of principal executive offices, including Zip Code)
(Address of principal executive offices, including Zip Code)
(231) 627-7111
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(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 þ No o
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 o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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 o No þ
As of May 7, 2010 there were 1,213,598 shares of the issuers common stock outstanding.
CNB CORPORATION
Index
Index
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (CONDENSED) |
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 3,134 | $ | 4,055 | ||||
Interest-bearing deposits with other
financial institutions |
12,703 | 13,192 | ||||||
Total cash and cash equivalents |
15,837 | 17,247 | ||||||
Time Deposits with other financial institutions |
8,532 | 8,669 | ||||||
Securities available for sale |
49,597 | 45,473 | ||||||
Securities held to maturity (market value of $10,496
in 2010 and $10,837 in 2009) |
9,943 | 10,302 | ||||||
Other securities |
1,008 | 1,008 | ||||||
Loans, held for sale |
1,099 | | ||||||
Loans, net of allowance for loan losses of $3,038
in 2010 and $2,863 in 2009 |
145,016 | 148,171 | ||||||
Premises and equipment, net |
5,806 | 5,921 | ||||||
Other assets |
12,915 | 12,711 | ||||||
Total assets |
$ | 249,753 | $ | 249,502 | ||||
LIABILITIES |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 37,920 | $ | 40,016 | ||||
Interest-bearing |
186,915 | 184,542 | ||||||
Total deposits |
224,835 | 224,558 | ||||||
Other liabilities |
4,421 | 4,624 | ||||||
Total liabilities |
229,256 | 229,182 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock $2.50 par value; 2,000,000 shares
authorized; and 1,213,598 shares
issued and outstanding in 2010 and 2009 |
3,034 | 3,034 | ||||||
Additional paid-in capital |
19,509 | 19,509 | ||||||
Accumulated deficit |
(1,231 | ) | (1,456 | ) | ||||
Accumulated other comprehensive loss, net of tax |
(815 | ) | (767 | ) | ||||
Total shareholders equity |
20,497 | 20,320 | ||||||
Total liabilities and shareholders equity |
$ | 249,753 | $ | 249,502 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
INTEREST INCOME |
||||||||
Loans, including fees |
$ | 2,234 | $ | 2,597 | ||||
Securities |
||||||||
Taxable |
215 | 419 | ||||||
Tax exempt |
145 | 129 | ||||||
Other interest income |
59 | 62 | ||||||
Total interest income |
2,653 | 3,207 | ||||||
INTEREST EXPENSE ON DEPOSITS |
587 | 989 | ||||||
NET INTEREST INCOME |
2,066 | 2,218 | ||||||
Provision for loan losses |
225 | 275 | ||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
1,841 | 1,943 | ||||||
NONINTEREST INCOME |
||||||||
Service charges and fees |
246 | 265 | ||||||
Net realized gains from sales of loans |
30 | 88 | ||||||
Loan servicing fees, net of amortization |
20 | (48 | ) | |||||
Other income |
82 | 76 | ||||||
Total noninterest income |
378 | 381 | ||||||
NONINTEREST EXPENSES |
||||||||
Salaries and employee benefits |
984 | 1,045 | ||||||
Deferred compensation |
61 | 78 | ||||||
Occupancy |
256 | 290 | ||||||
Legal and professional |
175 | 99 | ||||||
FDIC Premiums |
128 | 100 | ||||||
ORE losses and carrying costs |
114 | 42 | ||||||
Securities write-down, net |
| 37 | ||||||
Other expenses |
250 | 259 | ||||||
Total noninterest expense |
1,968 | 1,950 | ||||||
INCOME BEFORE INCOME TAXES |
251 | 374 | ||||||
Income tax expense |
26 | 52 | ||||||
NET INCOME |
$ | 225 | $ | 322 | ||||
TOTAL COMPREHENSIVE INCOME |
$ | 177 | $ | 188 | ||||
Return on average assets (annualized) |
0.36 | % | 0.50 | % | ||||
Return on average equity (annualized) |
4.34 | % | 7.28 | % | ||||
Basic earnings per share |
$ | 0.19 | $ | 0.27 | ||||
Diluted earnings per share |
$ | 0.19 | $ | 0.27 | ||||
Dividends declared per share |
$ | | $ | |
See accompanying notes to consolidated financial statements.
