CNBZ CNB Corporation (PK)

 

---

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

 

S   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

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)

 

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   S                         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  S
(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   S

 

As of May 10, 2012 there were 1,212,098 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, 2012 and December 31, 2011	3
Consolidated Statements of Income – Three Months Ended March 31, 2012 and 2011	4
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011	5
Notes to Consolidated Financial Statements	6 – 17
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	18 – 20
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	21
Item 4 – Controls and Procedures	21
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings	22
Item 1A – Risk Factors	22
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3 – Defaults Upon Senior Securities	22
Item 4 – (Removed and Reserved)	22
Item 5 – Other Information	23
Item 6 – Exhibits and Reports on Form 8-K	23
Signatures	24
Exhibit Index	25

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1-FINANCIAL STATEMENTS (CONDENSED)

 

CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)

 

		March 31,				December 31,
		2012				2011
ASSETS		(Unaudited)
Cash and due from banks		$	5,755			$	5,446
Interest-bearing deposits with other financial institutions			18,186				10,095
Total cash and cash equivalents			23,941				15,541
Time Deposits with other financial institutions			14,054				14,173
Securities available for sale			74,076				79,086
Securities held to maturity (market value of $4,995 in 2012 and $5,121 in 2011)			4,578				4,653
Other securities			997				997
Loans, held for sale			2,602				1,810
Loans, net of allowance for loan losses of $3,804 in 2012 and $3,339 in 2011			113,293				115,094
Premises and equipment, net			5,160				5,209
Other assets			13,425				13,579
Total assets		$	252,126			$	250,142
LIABILITIES
Deposits
Noninterest-bearing		$	54,056			$	49,956
Interest-bearing			175,572				177,987
Total deposits			229,628				227,943
Other liabilities			4,414				4,181
Total liabilities			234,042				232,124
SHAREHOLDERS’ EQUITY
Common stock - $2.50 par value; 2,000,000 shares authorized; and 1,212,098 shares issued and outstanding in 2012 and 2011			3,030				3,030
Additional paid-in capital			19,499				19,499
Accumulated deficit			(3,465	)			(3,830	)
Accumulated other comprehensive loss, net of tax			(980	)			(681	)
Total shareholders’ equity			18,084				18,018
Total liabilities and shareholders’ equity		$	252,126			$	250,142

 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)

 

		Three months ended
		March 31,
		2012				2011
		(Unaudited)
INTEREST INCOME
Loans, including fees		$	1,855			$	1,938
Securities
Taxable			196				281
Tax exempt			86				129
Other interest income			55				57
Total interest income			2,192				2,405
INTEREST EXPENSE ON DEPOSITS			284				406
NET INTEREST INCOME			1,908				1,999
Provision for loan losses			710				300
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			1,198				1,699
NONINTEREST INCOME
Service charges and fees			232				237
Net realized gains from sales of loans			160				27
Loan servicing fees, net of amortization			2				23
Gain on the sale of other real estate owned			400				—
Gain on the sale of securities			253				—
Other income			101				127
Total noninterest income			1,148				414
NONINTEREST EXPENSES
Salaries and employee benefits			1,017				962
Deferred compensation			70				64
Occupancy			230				264
Legal and professional			149				147
FDIC premiums			87				139
ORE losses and carrying costs			31				40
Other expenses			274				300
Total noninterest expense			1,858				1,916
INCOME BEFORE INCOME TAXES			488				197
Income tax expense			123				13
NET INCOME		$	365			$	184
Unrealized (losses) gains on available for sale securities, net of tax			(229	)			128
Unrecognized pension (losses) gains, net of tax			(70	)			—
Other comprehensive income, net of tax			(299	)			128
TOTAL COMPREHENSIVE INCOME		$	66			$	312
Return on average assets (annualized)			0.59	%			0.29	%
Return on average equity (annualized)			7.97	%			3.55	%
Basic earnings per share		$	0.30			$	0.15
Diluted earnings per share		$	0.30			$	0.15
Dividends declared per share		$	—			$	—

 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).

