-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D9TjQqhYEGIyOOHRbcsEvXfveuxFSxBsSXvgRSGoOC5bA4l9xsb+jw+VJeJL9gax fSAgt0nZGznGe5MOeSsYVQ== 0000950124-06-004514.txt : 20060814 0000950124-06-004514.hdr.sgml : 20060814 20060814124723 ACCESSION NUMBER: 0000950124-06-004514 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060814 DATE AS OF CHANGE: 20060814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB CORP /MI/ CENTRAL INDEX KEY: 0000779125 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 362662386 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-00737 FILM NUMBER: 061028354 BUSINESS ADDRESS: STREET 1: PO BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 BUSINESS PHONE: 6166277111 MAIL ADDRESS: STREET 1: P O BOX 10 CITY: CHEBOYGAN STATE: MI ZIP: 49721 10-Q 1 k07792e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2006 Commission file # 0-28388 CNB CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-2662386 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
303 North Main Street, Cheboygan MI 49721 (Address of principal executive offices, including Zip Code) (231) 627-7111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of August 4, 2006 there were 1,238,762 shares of the issuer's common stock outstanding. CNB CORPORATION Index PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Condensed): Consolidated Balance Sheets - June 30, 2006 and December 31, 2005 ... 3 Consolidated Statements of Income - Three and Six Months Ended June 30, 2006 and 2005 ........................................... 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2006 and 2005 .................................................... 5 Notes to Consolidated Financial Statements .......................... 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 8-11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk .... 11 Item 4 - Controls and Procedures ....................................... 12 PART II - OTHER INFORMATION Item 1 - Legal Proceedings ............................................. 13 Item 1A - Risk Factors ................................................. 13 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ... 13 Item 3 - Defaults Upon Senior Securities ............................... 13 Item 4 - Submission of Matters to a Vote of Security Holders ........... 13 Item 5 - Other Information ............................................. 13 Item 6 - Exhibits and Reports on Form 8-K .............................. 13 Signatures ............................................................. 14-17 Exhibit Index .......................................................... 18
2 PART I - FINANCIAL INFORMATION ITEM 1-FINANCIAL STATEMENTS (CONDENSED) CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
June 30, December 31, 2006 2005 ----------- ------------ (Unaudited) ASSETS Cash and due from banks $ 8,747 $ 6,586 Federal funds sold 3,119 5,357 -------- -------- Total cash and cash equivalents 11,866 11,943 Securities available for sale 58,009 69,315 Securities held to maturity (market value of $4,851 in 2006 and $4,128 in 2005) 4,843 4,117 Other securities 1,053 1,053 Loans, held for sale 411 51 Loans, net of allowance for loan losses of $1,487 in 2006 and $1,456 in 2005 163,399 154,811 Premises and equipment, net 5,714 5,443 Other assets 6,335 5,998 -------- -------- Total assets $251,630 $252,731 ======== ======== LIABILITIES Deposits Noninterest-bearing $ 40,424 $ 38,943 Interest-bearing 180,997 184,494 -------- -------- Total deposits 221,421 223,437 Other liabilities 4,946 4,795 -------- -------- Total liabilities 226,367 228,232 SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares authorized; and 1,238,762 and 1,237,418 shares issued and outstanding in 2006 and 2005 3,097 3,094 Additional paid-in capital 20,459 20,430 Retained earnings 2,226 1,576 Accumulated other comprehensive loss, net of tax (519) (601) -------- -------- Total shareholders' equity 25,263 24,499 -------- -------- Total liabilities and shareholders' equity $251,630 $252,731 ======== ========