4
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities |
||||||||
Net Income |
$ | 225 | $ | 322 | ||||
Adjustments to reconcile net income to net cash
from operating activities |
||||||||
Depreciation, amortization and accretion, net |
171 | 161 | ||||||
Provision for loan losses |
225 | 275 | ||||||
Loans originated for sale |
(2,735 | ) | (7,162 | ) | ||||
Proceeds from sales of loans originated for sale |
1,654 | 7,012 | ||||||
Gain on sales of loans |
(30 | ) | (88 | ) | ||||
Other real estate owned writedowns/losses |
38 | 18 | ||||||
Net losses on impairment of investment securities |
| 37 | ||||||
(Increase) decrease in deferred tax benefit |
(229 | ) | 165 | |||||
(Increase) decrease in other assets |
(10 | ) | (305 | ) | ||||
Increase (decrease) in other liabilities |
(203 | ) | (335 | ) | ||||
Total adjustments |
(1,119 | ) | (222 | ) | ||||
Net cash (used in) provided by operating activities |
(894 | ) | 100 | |||||
Cash flows from investing activities |
||||||||
Proceeds from sales of securities available for sale |
420 | | ||||||
Proceeds from maturities of securities available for sale |
10,026 | 6,253 | ||||||
Purchase of securities available for sale |
(14,683 | ) | (9,707 | ) | ||||
Proceeds from maturities of securities held to maturity |
359 | 497 | ||||||
Proceeds from maturities of time deposits |
574 | 20 | ||||||
Purchase of time deposits |
(437 | ) | | |||||
Net change in portfolio loans |
2,963 | (6,505 | ) | |||||
Premises and equipment expenditures |
(15 | ) | (211 | ) | ||||
Net cash used in investing activities |
(793 | ) | (9,653 | ) | ||||
Cash flows from financing activities |
||||||||
Net increase in deposits |
277 | 9,474 | ||||||
Net cash provided by financing activities |
277 | 9,474 | ||||||
Net change in cash and cash equivalents |
(1,410 | ) | (79 | ) | ||||
Cash and cash equivalents at beginning of year |
17,247 | 23,286 | ||||||
Cash and cash equivalents at end of period |
$ | 15,837 | $ | 23,207 | ||||
Cash paid during the period for: |
||||||||
Interest |
$ | 586 | $ | 982 | ||||
Non-cash transactions: |
||||||||
Transfer from loans to other real estate owned |
115 | 156 |
See accompanying notes to consolidated financial statements.
5
Table of Contents
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 Companys 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 Companys 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 Companys financial performance and could cause the Companys
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 for the three months ended March 31, 2010 include the
accounts of CNB Corporation (Company) and its wholly owned subsidiary, Citizens National Bank of
Cheboygan (Bank) and the Banks then wholly owned subsidiary CNB Mortgage Corporation. All
significant intercompany accounts and transactions are eliminated in the consolidation process. In
November 2009, Citizens National Bank of Cheboygan and CNB Mortgage Corporation merged leaving
Citizens National Bank of Cheboygan as the survivor. The consolidated financial statements for
March 31, 2010 and December 31, 2009 include CNB Corporation and its wholly-owned subsidiary,
Citizens National Bank of Cheboygan. 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 Corporations Form 10-K for the year ended December 31, 2009.
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 Companys assets measured at fair value on a
recurring basis at March 31, 2010 and December 31, 2009, 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.
6
Table of Contents
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.
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 Companys 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
(dollars in thousands)
(dollars in thousands)
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Balance | |||||||||||||
Assets |
||||||||||||||||
March 31, 2010 |
||||||||||||||||
Investment securities-available-for-sale |
$ | 41,479 | $ | | $ | 8,118 | $ | 49,597 | ||||||||
December 31, 2009 |
||||||||||||||||
Investment securities-available-for-sale |
$ | 36,637 | $ | | $ | 8,836 | $ | 45,473 |
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)
(dollars in thousands)
Investment | ||||
securities- | ||||
available-for- | ||||
sale | ||||
Balance at December 31, 2009 |
$ | 8,836 | ||
Total realized and unrealized gains (losses) included in income |
| |||
Total unrealized gains (losses) included in other comprehensive income |
(5 | ) | ||
Net purchases, sales, calls and maturities |
(713 | ) | ||
Net transfers in/out of Level 3 |
| |||
Balance at March 31, 2010 |
$ | 8,118 | ||
Available-for-sale investment securities categorized as Level 3 assets primarily consist of bonds
issued by local municipalities. The Company estimates the fair value of these assets based on the
present value of expected future cash flows using managements 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 presented in the tables above may include changes in fair value that were attributable
to both observable and unobservable inputs.