 

		Three months ended March 31,
		2012				2011
		(Unaudited)
Cash flows from operating activities
Net Income		$	365			$	184
Adjustments to reconcile net income to net cash
from operating activities
Depreciation, amortization and accretion, net			(13	)			130
Provision for loan losses			710				300
Loans originated for sale			(9,101	)			(1,955	)
Proceeds from sales of loans originated for sale			6,610				1,516
Gain on sales of investment securities			253				—
Gain on sales of loans			(160	)			(27	)
Proceeds from sales of other real estate owned properties			700				19
Gain on sales of other real estate owned properties			(400	)			—
(Increase) decrease in deferred tax benefit			47				(67	)
Decrease in other assets			10				4
Increase in other liabilities			127				9
Total adjustments			(1,217	)			(71	)
Net cash (used in) provided by operating activities			(852	)			113
Cash flows from investing activities
Proceeds from sales of securities available for sale			11,880				—
Proceeds from maturities of securities available for sale			8,947				4,069
Purchase of securities available for sale			(16,317	)			(12,692	)
Proceeds from maturities of securities held to maturity			75				265
Proceeds from maturities of time deposits			1,017				878
Purchase of time deposits			(898	)			(1,043	)
Net change in portfolio loans			2,901				2,811
Premises and equipment expenditures			(38	)			(16	)
Net cash (used in) provided by investing activities			7,567				(5,728	)
Cash flows from financing activities
Net increase in deposits			1,685				862
Net cash provided by financing activities			1,685				862
Net change in cash and cash equivalents			8,400				(4,753	)
Cash and cash equivalents at beginning of year			15,541				22,553
Cash and cash equivalents at end of period		$	23,941			$	17,800
Cash paid during the period for:
Interest		$	283			$	405
Non-cash transactions:
Transfer from loans to other real estate owned			—				2,219

 

See accompanying notes to consolidated financial statements.

 

 

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 for the three months ended March 31, 2012 and 2011 and the year ended December 31, 2011 include the accounts of CNB Corporation (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”). 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, 2011.

 

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.

 

Note 2 – New Accounting Standards

 

None

 

Note 3 – Securities

 

The securities portfolio decreased $5.1 million since December 31, 2011. The available for sale portfolio decreased marginally to 93.0% of the investment portfolio at March 31, 2012 compared to 93.3% December 31, 2011.

 

 

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, 2012
U.S. Government and agency		$	49,017			$	106			$	(36	)
Mortgage-backed			6,106				34				(65	)
Collateralized mortgage obligations			6,829				—				—
State and municipal			10,041				419				(5	)
Corporate obligations			1,004				5				—
Auction rate securities			1,000				—				—
Preferred Shares			79				57				—
		$	74,076			$	621			$	(106	)
December 31, 2011
U.S. Government and agency		$	52,915			$	217			$	(22	)
Mortgage-backed			15,168				226				(45	)
State and municipal			8,914				418				—
Corporate obligations			1,009				10				—
Auction rate securities			1,000				—				—
Preferred Shares			80				58				—
		$	79,086			$	929			$	(67	)

 

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, 2012
State and municipal		$	4,578			$	417			$	—			$	4,995
December 31, 2011
State and municipal		$	4,653			$	477			$	(9	)		$	5,121

 

 

The carrying amount and fair value of securities by contractual maturity at March 31, 2012 are shown below, in thousands of dollars.

 

		Available for				Held to Maturity
		sale				Carrying				Fair
		Fair Value				Amount				Value
Due in one year or less		$	20,489			$	1,210			$	1,215
Due from one to five years			36,408				1,576				1,697
Due from five to ten years			2,201				1,792				2,083
Due after ten years			964				—				—
Subtotal			60,062				4,578				4,995
Mortgage-backed securities			6,106				—				—
Collateralized mortgage obligations			6,829
Auction Rate Securities			1,000				—				—
Preferred Shares			79				—				—
		$	74,076			$	4,578			$	4,995

 

Note 4 – Loans

 

The table below shows total loans outstanding by type, in thousands of dollars, at March 31, 2012 and December 31, 2011 and their percentages of the total loan portfolio. All loans are domestic.

