FORM 10-Q

UNITED STATES
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 June 30, 2009


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)

(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES o 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
(Do not check if a small reporting company)

Smaller reporting company þ

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 August 7, 2009 there were 1,213,598 shares of the issuer’s common stock outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1-FINANCIAL STATEMENTS (CONDENSED)

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


	June 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Cash and due from banks	$	8,810		$	5,188
Federal funds sold		8,915			18,098

Total cash and cash equivalents		17,725			23,286

Time Deposits with other financial institutions		6,792			5,757
Securities available for sale		44,150			37,438
Securities held to maturity (market value of $8,282 in 2009 and $11,119 in 2008)		8,652			10,883
Other securities		1,008			1,008
Loans, held for sale		1,691			201
Loans, net of allowance for loan losses of $2,212 in 2009 and $1,996 in 2008		160,540			159,569
Premises and equipment, net		6,006			6,019
Other assets		11,385			9,755


Total assets	$	257,949		$	253,916


LIABILITIES
Deposits
Noninterest-bearing	$	41,252		$	37,163
Interest-bearing		191,689			193,380

Total deposits		232,941			230,543
Other liabilities		5,730			5,833

Total liabilities		238,671			236,376

SHAREHOLDERS’ EQUITY
Common stock — $2.50 par value; 2,000,000 shares authorized; and 1,213,598 shares issued and outstanding in 2009 and 2008		3,034			3,034
Additional paid-in capital		19,509			19,509
Retained earnings (accumulated deficit)		(2,444	)		(3,571	)
Accumulated other comprehensive loss, net of tax		(821	)		(1,432	)

Total shareholders’ equity		19,278			17,540


Total liabilities and shareholders’ equity	$	257,949		$	253,916

See accompanying notes to consolidated financial statements.

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


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2008			2009			2008
	(Unaudited)						(Unaudited)
INTEREST INCOME
Loans, including fees	$	2,637		$	2,918		$	5,234		$	6,040
Securities
Taxable		332			430			751			927
Tax exempt		125			148			254			280
Other interest income		57			83			119			220

Total interest income		3,151			3,579			6,358			7,467

INTEREST EXPENSE ON DEPOSITS		932			1,211			1,921			2,556


NET INTEREST INCOME		2,219			2,368			4,437			4,911

Provision for loan losses		225			300			500			731


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,994			2,068			3,937			4,180


NONINTEREST INCOME
Service charges and fees		277			304			542			583
Net realized gains from sales of loans		184			46			272			83
Loan servicing fees, net of amortization		(27	)		37			(75	)		60
Gain on the sale of investment securities		620			—			620			—
Other income		115			59			191			120

Total noninterest income		1,169			446			1,550			846

NONINTEREST EXPENSES
Salaries and employee benefits		1,031			1049			2,076			2,198
Director Deferred compensation		80			92			158			178
Occupancy		256			259			546			551
Legal and professional		169			115			268			202
Securities impairment write-down		—			—			37			—
FDIC insurance premiums		274			26			374			33
Expenses relating to ORE property		246			88			288			113
Other expenses		290			309			549			606

Total noninterest expense		2,346			1,938			4,296			3,881


INCOME BEFORE INCOME TAXES		817			576			1,191			1,145

Income tax expense		12			114			64			216


NET INCOME	$	805		$	462		$	1,127		$	929


TOTAL COMPREHENSIVE INCOME	$	1,550		$	(85	)	$	1,738		$	549


Return on average assets (annualized)		1.25	%		0.71	%		0.87	%		0.71	%
Return on average equity (annualized)		17.72	%		7.53	%		11.72	%		7.54	%

Basic earnings per share	$	0.66		$	0.38		$	0.93		$	0.77
Diluted earnings per share	$	0.66		$	0.38		$	0.93		$	0.77

Dividends declared per share	$	—		$	0.30		$	—		$	0.72

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).