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Table of Contents
Assets Measured at Fair Value on a Nonrecurring Basis
(dollars in thousands)
(dollars in thousands)
Prices in | ||||||||||||||||||||
Active | ||||||||||||||||||||
Markets | Significant | |||||||||||||||||||
for | Other | |||||||||||||||||||
Identical | Observable | Significant | ||||||||||||||||||
Assets | Inputs | Unobservable | Total Losses | |||||||||||||||||
Balance | (Level 1) | (Level 2) | Inputs (Level 3) | for the Period | ||||||||||||||||
Assets |
||||||||||||||||||||
March 31, 2010 |
||||||||||||||||||||
Impaired loans |
$ | 270 | $ | 270 | $ | 21 | ||||||||||||||
Other real estate owned |
1,309 | 1,309 | | |||||||||||||||||
December 31, 2009 |
||||||||||||||||||||
Impaired loans |
$ | 248 | $ | 248 | $ | 211 | ||||||||||||||
Other real estate owned |
1,336 | 1,336 | 343 |
Impaired loans 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 managements 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 other real estate owned losses for the
period ending March 31, 2010 and December 31, 2009 represents charge-offs of loan balances written
down through the allowance for loan losses.
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, 2010 and 2009.
Due to the plan end date, there are no options available for grant as of March 31, 2010 and 2009.
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, 2010 |
4,462 | $ | 48.57 | |||||||||||||
Options exercised |
| | ||||||||||||||
Options expired |
| | ||||||||||||||
Options forfeited |
| | ||||||||||||||
Balance at March 31, 2010 |
4,462 | $ | 48.57 | 3.7 years | $ | | ||||||||||
Exercisable at March 31,
2010 |
4,462 | $ | 48.57 |
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Table of Contents
There were no options exercised during the three months ended March 31, 2010 and 2009 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 Companys critical accounting policies since December
31, 2009.
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, 2010 and 2009 the weighted average
shares outstanding in calculating basic and diluted earnings per share was 1,213,598. As of March
31, 2010 all of the 4,462 outstanding share options were not considered in the earnings per share
calculation because they were antidilutive.
9
Table of Contents
ITEM 2-MANAGEMENTS 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 Banks wholly owned subsidiary CNB Mortgage Corporation for the three
month period ending March 31, 2009. In November 2009, Citizens National Bank of Cheboygan and CNB
Mortgage Corporation merged leaving Citizens National Bank of Cheboygan as the survivor. The
consolidated financial statements for March 31, 2010 and December 31, 2009 include CNB Corporation
and its wholly-owned subsidiary, Citizens National Bank of Cheboygan.
Critical Accounting Policies
Certain of the Companys accounting policies are important to the portrayal of the Companys
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
Companys critical accounting policies are described in the Management Discussion and Analysis
section of its 2009 Annual Report.
Financial Condition
As of March 31, 2010 total assets of the company were $249.8 million which represents very minimal
change from December 31, 2009 assets of $249.5 million. The Company recognized a decrease in the
loan portfolio of $3.2 million or 2.1% while deposits also remained flat increasing $277,000.
Securities
The securities portfolio increased $3.8 million since December 31, 2009. The available for sale
portfolio increased to 81.9% of the investment portfolio at March 31, 2010 compared to 80.1%
December 31, 2009.