 

		March 31, 2012								December 31, 2011
		Balance				% of total				Balance				% of total
Portfolio loans:
Residential real estate		$	58,849				50.15	%		$	61,033				51.42	%
Consumer			4,542				3.87	%			5,124				4.32	%
Commercial real estate			48,962				41.72	%			48,110				40.54	%
Commercial			4,994				4.26	%			4,411				3.72	%
Gross Loans			117,347				100.00	%			118,678				100.00	%
Deferred loan origination fees, net			(251	)							(245	)
Allowance for loan losses			(3,804	)							(3,339	)
Loans, net		$	113,292							$	115,094

 

 

The following schedule represents the aging analysis of past due loans by loan type reported (in thousands):

 

		30-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loan				Accruing Loans 90 Days or More Days Past Due
March 31, 2012
Commercial		$	18			$	—			$	18			$	4,976			$	4,994			$	—
Commercial Real Estate			172				—				172				48,790				48,962				—
Consumer			11				—				11				4,531				4,542				—
Residential			899				—				899				57,950				58,849				—
Total		$	1,100			$	—			$	1,100			$	116,247			$	117,347			$	—
December 31, 2011
Commercial		$	90			$	—			$	90			$	4,321			$	4,411			$	—
Commercial Real Estate			126				—				126				47,984				48,110				—
Consumer			1				—				1				5,123				5,124				—
Residential			844				—				844				60,189				61,033				—
Total		$	1,061			$	—			$	1,061			$	117,617			$	118,678			$	—

 

Asset Quality

 

The lending staff continues to be well-trained and experienced. During 2011 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 assets 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); (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); (4) and other real estate owned properties. The aggregate amount of nonperforming assets is shown in the table below.

 

		March 31,				December 31,
		2012				2011
Nonaccrual		$	5,175			$	1,979
Loans past due 90 days or more			—				—
Troubled debt restructurings			5,666				4,496
Other real estate owned			1,156				1,600
Total nonperforming assets		$	11,997			$	8,075
Percent of total assets			4.76	%			3.23	%

 

At March 31, 2012, total nonperforming assets increased by $3.9 million from December 31, 2011. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans increased to $3.2 million and troubled debt restructurings increased $1.2 million since December 31, 2011. Offsetting the increase in nonaccrual loans and troubled debt restructurings was a decrease to other real estate owned. Other real estate owned decreased $444,000 from December 31, 2011 to March 31, 2012. Loans past due 90 days and still accruing are loans that management considers to be collectable including accrued interest. Uncertainty in the local economic conditions continues to contribute to the weakness in credit quality.

 

 

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 assets to remain at current levels throughout the remainder of 2012. The Bank believes it is adequately reserved on these loans.

 

Detail of the loans on nonaccrual status by loan type is presented in the table below:

 

		March 31,				December 31,
		2012				2011
		(In thousands)
Commercial		$	12			$	22
Commercial real estate			4,949				1,876
Consumer			—				—
Residential			213				81
Total		$	5,174			$	1,979

 

The Company uses a seven grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan ratings rank the credit quality of a borrower by measuring liquidity, debt capacity, and payment behavior as shown in the borrower’s financial statements. The loan ratings also measure the quality of the borrower’s management and the repayment support offered by any guarantors. A summary of the Company’s loan ratings (or, characteristics of the loans within each rating) follows:

 

Credit Quality Indicators

 

Risk Ratings 1-3 (Pass) — All loans in risk ratings 1— 3 are considered to be acceptable credit risks by the Company and are grouped for purposes of allowance for loan loss considerations and financial reporting. The three ratings essentially represent a ranking of loans that are all viewed to be of acceptable credit quality, taking into consideration the various factors mentioned above, but with varying degrees of financial strength, debt coverage, management and factors that could impact credit quality.

 

Risk Rating 4 (Special Mention) — A special mention business credit has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the Company’s credit position at some future date. Special mention business credits are not adversely ranked and do not expose the Company to sufficient risk to warrant adverse ranking.

 

Risk Rating 5 (Substandard) — A substandard business credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Business credit classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. If the likelihood of full collection of interest and principal may be in doubt; such loans are placed on nonaccrual status.

 

Risk Rating 6 (Doubtful) — A business credit rated as doubtful has all the weaknesses inherent in substandard as risk rating 5 with the added characteristic that the weaknesses make collection or liquidation in full, on the basis or currently existing fact, conditions, and values, highly questionable and improbable. Due to the high probability of loss, nonaccrual treatment is required for doubtful rated loans.