	Six months ended June 30,
	2009			2008
	(Unaudited)

Cash flows from operating activities
Net Income	$	1,127		$	929
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net		366			335
Provision for loan losses		500			731
Loans originated for sale		(16,261	)		(2,136	)
Proceeds from sales of loans originated for sale		14,733			2,049
Gain on sales of loans		(272	)		(83	)
Gain on sales of other real estate owned properties		(3	)		(7	)
Other real estate owned writedowns/losses		208			25
Net losses on impairment of investment securities		37			—
Increase (decrease) in deferred tax benefit		(315	)		196
(Increase) decrease in other assets		(606	)		(157	)
Increase (decrease) in other liabilities		(103	)		98

Total adjustments		(1,716	)		1,051

Net cash (used in) provided by operating activities		(589	)		1,980

Cash flows from investing activities
Proceeds from maturities of securities available for sale		16,347			14,109
Purchase of securities available for sale		(21,264	)		(15,813	)
Proceeds from maturities of securities held to maturity		2,519			2,962
Purchase of securities held to maturity		(1,297	)		(3,965	)
Proceeds from maturities of time deposits		1,077			—
Purchase of time deposits		(2,112	)		—
Net change in portfolio loans		(2,390	)		3,051
Premises and equipment expenditures		(250	)		(116	)

Net cash (used in) provided by investing activities		(7,370	)		228

Cash flows from financing activities
Net increase in deposits		2,398			3,782
Dividends paid		—			(1,753	)

Net cash provided by financing activities		2,398			2,029


Net change in cash and cash equivalents		(5,561	)		4,237

Cash and cash equivalents at beginning of year		23,286			17,272


Cash and cash equivalents at end of period	$	17,725		$	21,509


Cash paid during the period for:
Interest	$	1,948		$	2,594
Income taxes		138			169
Non-cash transactions:
Transfer from loans to other real estate owned		1,375			1,099

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 include the accounts of CNB Corporation (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”) and the Bank’s wholly owned subsidiary CNB Mortgage Corporation. All significant intercompany accounts and transactions are eliminated in the consolidation process. The statements have been prepared by management without an audit by independent certified public accountants. However, these statements reflect all adjustments (consisting of normal recurring accruals) and disclosures which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and should be read in conjunction with the notes to the consolidated financial statements included in the CNB Corporation’s Form 10-K for the year ended December 31, 2008.

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 Measurements

The following tables present information about the Company’s assets measured at fair value on a recurring basis at June 30, 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.

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 at June 30, 2009
(dollars in thousands)

Quoted Prices in

Active Markets for

Significant Other

Significant

Balance at

Identical Assets

Observable Inputs

Unobservable Inputs

June 30,

(Level 1)

(Level 2)

(Level 3)

2009

Assets

Investment securities-available-for-sale

31,531

3,978

8,641

44,150

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)


	Investment
	securities-
	available-for-
	sale
Balance at December 31, 2008	$	6,954
Total realized and unrealized gains (losses) included in income		—
Total unrealized gains (losses) included in other comprehensive income		597
Net purchases, sales, calls and maturities		1,090
Net transfers in/out of Level 3		—

Balance at June 30, 2009	$	8,641

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 and liabilities 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 at June 30, 2009
(dollars in thousands)


			Prices in Active
			Markets for		Significant Other		Significant		Total Losses for
	Balance at		Identical Assets		Observable Inputs		Unobservable Inputs		the Period Ended
	June 30, 2009		(Level 1)		(Level 2)		(Level 3)		June 30, 2009
Assets
Impaired loans accounted for under FAS 114	$	180		—		—	$	180	$	103
Other real estate owned		989		—		—		989		177

Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The FAS 114 losses for the period ending June 30, 2009 represents charge-offs of loan balances written down through the allowance for loan losses.

The Company’s other real estate owned is held at an estimated realizable value and that value changes periodically with the real estate market. Losses for the period associated with other real estate owned represent valuation adjustments and are write downs through the income statement.

Other assets, including bank-owned life insurance and intangible assets are also subject to periodic impairment assessments under other accounting principles generally accepted in the United States of America. These assets are not considered financial instruments. Effective February 12, 2008, the FASB issued a staff position, FSP FAS 157-2, which delayed the applicability of FAS 157 to non-financial instruments. Accordingly, these assets have been omitted from the above disclosures.

Fair Value of Financial Instruments

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 estimated values of financial instruments were:


	June 30, 2009						December 31, 2008
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
	(In thousands)
Assets
Cash and cash equivalents	$	17,725		$	17,725		$	23,286		$	23,286
Time Deposits with other financial institutions		6,792			6,792			5,757			5,757
Securities available for sale		44,150			44,150			37,438			37,438
Securities held to maturity		8,652			8,282			10,883			11,119
Other securities		1,008			1,008			1,008			1,008
Loans, net		162,231			163,029			159,770			162,770
Accrued interest receivable on loans		750			750			608			608

Liabilities
Deposits
Noninterest-bearing	$	(41,252	)	$	(41,252	)	$	(37,163	)	$	(37,163	)
Interest bearing		(191,689	)		(192,234	)		(193,380	)		(194,258	)
Accrued interest payable on deposits		(120	)		(120	)		(147	)		(147	)

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 June 30, 2009 and 2008.