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months Six months ended June 30, ended June 30, --------------- --------------- 2006 2005 2006 2005 ------ ------ ------ ------ (Unaudited) INTEREST INCOME Loans, including fees $3,007 $2,575 $5,829 $5,024 Securities Taxable 453 538 909 1,046 Tax exempt 110 152 237 304 Other interest income 58 55 160 107 ------ ------ ------ ------ Total interest income 3,628 3,320 7,135 6,481 INTEREST EXPENSE ON DEPOSITS 1,131 726 2,126 1,379 ------ ------ ------ ------ NET INTEREST INCOME 2,497 2,594 5,009 5,102 Provision for loan losses 30 30 60 60 ------ ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,467 2,564 4,949 5,042 ------ ------ ------ ------ NONINTEREST INCOME Service charges and fees 244 237 469 457 Net realized gains from sales of loans 32 60 82 112 Loan servicing fees, net of amortization 30 35 59 57 Gain on sale of premises and equipment 509 -- 509 -- Other income 52 348 92 403 ------ ------ ------ ------ Total noninterest income 867 680 1,211 1,029 NONINTEREST EXPENSES Salaries and employee benefits 869 821 1,749 1,614 Deferred compensation 79 391 160 466 Pension 65 78 129 156 Hospitalization 144 134 285 263 Occupancy 268 207 537 419 Supplies 77 49 111 92 Legal and professional 97 138 195 232 Other expenses 298 259 621 518 ------ ------ ------ ------ Total noninterest expense 1,897 2,077 3,787 3,760 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 1,437 1,167 2,373 2,311 Income tax expense 441 235 683 574 ------ ------ ------ ------ NET INCOME $ 996 $ 932 $1,690 $1,737 ====== ====== ====== ====== TOTAL COMPREHENSIVE INCOME $ 985 $1,147 $1,772 $1,666 ====== ====== ====== ====== Return on average assets (annualized) 1.60% 1.45% 1.34% 1.35% Return on average equity (annualized) 15.89% 15.11% 13.57% 14.12% Basic earnings per share $ 0.80 $ 0.75 $ 1.37 $ 1.40 Diluted earnings per share $ 0.80 $ 0.75 $ 1.36 $ 1.40 Dividends declared per share $ 0.42 $ 0.40 $ 0.84 $ 0.80
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Six months ended June 30, ------------------ 2006 2005 ------- -------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,690 $ 1,737 Adjustments to reconcile net income to net cash from operating activities Depreciation, amortization and accretion, net 72 295 Provision for loan losses 60 60 Loans originated for sale (3,867) (5,862) Proceeds from sales of loans originated for sale 3,542 5,380 Gain on sales of loans (82) (112) Gain on sales of premises and equipment (509) -- Increase in other assets (297) (392) Increase in other liabilities 867 849 ------- -------- Total adjustments (214) 218 ------- -------- Net cash provided by operating activities 1,476 1,955 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 16,360 9,425 Purchase of securities available for sale (4,697) (10,440) Proceeds from maturities of securities held to maturity 709 688 Purchase of securities held to maturity (1,435) (1,450) Proceeds from maturities of other securities -- 2,000 Purchase of other securities -- (58) Net change in portfolio loans (8,683) (5,019) Premises and equipment expenditures (609) (305) Proceeds from sale of premises and equipment 542 -- ------- -------- Net cash provided by (used in) investing activities 2,187 (5,159) CASH FLOWS FROM FINANCING ACTIVITIES Net increase(decrease) in deposits (2,016) 4,012 Dividends paid (1,756) (1,716) Net proceeds from exercise of stock options 37 11 Purchases of common stock (5) (64) ------- -------- Net cash (used in) provided by financing activities (3,740) 2,243 ------- -------- Net change in cash and cash equivalents (77) (961) Cash and cash equivalents at beginning of year 11,943 12,695 ------- -------- Cash and cash equivalents at end of period $11,866 $ 11,734 ======= ======== Cash paid during the period for: Interest $ 2,079 $ 1,351 Income taxes 186 655 Non-cash transactions: Transfer from loans to other real estate owned 35 389
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL 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, 2005. 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. Stock Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment, which requires companies to record compensation expense for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee's service period, which is normally the vesting period of the options. This will apply to awards granted or modified after adoption and for prior grants that vest after the date of adoption. As of and for the six months ended June 30, 2006 there was no unrecognized compensation expense or recorded compensation expense as there were no options granted or modified during this period and all previously granted options were fully vested prior to 2006. The effect on future results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Prior to December 31, 2005 stock-based compensation was accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost of stock options was measured as the excess, if