 

Risk Rating 7 (Loss) — A business credit rated as loss is considered uncollectible and of such little value that its continuance as a collectable loan is not warranted. This rating does not necessarily result in absolutely no recovery or salvage value, but rather it is not practical or desirable to defer charging off even if partial recovery may be a consideration in the future.

 

 

The following table presents the recorded investment of loans in the commercial loan portfolio by risk rating categories:

 

		Commercial								Commercial Real Estate
		March 31,				December 31,				March 31,				December 31,
		2012				2011				2012				2011
		(In thousands)
1 - 3		$	4,910			$	4,214			$	38,005			$	36,665
4			21				30				1,576				2,633
5			53				156				8,581				8,569
6			10				11				800				243
7			—				—				—				—
Total		$	4,994			$	4,411			$	48,962			$	48,110

 

The Company evaluates the credit quality of loans in the residential loan portfolio based primarily on the aging status of the loan, payment activity and credit quality indicators as defined above for business loans. The following schedule presents the recorded investment of loans in the residential loan portfolio based on the credit risk profile of loans in a pass, special mention and substandard rating:

 

		Residential
		March 31,				December 31,
		2012				2011
		(In thousands)
Grade:
Pass		$	58,288			$	60,671
Special mention			—				—
Substandard			561				362
Total		$	58,849			$	61,033

 

The Company evaluates the credit quality of loans in the consumer loan portfolio, based primarily on the aging status of the loan. Accordingly loans past due as to principal or interest 90 days or more are considered in a nonperforming status for purposes of credit quality evaluation. The following schedule presents the recorded investment of loans in the consumer loan portfolio based on the credit risk profile of loans in a performing status and loans in a nonperforming status:

 

		Consumer
		March 31,				December 31,
		2012				2011
		(In thousands)
Performing		$	4,542			$	5,124
Nonperforming			—				—
Total		$	4,542			$	5,124

 

There were thirty-five loans in the loan portfolio that were considered impaired as of March 31, 2012. Twenty-three of the thirty-five loans considered impaired have a valuation allowance against probable losses. There were thirty-one loans that were considered impaired as of year-end 2011. Fifteen of the thirty-one loans considered impaired had a valuation allowance against probable losses.

 

 

Impaired loans are presented in the table below (in thousands):

 

		Unpaid Contractual Principal Balance				Loans With No Allowance				Loans With Allowance				Total Impaired Loans				Related Allowance				Average Impaired Loan Balance				Interest Income Recognized
March 31, 2012
Commercial		$	86			$	2			$	37			$	39			$	12			$	74			$	1
Commercial Real Estate			7,181				2,001				5,180				7,181				1,885				6,432				35
Residential			1,106				286				804				1,090				106				922				11
Total		$	8,373			$	2,289			$	6,021			$	8,310			$	2,003			$	7,428			$	47
December 31, 2011
Commercial		$	176			$	—			$	108			$	108			$	82			$	249			$	1
Commercial Real Estate			5,683				3,271				2,412				5,683				952				4,094				79
Residential			786				266				487				753				47				411				21
Total		$	6,645			$	3,537			$	3,007			$	6,544			$	1,081			$	4,754			$	101

 

Impaired loans are evaluated individually for impairment. All other loans are evaluated collectively for impairment.

 

 

Note 5 – Allowance for Loan Losses

 

The following schedule presents, by loan type, the changes in the allowance for the period ending March 31 and details regarding the balance in the allowance and the recorded investment in loans at March 31 by impairment evaluation method (in thousands).

 