Due to the plan end date, there are no options available for grant as of June 30, 2009 and 2008.

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, 2009		10,546		$	52.74
Options exercised		—			—
Options expired		—			—
Options forfeited		(315	)		47.62

Balance at June 30, 2009		10,231		$	52.90	2.4 years	$	—

There were no options exercised during the three months ended June 30, 2009 and 2008 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, 2008.

ITEM 2-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”) and the Bank’s wholly owned subsidiary CNB Mortgage Corporation for the six month period ending June 30, 2009.

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 2008 Annual Report.

Financial Condition

As of June 30, 2009 total assets of the company were $257.9 million which represents an increase of $4.0 million or 1.6% from December 31, 2008. The Company recognized an increase in the loan portfolio of $2.8 million or 1.7% while deposits increased $2.4 million.

Securities

The securities portfolio increased $4.5 million since December 31, 2008. The available for sale portfolio increased to 82.0% of the investment portfolio at June 30, 2009 compared to 78.1% at December 31, 2008.

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
June 30, 2009
U.S. Government and agency	$	25,316	$	153	$	(12	)
Mortgage-backed		6,812		121		—
State and municipal		7,041		103		(118	)
Corporate Obligations		1,003		5		—
Auction rate securities		1,600		600		—
Preferred Shares		2,378		400		—

	$	44,150	$	1,382	$	(130	)


December 31, 2008
U.S. Government and agency	$	17,061	$	265	$	—
Mortgage-backed		9,629		78		(38	)
State and municipal		5,955		77		(56	)
Auction rate securities		4,793		—		—

	$	37,438	$	420	$	(94	)

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
June 30, 2009
State and municipal	$	8,652	$	84	$	(454	)	$	8,282

December 31, 2008
U.S. Government and agency	$	2,001	$	19	$	—		$	2,020
State and municipal		8,882		236		(19	)		9,099

		10,883		255		(19	)		11,119

The carrying amount and fair value of securities by contractual maturity at June 30, 2009 are shown below, in thousands of dollars.


	Available for sale		Held to Maturity
	Fair		Carrying		Fair
	Value		Amount		Value

Due in one year or less	$	13,104	$	310	$	310
Due from one to five years		15,196		5,202		5,017
Due from five to ten years		3,791		2,410		2,167
Due after ten years		1,269		730		788

		33,360		8,652		8,282

Subtotal

Mortgage-backed securities		6,812		—		—
Auction Rate Securities		1,600		—		—
Preferred Shares		2,378		—		—


	$	44,150	$	8,652	$	8,282

Loans

Net loans at June 30, 2009 increased $2.5 million from December 31, 2008. The table below shows total loans outstanding by type, in thousands of dollars, at June 30, 2009 and December 31, 2008 and their percentages of the total loan portfolio. All loans are domestic. A quarterly review of loan concentrations at June 30, 2009 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 14.0% of total loans.


	June 30, 2009						December 31, 2008
	Balance			% of total			Balance			% of total
Portfolio loans:
Residential real estate	$	83,615			50.80	%	$	77,734			48.03	%
Consumer		7,237			4.40	%		7,518			4.65	%
Commercial real estate		65,209			39.61	%		67,282			41.57	%
Commercial		8,542			5.19	%		9,314			5.75	%

Gross Loans		164,603			100.00	%		161,848			100.00	%

Deferred loan origination fees, net		(160	)					(82	)
Allowance for loan losses		(2,212	)					(1,996	)

Loans, net	$	162,231					$	159,770

Since December 31, 2008 commercial real estate mortgages have decreased $2.1 million while consumer mortgages have increased $5.9 million. This increase in residential real estate loans is primarily due to in-house mortgages being refinanced from mortgages that were sold in the secondary market as the result of a mortgage loan special offered by the Bank in February 2009 and the Bank’s stronger emphasis on residential real estate lending. Demand for new commercial loans of any kind has become stagnant and the Bank continues to work with its current borrows and their financial commitments during these tough economic times in Michigan.