The fair values and related unrealized gains and losses for securities available for sale were as
follows, in thousands of dollars:
10
Table of Contents
Gross | Gross | |||||||||||
Fair | Unrealized | Unrealized | ||||||||||
Value | Gains | Losses | ||||||||||
Available for Sale |
||||||||||||
March 31, 2010 |
||||||||||||
U.S. Government and agency |
$ | 27,215 | $ | 125 | $ | (3 | ) | |||||
Mortgage-backed |
13,184 | 130 | (18 | ) | ||||||||
State and municipal |
7,118 | 272 | (14 | ) | ||||||||
Corporate Obligations |
1,020 | 22 | | |||||||||
Auction rate securities |
1,000 | | | |||||||||
Preferred Shares |
60 | 38 | | |||||||||
$ | 49,597 | $ | 587 | $ | (35 | ) | ||||||
December 31, 2009 |
||||||||||||
U.S. Government and agency |
$ | 26,312 | $ | 179 | $ | | ||||||
Mortgage-backed |
9,259 | 136 | | |||||||||
State and municipal |
7,836 | 285 | (21 | ) | ||||||||
Corporate Obligations |
1,020 | 22 | | |||||||||
Auction rate securities |
1,000 | | | |||||||||
Preferred Shares |
46 | 24 | | |||||||||
$ | 45,473 | $ | 646 | $ | (21 | ) | ||||||
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity
were as follows, in thousand of dollars:
Gross | Gross | |||||||||||||||
Carrying | Unrecognized | Unrecognized | Fair | |||||||||||||
Amount | Gains | Losses | Value | |||||||||||||
Held to Maturity |
||||||||||||||||
March 31, 2010 |
||||||||||||||||
State and municipal |
$ | 9,943 | $ | 553 | $ | | $ | 10,496 | ||||||||
December 31, 2009 |
||||||||||||||||
State and municipal |
$ | 10,302 | $ | 556 | $ | (21 | ) | $ | 10,837 |
The carrying amount and fair value of securities by contractual maturity at March 31, 2010 are
shown below, in thousands of dollars.
11
Table of Contents
Available for sale | Held to Maturity | |||||||||||
Fair | Carrying | Fair | ||||||||||
Value | Amount | Value | ||||||||||
Due in one year or less |
$ | 12,028 | $ | 3,180 | $ | 3,197 | ||||||
Due from one to five years |
20,697 | 3,992 | 4,342 | |||||||||
Due from five to ten years |
1,910 | 2,051 | 2,148 | |||||||||
Due after ten years |
718 | 720 | 809 | |||||||||
35,353 | 9,943 | 10,496 | ||||||||||
Subtotal |
||||||||||||
Mortgage-backed securities |
13,184 | | | |||||||||
Auction Rate Securities |
1,000 | | | |||||||||
Preferred Shares |
60 | | | |||||||||
$ | 49,597 | $ | 9,943 | $ | 10,496 | |||||||
Loans
Net loans at March 31, 2010 decreased $3.2 million from December 31, 2009. The table below shows
total loans outstanding by type, in thousands of dollars, at March 31, 2010 and December 31, 2009
and their percentages of the total loan portfolio. All loans are domestic. A quarterly review of
loan concentrations at March 31, 2010 indicates the pattern of loans in the portfolio has not
changed significantly. There is no individual industry with more than a 10% concentration.
However, all tourism related businesses, when combined, total 13.0% of total loans.
March 31, 2010 | December 31, 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Balance | total | Balance | total | |||||||||||||
Portfolio loans: |
||||||||||||||||
Residential real estate |
$ | 75,221 | 50.74 | % | $ | 77,152 | 51.02 | % | ||||||||
Consumer |
6,598 | 4.45 | % | 7,002 | 4.63 | % | ||||||||||
Commercial real estate |
59,734 | 40.30 | % | 60,150 | 39.78 | % | ||||||||||
Commercial |
6,684 | 4.51 | % | 6,903 | 4.57 | % | ||||||||||
Gross Loans |
148,237 | 100.00 | % | 151,207 | 100.00 | % | ||||||||||
Deferred loan origination fees, net |
(183 | ) | (173 | ) | ||||||||||||
Allowance for loan losses |
(3,038 | ) | (2,863 | ) | ||||||||||||
Loans, net |
$ | 145,016 | $ | 148,171 | ||||||||||||
Since December 31, 2009 commercial real estate mortgages have decreased $416,000 while consumer
mortgages have decreased $1.9 million. This decrease in residential real estate loans is primarily
due to in house mortgages being refinanced and subsequently sold in the secondary market. Loan
demand continues to be low and overall total loan growth is not expected in 2010.