		Commercial				Commercial Real Estate				Consumer				Residential				Unallocated				Total
For the three months ended March 31, 2012
Allowance for credit losses:
Beginning balance		$	158			$	2,793			$	35			$	195			$	158			$	3,339
Charge-offs			(5	)			(240	)			(5	)			(35	)			—			$	(285	)
Recoveries			—				26				4				10				—			$	40
Provision			107				652				(2	)			71				(118	)			710
Ending Balance		$	260			$	3,231			$	32			$	241			$	40			$	3,804
Ending balance: individually evaluated for impairment		$	12			$	1,885			$	—			$	106			$	—			$	2,003
Ending balance: collectively evaluated for impairment		$	248			$	1,346			$	32			$	135			$	40			$	1,801
For the three months ended March 31, 2011
Allowance for credit losses:
Beginning balance		$	43			$	2,000			$	107			$	186			$	18			$	2,354
Charge-offs			—				(840	)			(7	)			(2	)			—			$	(849	)
Recoveries			—				32				7				1				—			$	40
Provision			16				95				(19	)			38				170				300
Ending Balance		$	59			$	1,287			$	88			$	223			$	188			$	1,845
Ending balance: individually evaluated for impairment		$	—			$	965			$	—			$	15			$	—			$	980
Ending balance: collectively evaluated for impairment		$	59			$	322			$	88			$	208			$	188			$	865

 

Note 6 – Fair Value Measurements

 

The following tables present information about the Company’s assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011, 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.

 

 

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

(dollars in thousands)

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance
Assets
March 31, 2012
Investment securities-available-for-sale:
U.S. Government and agency		$	—			$	49,017			$	—			$	49,017
Mortgage-backed			—				6,106				—				6,106
Collateralized mortgage obligations			—				6,829				—				6,829
State and municipal			—				—				10,041				10,041
Corporate Obligations			—				1,004				—				1,004
Auction rate securities			—				—				1,000				1,000
Preferred Shares			—				79				—				79
		$	—			$	63,035			$	11,041			$	74,076
December 31, 2011
Investment securities-available-for-sale:
U.S. Government and agency		$	—			$	52,915			$	—			$	52,915
Mortgage-backed			—				15,168				—				15,168
State and municipal			—				—				8,914				8,914
Corporate Obligations			—				1,009				—				1,009
Auction rate securities			—				—				1,000				1,000
Preferred Shares			—				80				—				80
		$	—			$	69,172			$	9,914			$	79,086

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

(dollars in thousands)

 

		Investment securities available-for-sale:
		2012				2011
Balance at January 1,		$	9,914			$	11,527
Total realized and unrealized gains (losses) included in income			—				—
Total unrealized gains (losses) included in other comprehensive income			(4	)			44
Net purchases, sales, calls and maturities			1,131				(186	)
Net transfers in/out of Level 3			—				—
Balance at March 31,		$	11,041			$	11,385

 

 

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 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 presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

 

Assets Measured at Fair Value on a Nonrecurring Basis

(dollars in thousands)

 

		Balance				Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
March 31, 2012
Impaired loans		$	13				—				—			$	13
Other real estate owned			1,080				—				—				1,080
December 31, 2011
Impaired loans		$	25				—				—			$	25
Other real estate owned			1,515				—				—				1,515

 

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 using management’s best estimate of key assumptions. These assumptions include future payment ability and estimated realizable values of available collateral (typically based on outside appraisals). The impaired loan losses for the period ending March 31, 2012 and December 31, 2011 represents charge-offs of loan balances written down through the allowance for loan losses. The other real estate owned losses for the period ending March 31, 2012 and December 31, 2011 represents balances written down through the income statement.

 

Note 7 – Fair Value of Financial Instruments

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

 

 

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

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.

 

The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis or underlying collateral values, where applicable. The fair value of off-balance sheet items approximates cost and is not considered significant to this presentation.

 

 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

		Carrying Amount				Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Siginificant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2012		(In thousands)
Assets
Cash and cash equivalents		$	23,941			$	23,941			$	23,941			$	—			$	—
Time Deposits with other financial institutions			14,054				14,262				—				14,262				—
Securities available for sale			74,076				74,076				—				63,035				11,041
Securities held to maturity			4,578				4,995				—				—				4,995
Other securities			997				997				997				—				—
Loans held for sale			2,602				2,633				—				2,633				—
Loans, net			113,293				114,838				—				—				114,838
Accrued interest receivable on loans			466				466				—				—				466
Liabilities
Deposits:
Noninterest-bearing		$	(54,056	)		$	(54,056	)		$	(54,056	)		$	(54,056	)		$	—
Interest bearing			(175,572	)			(175,975	)			(175,975	)			(175,975	)			—
Accrued interest payable on deposits			(36	)			(36	)			—				—				(36	)
December 31, 2011
Assets
Cash and cash equivalents		$	15,541			$	15,541			$	15,541			$	—			$	—
Time Deposits with other financial institutions			14,173				13,952				—				13,952				—
Securities available for sale			79,086				79,086								69,172				9,914
Securities held to maturity			4,653				5,121				—				—				5,121
Other securities			997				997				997				—				—
Loans held for sale			1,810				1,833				—				1,833				—
Loans, net			115,094				116,918				—				—				116,918
Accrued interest receivable on loans			432				432				—				—				432
Liabilities
Deposits:
Noninterest-bearing		$	(49,956	)		$	(49,956	)		$	(49,956	)		$	(49,956	)		$	—
Interest bearing			(177,987	)			(178,407	)			(178,407	)			(178,407	)			—
Accrued interest payable on deposits			(35	)			(35	)			—				—				(35	)