Allowance and Provision for Loan Losses

An analysis of the allowance for loan losses, in thousands of dollars, follows:


	Three Months Ended						Six Month Ended
	June 30,						June 30,
	2009			2008			2009			2008

Beginning balance	$	2172		$	1795		$	1,996		$	1,670
Provision for loan losses		225			300			500			731
Charge-offs		(200	)		(457	)		(321	)		(774	)
Recoveries		15			4			37			15

Ending balance	$	2,212		$	1,642		$	2,212		$	1,642

Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $500,000 for the first six months of 2009 compared to the prior year amount of $731,000 in the first six months of 2008. The amount of provisions for loan losses recognized by the Company is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio.

Credit Quality

The Company has experienced a continued decrease in the quality of its loan portfolio as a result of persisting strain on 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); and (4) other real estate owned properties . The aggregate amount of nonperforming loans is shown in the table below.


	June 30,			December 31,
	2009			2008
	(dollars in thousands)

Nonaccrual	$	5,773		$	5,356
Loans past due 90 days or more		632			295
Troubled debt restructurings		260			393
Other real estate owned		2,431			1,762

Total nonperforming assets	$	9,096		$	7,806


Percent of total assets		3.53	%		3.07	%

At June 30, 2009, total nonperforming assets increased by $1.3 million from December 31, 2008. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans increased to $5.8 million since December 31, 2008. Loans past due 90 days and still accruing are loans that management considers to be collectable including accrued interest. Other real estate owned increased to $2.4 million since December 31, 2008. The increase in non-performing assets was due to continued deteriorating credit quality. Uncertainty in the local economic conditions also contributed to the weakness in credit quality.

The Company had 49 problem commercial loans that were reviewed for impairment totaling $12.1 million as of June 30, 2009. 16 of the 49 loans were considered impaired and have a valuation allowance against loss potential. The balance of these 16 loans at June 30, 2009 totaled $2.1 million and the valuation allowance was $449,000.

Beginning in the fall of 2008, the Bank has outsourced a loan review process performed twice per year. 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 2009. The Bank believes it is adequately reserved on the nonperforming loans.

Deposits

Deposits at June 30, 2009 increased $2.4 million since December 31, 2008. This increase is due primarily to regular deposit seasonality. Interest-bearing deposits decreased $1.7 million or 0.9% for the six months ended June 30, 2009, while noninterest-bearing deposits increased $4.1 million or 11.0%. As stated above, this increase in deposits is due for the most part to regular seasonal activity in deposits. The overall elevated level of deposits continues as some customers have fled more risky market investment for the safety of FDIC insured bank deposits.

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 decreased $5.6 million or 23.9% to $17.7 million. During the six month period ending June 30, 2009, $589,000 in cash was used in operating activities. Investing activities utilized $7.4 million during the six months ended June 30, 2009, primarily due to purchases of available for sale securities and financing activities provided $2.4 million.

As of June 30, 2009, the Company had $8.9 million in federal funds sold, $44.2 million in securities available for sale and $310,000 in held to maturity securities maturing within one year. These sources of liquidity are supplemented by new deposits and loan payments received by customers. These short-term assets represent 22.9% of total deposits as of June 30, 2009.

Total equity of the Company at June 30, 2009 was $19.3 million compared to $17.5 million at December 31, 2008. The increase in equity for the six months ended June 30, 2008 includes an increase in retained earnings from net income and net changes related to accumulated other comprehensive loss. The Board of Directors of CNB Corporation voted at its June 11, 2009 meeting that no dividend will be paid for the second quarter of 2009.

RESULTS OF OPERATIONS

CNB Corporation’s 2009 net income for the first six months was $1.1 million, an increase of $198,000 compared to 2008 results. This increase in net income can be attributed to gains on the sale of investment securities and mortgage banking activity, offset by increase in FDIC insurance premiums and a lower net interest margin. Basic and diluted earnings per share were $0.93 for 2009 compared to $0.77 for 2008. The return on assets was .87% for the first six months of the year versus 0.71% for the same period in 2008. The return on equity was 11.72% compared to 7.54% for the same period last year.

Net income for the three months ending June 30, 2009 was $805,000 compared to $462,000 for 2008. This was an increase of $343,000 or 74.2%. Basic and diluted earnings per share were $0.66 compared to $0.38 for 2008. The return on average assets was 1.25% compared to 0.71% for 2008. The return on average equity was 17.72% compared to 7.53% for 2008. This increase in quarterly earnings is also due to the gains on sale of investments as mentioned above.