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:
12
Table of Contents
2010 | 2009 | |||||||
Beginning balance |
$ | 2,863 | $ | 1,996 | ||||
Provision for loan losses |
225 | 275 | ||||||
Charge-offs |
(62 | ) | (121 | ) | ||||
Recoveries |
12 | 22 | ||||||
Ending balance |
$ | 3,038 | $ | 2,172 | ||||
Management continually monitors its allowance for loan losses and as a result of this monitoring
process recorded a loan loss provision of $225,000 for the first three months of 2010 compared to
the prior year amount of $275,000 in the first three months of 2009. The amount of provisions for
loan losses recognized by the Company is based on managements evaluation as to the amounts
required to maintain an allowance adequate to provide for potential losses inherent in the loan
portfolio.
Credit Quality
The lending staff continues to be well-trained and experienced. During 2009 the Company
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.
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Nonaccrual |
$ | 8,158 | $ | 8,095 | ||||
Loans past due 90 days or more |
15 | 83 | ||||||
Troubled debt restructurings |
| 260 | ||||||
Total nonperforming loans |
$ | 8,173 | $ | 8,438 | ||||
Percent of gross loans |
5.51 | % | 5.59 | % |
At March 31, 2010, total nonperforming assets decreased by $265,000 from December 31, 2009. The
Bank is closely monitoring and managing nonperforming loans. Nonaccrual loans increased slightly
to $8.2 million since December 31, 2009. Loans past due 90 days and still accruing are loans that
management considers to be collectable including accrued interest. The level of non-performing
loans remained stable from December 31, 2009. Uncertainty in the local economic conditions
continues to contribute to the weakness in credit quality.
The Company had 27 problem loans that were reviewed for impairment totaling $8.5 million as of
March 31, 2010. Of the 27 impaired loans 9 of the loans have a valuation allowance against loss
potential. The balance of these 9 loans at March 31, 2010 totaled $6.0 million and the valuation
allowance was $1.9 million.
Because of the continuing efforts to identify and analyze the overall amount of credit risk in the
Companys loan portfolio, the Company expects the level of non-performing loans to remain at
current levels throughout the remainder of 2010. The Bank believes it is adequately reserved on
these loans.
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Deposits
As of March 31, 2010 a marginal increase of $277,000 was recognized in deposits since December 31,
2009. Although there was little change in total deposits, there was a shift in the deposit mix.
Interest-bearing deposits increased $2.4 million or 1.3% for the three months ended March 31, 2010,
while noninterest-bearing deposits decreased $2.1 million or 5.2%.
Liquidity and Capital
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 Federal Reserve Discount Window availability. 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
Companys 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 Companys balances of cash and cash equivalents decreased $1.4 million or 8.2%. During the
three month period ending March 31, 2010, $894,000 in cash was used in operating activities.
Investing activities utilized $793,000 during the three months ended March 31, 2010 and financing
activities provided $277,000.
As of March 31, 2010, the Company had no federal funds sold, $12.7 million in interest-bearing
deposits with other financial institutions, $49.6 million in securities available for sale and $3.2
million in held to maturity securities maturing within one year. These sources of liquidity are
supplemented by new deposits and loan payments received by customers. These short-term assets
represent 29.1% of total deposits as of March 31, 2010.
Total equity of the Company at March 31, 2010 was $20.5 million compared to $20.3 million at
December 31, 2009. The increase in equity for the three months ended March 31, 2010 includes a
decrease in the accumulated deficit and was offset by a marginal decrease in net changes related to
accumulated other comprehensive loss.
RESULTS OF OPERATIONS
CNB Corporations 2010 net income for the first three months was $225,000, a decrease of $97,000
compared to 2009 results. This decrease in net income can be attributed for the most part to a
decreased level of net interest income. Net interest income decreased compared to the same three
month period last year due in part to the elevated level of nonaccrual loans. This decrease in net
interest income can also be attributed to the current rate environment. While deposit rates have
reached near minimum levels, loans and investments continue to reprice at lower levels. Basic and
diluted earnings per share were $0.19 for 2010 compared to $0.27 for 2009. The return on assets
was .36% for the first three months of the year versus .50% for the same period in 2009. The
return on equity was 4.34% compared to 7.28% for the same period last year.