 

Note 8 - 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, 2012 and 2011.

 

Due to the plan end date, there are no options available for grant as of March 31, 2012 and 2011.

 

 

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, 2012			4,462			$	48.57
Options exercised			—				—
Options expired			—				—
Options forfeited			—				—
Balance at March 31, 2012			4,462			$	48.57				1.7 years			$	—
Exercisable at March 31, 2012			4,462			$	48.57

 

There were no options exercised during the three months ended March 31, 2012 and 2011 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, 2011.

 

Note 9 - 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, 2012 and 2011 the weighted average shares outstanding in calculating basic and diluted earnings per share was 1,212,098. As of March 31, 2012 all of the 4,462 outstanding share options were not considered in the earnings per share calculation because they were antidilutive.

 

 

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”) for the three month period ending March 31, 2012.

 

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 2011 Annual Report.

 

Financial Condition

 

As of March 31, 2012 total assets of the company were $252.1 million which represented an increase of $2.0 million or 0.79% from December 31, 2011 assets of $250.1 million. The Company recognized a decrease in the loan portfolio of $1.3 million or 1.1% while deposits increased $1.7 million.

 

Loans

 

Net portfolio loans at March 31, 2012 decreased $1.8 million from December 31, 2011. During the first three months of 2012 and over the most recent twelve months total loans has decreased as a result of slowing loan demand, charge-offs and the Company’s effective use of loan sales and servicing to mitigate interest rate risk. The Company generally sells its fixed long-term mortgages on the secondary market. Since December 31, 2011 commercial real estate mortgages have increased $852,000 while consumer mortgages have decreased $2.2 million. The Company is beginning to see new loan demand and overall total loan growth is expected in 2012.

 

A quarterly review of loan concentrations at March 31, 2012 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 14.9% of total loans.

 

Allowance and Provision for Loan Losses

 

The following is a summary of transactions in the allowance for loan losses for the three month period ending March 31, in thousands of dollars:

 

		2012				2011
Beginning balance		$	3,339			$	2,354
Provision for loan losses			710				300
Charge-offs			(285	)			(849	)
Recoveries			40				40
Ending balance		$	3,804			$	1,845

 

Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $710,000 for the first three months of 2012 compared to the prior year amount of $300,000 in the first three months of 2011. 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.

 

 

Deposits

 

As of March 31, 2012 total deposits increased $1.7 million from December 31, 2011. Accompanying the increase was a shift in the deposit mix since December 31, 2011. Noninterest-bearing deposits increased $4.1 million or 8.2% while interest-bearing deposits decreased $2.4 million or 1.4% for the three months ended March 31, 2012.

 

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 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 $8.4 million or 54.1% . During the three month period ending March 31, 2012, $1.1 million in cash was used in operating activities . Investing activities provided $7.8 million during the three months ended March 31, 2012 and financing activities provided $1.7 million.

 

As of March 31, 2012, the Company had no federal funds sold, $18.2 million in interest-bearing deposits with other financial institutions, $74.1 million in securities available for sale and $1.2 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 40.7% of total deposits as of March 31, 2012.

 

Total equity of the Company at March 31, 2012 was $18.1 million compared to $18.0 million at December 31, 2011. The increase in equity for the three months ended March 31, 2012 includes an increase in retained earnings from net income and a decrease in the accumulated deficit. This was offset by a marginal decrease in net changes related to accumulated other comprehensive loss.