Interest income for the first six months of 2009 was $6.4 million, a decrease of $1.1 million or 14.9% compared to the 2008 results. This decrease in interest income can be attributed to a decreasing rate environment as loan customers refinance their loans to take advantage of the decreasing rates, interest income earned on those loans also decreases. In addition to the decreasing rate environment, interest income is affected by loans that are on nonaccrual status and are not accruing interest. The Bank’s average total loan portfolio has decreased since the same period last year also contributing to the decreased interest income. Decreases in the loan portfolio are a result of decreasing loan demand, loans being sold to the secondary market, loan charge-offs and loan balances being transferred to Other Assets as collateral is collected on loans through the foreclosure process.

Interest income for the quarter ending June 30, 2009 was $3.0 million compared to $3.6 million for the same period last year. This decreased is primarily for the same reasons as noted above for the year to date period.

Interest expense for the first six months of 2009 was $1.9 million, a decrease of $635,000 or 24.8% compared to 2008 results. This decrease can be attributed to the decreasing rate environment.

Interest expense for the quarter ending June 30, 2009 was $932,000 compared to $1.2 million for the same period last year. This decrease is attributed to the same reasons as noted above for the year to date period.

For the first six months of 2009, net interest income was $4.4 million representing a decrease of 9.7% from the same period in 2008. The fully taxable equivalent net interest margin decreased to 3.86% for the six month period ending June 30, 2009 compared to 4.25% for the same period ending June 30, 2008. This change can be attributed to the Bank’s increased level of nonaccrual loans.

Year to date net charge-offs recorded in the allowance for loan losses were $284,000 for 2009 compared to $759,000 for the same period in 2008. A provision expense of $500,000 was recorded in the first six months of 2009 compared to $731,000 in the first six months in 2008 in order to maintain an acceptable allowance for loan loss level. The decreased provision expense is in response to the change in the loan portfolio composition and the stabilizing asset quality.

Noninterest income for the six months ending June 30, 2009 was $1.2 million, an increase of $723,000 from the same period last year. This change between the two periods is attributed, mostly, due to the gain on the sale of investment securities. The investment securities sold were one auction rate security with Bank of America preferred shares as underlying collateral and Bank of America (BofA) preferred shares. The BofA preferred shares were the underlying collateral of an auction rate securities investment held by the bank in 2008. This auction rate security was originally collateralized with Merrill Lynch preferred stock, but the purchase of Merrill Lynch by BofA replaced the Merrill Lynch shares with BofA shares as the underlying collateral. The meltdown of the auction rate securities market triggered the distribution of the investment’s underlying collateral, thus resulting in the Bank acquiring the BofA preferred shares. During the second quarter of 2008 BofA announced a tender offer for its preferred share holders. Management along with the Board of Directors reviewed the details of the tender offer and considered the tender offer to be an opportunity for the Bank to liquidate its BofA holdings with limited market risk.

The increase in noninterest income between the two periods is also due, in part, to the decreasing rate environment resulting in an increased number of refinances of mortgages sold to the secondary market thus increasing the banks gains from the sales of these types of loans.

Noninterest income for the three month period ending June 30, 2009 was $1.6 million compared to $446,000 for the same period last year. This represents an increase of $706,000. This increase is attributable, mostly, to the investment securities gains and other reasons as noted above.

Noninterest expense for the first six months of 2009 was $4.3 million, an increase of $415,000 or 10.7% compared to 2008 results. The increase in noninterest expense can largely be attributable to increases in expense relating to other real estate owned (ORE) properties and FDIC insurance premiums. Other real estate owned is included in the Other assets section of the balance sheet. When the collateral supporting a borrowing is relinquished by customers through the collection process (including a deed in lieu of foreclosure and foreclosures); the assets are written down to market value based on a professional appraisal or other common means of valuation and held until they can be sold. The income statement category “Expenses relating to ORE property” includes the write downs mentioned above, losses on sales and property holding costs such as insurance, taxes and maintenance. The Bank held 21 properties on June 30, 2009 with a balance sheet value totaling $2.4 million compared to 13 properties on June 30, 2008 with a balance sheet value totaling $2.4 million. If any relinquished asset is sold for less than it is being held or experiences a decline in market value during the holding period, further losses could result. The Bank’s FDIC insurance premium increased by $341,000 to $374,000 for the period ending June 30, 2009 compared to $33,000 for the same period last year. The increase in FDIC insurance premiums is largely due to an increased overall assessment rate and also an emergency special assessment announced in March 2009 and was charged to banks due to the large number of bank failures and the need for the insurance fund to be replenished.