For the first three months of 2010, net interest income was $2.1 million representing a decrease of
6.8% from the same period in 2009. The fully taxable equivalent net interest margin decreased to
3.86% for the three month period ending March 31, 2009 compared to 4.37% for the same period ending
March 31, 2008. This change can be attributable to the same reasons noted above. The decreasing
interest rate environment continues to cause a decrease in interest income on earning assets.
Management continually reviews changes in the loan portfolio composition and asset quality. In
response to the stabilizing asset quality, management recorded a provision expense of $225,000 in
the first three months in 2010 and $275,000 in the first three months in 2009.
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Noninterest income for the three months ending March 31, 2010 was $378,000, a decrease of $3,000 or
0.79% from the same period last year. This change between the two periods is attributed, in part,
to the Banks loan promotion offered in February 2009 during which the Bank grew its mortgages held
for investment with the loan special which caused some of the mortgages previously sold to the
secondary market to refinance into portfolio loans. The decrease in the loans sold to the
secondary market also causes a decrease in the intangible mortgage servicing asset through a net
decrease of the amortization of the loan servicing fees. Although the net amortization of the loan
servicing fees was a $48,000 decrease in 2009, it was a $20,000 net increase in 2010. This is a
$68,000 change year over year. This increase in income was offset by decreases in the gains on the
sales of loans and decreases in service charges and fees in the three month comparison.
Noninterest expense for the first three months of 2010 and 2009 was $2.0 million. Although
noninterest expenses did not change significantly, the mix of expenses has changed. Salaries and
employee benefits have decreased due to reductions in staff while legal and professional expenses
increased due to legal fees from an ongoing litigation against the Banks former investment advisor
and additional legal fees from the increased level of foreclosures. The increased level of
foreclosures has also increased the expenses related to ORE losses and carrying costs. FDIC
insurance premiums have increased again in 2010 due to the large number of bank failures and the
need for the insurance fund to be replenished.
The provision for federal income tax was 10.4% of pretax income for the three months ended March
31, 2010 as compared to 13.9% for the same period in 2009. 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 Companys 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, 2009 Management Discussion and Analysis appearing in the
December 31, 2009 10K.
ITEM 4T-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 Companys 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 Companys
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.
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Managements 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 Corporations internal control system was designed to
provide reasonable assurance to the Companys management and board of directors regarding the
preparation and fair presentation of its financial statements.
Management of CNB Corporation assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2009. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
ControlIntegrated Framework. Based on our assessment we believe that, as of December 31, 2009, the
Companys internal control over financial reporting is effective based on those criteria.
The December 31, 2009 annual report does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company
to provide only managements report in the annual report.
The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the
Companys 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 Companys internal control over financial reporting that occurred
during the quarter ended December 31, 2009 that materially affected, or is reasonably likely to
materially affect the Companys 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
CNB vs. Heber Fuger Wendin, Inc. and Mark Williams
The Bank filed a complaint in the Circuit Court for the County of Cheboygan on May 19, 2009 and
served the defendants in this matter, Heber Fuger Wendin, Inc. (HFW) and Mark Williams, President
of HFW, on May 26, 2009. The complaint is the consequence of losses incurred by the Bank as a
result of its purchase of money market preferred (MMP) securities beginning in 2006 and ending in
2007 on the advice of Mr. Williams. Upon subsequent review and investigation it was determined
MMPs were not a suitable investment for the Bank and as an investment advisor HFW did not perform
sufficient due diligence to adequately advise the Bank of the associated potential risk. The six
counts charged in the complaint are: (i) breach of fiduciary duty; (ii) negligence; (iii) breach of
contract; (iv) common law fraud; (v) negligent misrepresentation; and (vi) violation of Michigan
Uniform Securities Act. The case is in discovery.
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Item 1A.-Risk Factors
Not applicable.
Item 2- Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3-Defaults Upon Senior Securities
None
Item 4-(Removed and Reserved)
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 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
CNB Corporation (Registrant) |
||||
Date: May 13, 2010 | /s/ Susan A. Eno | |||
Susan A. Eno | ||||
President and Chief Executive Officer | ||||
Date: May 13, 2010 | /s/ Douglas W. Damm | |||
Douglas W. Damm | ||||
Senior Vice President |
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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 he Sarbanes-Oxley Act of 2002 by the Principal Financial Officer | |
32.1
|
Certifications 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