 

RESULTS OF OPERATIONS

 

CNB Corporation’s 2012 net income for the first three months was $365,000, an increase of $181,000 compared to 2011 results. This increase in net income can be attributed for the most part to gains on the sales of other real estate owned and investment securities. Net interest income decreased compared to the same three month period last year due in part to the elevated level of nonaccrual loans and the decreased loan volume. 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 $0.30 for 2012 compared to $0.15 for 2011. The return on assets was .59% for the first three months of the year versus .29% for the same period in 2011. The return on equity was 7.97% compared to 3.55% for the same period last year.

 

For the first three months of 2012, net interest income was $1.9 million representing a decrease of 4.6% from the same period in 2011. The fully taxable equivalent net interest margin decreased to 3.42% for the three month period ending March 31, 2012 compared to 3.53% for the same period ending March 31, 2011. This change can be attributable to the same reasons noted above. The decreasing interest rate environment and nonaccrual loans continue to cause a decrease in interest income on earning assets.

 

 

Management continually reviews changes in the loan portfolio composition and asset quality. A provision expense of $710,000 was recorded in the first three months in 2012 and $300,000 in the first three months in 2011. It is management’s belief that asset quality is stabilizing.

 

Noninterest income for the three months ending March 31, 2012 was $1.1 million, an increase of $734,000 from the same period last year. The increase in noninterest income over the same period last year was due for the most part to a $400,000 gain on the sale of other real estate owned and a $253,000 gain on the sale of investment securities. Also contributing to the increased level of noninterest income were increased gains from the sales of loans due to increase refinancing activity. Offsetting the increased gains from the sales of loans was a decrease in income from loan servicing fees from $23,000 for the three months ended March 31, 2011 to $2,000 for the same period in 2012.

 

Noninterest expense for the first three months of 2012 was $1.9 million; a decrease of 3.0% from the same period last year. The Bank’s FDIC premiums decreased for the first three months of 2012 compared to the same period last year. In 2010 the FDIC announced a change to the FDIC assessment calculation to base premiums on Bank assets rather than Bank deposits. Along with that change was a decrease in the assessment rates. The change was effective for the 2nd quarter of 2011. The Company continues to monitor and control expenses at all levels.

 

The provision for federal income tax was 25.2% of pretax income for the three months ended March 31, 2012 as compared to 6.6% for the same period in 2011. 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, 2011 Management Discussion and Analysis appearing in the December 31, 2011 10K.

 

ITEM 4-CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report (the “Evaluation Date”) an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Treasurer who serves as our Chief Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Treasurer have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that material information relating to the Company known to others within the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

 

Management’s Annual Report on Internal Controls Over Financial Reporting

 

The management of CNB Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. CNB Corporation’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of its financial statements.

 

Management of CNB Corporation assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. 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, 2011, the Company’s internal control over financial reporting is effective based on those criteria.

 

The December 31, 2011 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 rules of the Securities and Exchange Commission that permit the company to provide only management’s report in the 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 March 31, 2012 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

 

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
101		INS XBRL Instance Document
101		SCH XBRL Taxonomy Extension Schema Document
101		CAL XBRL Taxonomy Extension Calculation Document
101		DEF XBRL Taxonomy Extension Definition Document
101		LAB XBRL Taxonomy Extension Label Linkbase Document
101		PRE XBRL Taxonomy Extension Presentation Document

 

b.)   Reports on Form 8-K

 

A Current Report on Form 8-K was filed on March 9, 2012 updating shareholders of the Bank’s financial relationship with Cheboygan Memorial Hospital following the hospital’s bankruptcy filing.

 

 

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 10, 2012		/s/ Susan A. Eno
		Susan A. Eno
		President and Chief Executive Officer
Date: May 10, 2012		/s/ Douglas W. Damm
		Douglas W. Damm
		Executive Vice President

 

 

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
101		INS XBRL Instance Document
101		SCH XBRL Taxonomy Extension Schema Document
101		CAL XBRL Taxonomy Extension Calculation Document
101		DEF XBRL Taxonomy Extension Definition Document
101		LAB XBRL Taxonomy Extension Label Linkbase Document
101		PRE XBRL Taxonomy Extension Presentation Document

 

25

---