Noninterest expense for the three month period ending June 30, 2009 was $2.3 million, an increase of $408,000 or 21.1% compared to 2008 results. This increase is primarily for the same reasons as noted above for the year to date period.

The provision for federal income tax was 5.4% of pretax income for the six months ended June 30, 2009 as compared to 18.9% for the same period in 2008. The difference between the tax rates for the two periods is due, in part, to the circumstance surrounding the original impairment loss on the securities investment reported in prior periods. The gains on the securities sold this year are not taxable as the gain is offsetting prior capital losses. 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, 2008 Management Discussion and Analysis appearing in the December 31, 2008 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, 2008. 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, 2008, the Company’s internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report

The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. It meets quarterly with management and the internal auditor and periodically with the independent auditors to ensure that they are carrying out their responsibilities. The independent auditors and the internal auditor have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over

financial reporting, and any other matter which they believe should be brought to the attention of the Audit Committee.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2008 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

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, 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 from July 2006 through March 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.

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-Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of CNB Corporation was held on May 19, 2009. Elected as Directors for one year term were Steven J. Baker; James C. Conboy, Jr.; Kathleen M. Darrow; Thomas J. Ellenberger; Susan A. Eno; Vincent J. Hillesheim; Kathleen A. Lieder; ; R. Jeffery Swadling; and Francis J. VanAntwerp Jr.

Votes cast for: 808,139
Votes cast against: 30,263
Votes withheld: 17,066

Votes cast for were for all ten directors listed above with the exception of the votes cast against as noted. Votes cast against were 7,000 for Steven J. Baker, 3,290 for James C. Conboy, Jr., 3,241 for Susan A. Eno, 7,000 for Vincent J. Hillesheim, 297 Kathleen A. Lieder, 7,335 R. Jeffrey Swadling and 2,100 for Francis J. VanAntwerp, Jr. Votes withheld were for all nine directors listed above.

Item 5-Other Information

None

Item 6-Exhibits and Reports of Form 8-K


a.) Exhibits

31.1		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31.2		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32.1		Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
32.2		Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

b.) Reports on Form 8-K

A Current Report on Form 8-K was filed on May 19, 2009, with an accompanying letter to shareholders, disclosing the Corporation’s financial performance for the first three months of 2009.

A Current Report on Form 8-K was filed on May 19, 2009 announcing the retirement of John L. Ormsbee as Director of CNB Corporation.

A Current Report on Form 8-K was filed on May 19, 2009 announcing the filing of a complaint by Citizens National Bank of Cheboygan against Heber-Fuger-Wendin, Inc. and Mark Williams

A Current Report on Form 8-K was filed on June 17, 2009 announcing that no dividend was declared for the second quarter 2009.


PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements (Condensed):
Consolidated Balance Sheets — June 30, 2009 and December 31, 2008			3
Consolidated Statements of Income — Three and Six Months Ended June 30, 2009 and 2008			4
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2009 and 2008			5
Notes to Consolidated Financial Statements			6 — 10
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			11 — 16
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			17
Item 4 — Controls and Procedures			17 — 18

PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			18
Item 1A — Risk Factors			18
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			18
Item 3 — Defaults Upon Senior Securities			18
Item 4 — Submission of Matters to a Vote of Security Holders			18
Item 5 — Other Information			19
Item 6 — Exhibits and Reports on Form 8-K			19

Signatures			20
Exhibit Index			21
EX-31.1
EX-31.2
EX-32.1
EX-32.2



	CNB Corporation
	(Registrant)



Date: August 14, 2009	/s/ Susan A. Eno
	Susan A. Eno
	President and Chief Executive Officer


Date: August 14, 2009	/s/ Douglas W. Damm
	Douglas W. Damm
	Senior Vice President

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

	c)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	b)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	c)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	d)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	e)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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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

	(1)		the Report fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



	By:	/s/ Shanna L. Hanley
		Shanna L. Hanley Treasurer
		(Principal Financial Officer)