any, of the fair value of our stock at the date of grant over the grant price and no stock-based employee compensation cost was reflected in the income statements for the periods ended prior to December 31, 2005. The effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, was less than $.01 per share for the three and six months ended June 30, 2005. There were no stock options granted during the six months ended June 30, 2006 and 2005. The Company adopted a stock option plan in May 1996 under which the options may be issued at market prices to employees. Stock options are used to reward certain officers and provide them with an additional equity interest. Options are 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. 6 Information about options available for grant, options outstanding and options exercisable follows:
Weighted Options Weighted Average Outstanding Average Remaining Aggregate Available and Exercise Contractual Intrinsic For Grant Exercisable Price Term Value --------- ----------- -------- ----------- --------- Balance at January 1, 2006 9,952 25,932 $47.35 Options exercised (1,444) 25.69 ----- ------ Balance at June 30, 2006 9,952 24,488 $48.63 4.2 years $(89,000) ===== ======
The aggregate intrinsic value of options exercised for the three and six months ended June 30, 2006 was approximately $24,000 and $28,000 respectively. The aggregate intrinsic value of options exercised for the three and six months ended June 30, 2005 was approximately $3,400. There were no shares vested for the same periods. Cash received from option exercises for the three and six month periods ending June 30, 2006 was approximately $29,000 and $37,000 and for the three and six month periods ending June 30, 2005 was approximately $7,000 and $11,000, respectively. There was no tax benefit realized from option exercises during the same periods. There have been no significant changes in the Company's critical accounting policies since December 31, 2005. Note 2-New Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN 48 requires that realization of an uncertain income tax position be "more likely than not" before it can be recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. FIN 48 also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the requirements of FIN 48 and the impact this interpretation may have on its financial statements. Note 3-Earnings Per Share Basic earnings per share are calculated solely on weighted-average common shares outstanding. Diluted earnings per share will reflect the potential dilution of stock options and other common stock equivalents. For the three and six month periods ending June 30, 2006 the weighted average shares outstanding in calculating basic earnings per share were 1,238,088 and 1,237,763 while the weighted average number of shares for diluted earnings per share were 1,239,378 and 1,239,601. As of June 30, 2006 there were 19,707 options not considered in the three and six month earnings per share calculations because they were antidilutive. For the three and six month periods ending June 30, 2005 the weighted average shares outstanding in calculating basic earnings per share were 1,237,518 and 1,237,683 while the weighted average number of shares for diluted earnings per share were 1,239,342 and 1,240,520. As of June 30, 2005 there were 8,340 options not considered in the three and six month earnings per share calculations because they were antidilutive. 7 ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation ("Company") and its wholly owned subsidiary, Citizens National Bank of Cheboygan ("Bank") and the Bank's wholly owned subsidiary CNB Mortgage Corporation for the three and six month periods ending June 30, 2006. FINANCIAL CONDITION The Company's balances of cash and cash equivalents decreased $77,000 or 0.6%. During the six month period ending June 30, 2006, $1.5 million in cash was provided by operating activities. Investing activities provided $2.2 million during the six months ended June 30, 2006, primarily due to proceeds of maturing securities and financing activities utilized $3.7 million. SECURITIES The securities portfolio decreased $10.6 million since December 31, 2005. The available for sale portfolio decreased to 90.8% of the investment portfolio down from 93.1% at year-end. The fair values and related unrealized gains and losses for securities available for sale were as follows, in thousands of dollars:
Gross Gross Fair Unrealized Unrealized Value Gains Losses ------- ---------- ---------- Available for Sale JUNE 30, 2006 U.S. Government agency $42,099 $-- $(536) Mortgage-backed 7,205 -- (240) State and municipal 8,705 37 (48) ------- --- ----- $58,009 $37 $(824) ======= === ===== DECEMBER 31, 2005 U.S. Government agency $49,099 $-- $(717) Mortgage-backed 8,140 -- (180) State and municipal 12,076 38 (52) ------- --- ----- $69,315 $38 $(949) ======= === =====
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, 2006 State and municipal $4,843 $30 $(22) $4,851 ====== === ==== ====== DECEMBER 31, 2005 State and municipal $4,117 $37 $(26) $4,128 ====== === ==== ======
8 The carrying amount and fair value of securities by contractual maturity at June 30, 2006 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 $ 36,341 $1,621 $1,622 Due from one to five years 20,289 1,683 1,700 Due from five to ten years 628 1,539 1,529 Due after ten years 751 -- -- --------- ------ ------ $ 58,009 $4,843 $4,851 ========= ====== ======
LOANS Net loans at June 30, 2006 increased $8.6 million from December 31, 2005. The table below shows total loans outstanding by type, in thousands of dollars, at June 30, 2006 and December 31, 2005 and their percentages of the total loan portfolio. All loans are domestic. A quarterly review of loan concentrations at June 30, 2006 indicates the pattern of loans in the portfolio has not changed significantly. There is no individual industry with more than a 10% concentration. However, all tourism related businesses, when combined, total 12.8% of total loans.
June 30, 2006 December 31, 2005 --------------------- --------------------- Balance % of total Balance % of total -------- ---------- -------- ---------- Portfolio loans: Residential real estate $ 83,209 50.46% $ 83,183 53.23% Consumer 9,914 6.01% 9,922 6.35% Commercial real estate 58,970 35.77% 53,133 34.00% Commercial 12,800 7.76% 10,037 6.42% -------- ------ -------- ------ 164,893 100.00% 156,275 100.00% ====== ====== Deferred loan origination fees, net (7) (8) Allowance for loan losses (1,487) (1,456) -------- -------- Loans, net $163,399 $154,811 ======== ========
ALLOWANCE AND PROVISION FOR LOAN LOSSES An analysis of the allowance for loan losses, in thousands of dollars, for the six months ended June 30, follows:
2006 2005 ------ ------ Beginning balance $1,456 $1,350 Provision for loan losses 60 60 Charge-offs (47) (11) Recoveries 18 10 ------ ------ Ending balance $1,487 $1,409 ====== ======
The Company had no impaired loans during the first six months of 2006 or 2005. Since December 31, 2005 commercial mortgages have increased $5.8 million and commercial business loans have increased $2.8 million while consumer mortgages have remained level. This is primarily due to a slow down in residential refinancing and a stronger emphasis on commercial lending. There has been no change in the bank's lending policies. The lending staff continues to be well-trained and experienced. The trend and volume of past due loans continues to be well-controlled and in line with peer averages. In response to the change in portfolio composition and loan growth management recorded a provision of $60,000 in the first six months of 2006 and 2005. 9 CREDIT QUALITY The Company maintains a high level of asset quality as a result of actively managing delinquencies, nonperforming assets and potential loan problems. The Company performs an ongoing review of all large credits to watch for any deterioration in quality. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in nonaccrual loans in (1) above); and (3) other loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above). The aggregate amount of nonperforming loans is shown in the table below.
June December 30, 31, 2006 2005 ---- -------- (dollars in thousands) Nonaccrual $ - $ - Loans past due 90 days or more 325 255 Troubled debt restructurings -- -- ---- ---- Total nonperforming loans $325 $255 ==== ==== Percent of total loans 0.20% 0.16%
DEPOSITS Deposits at June 30, 2006 decreased $2 million since December 31, 2005. Interest-bearing deposits decreased $3.5 million or 1.9% for the six months ended June 3, 2006, while noninterest-bearing deposits increased $1.5 million or 3.8%. This change in the deposit mix can be attributed to seasonal activity. LIQUIDITY AND FUNDS MANAGEMENT As of June 30, 2006, the Company had $3.1 million in federal funds sold, $58 million in securities available for sale and $1.6 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 28.3% of total deposits as of June 30, 2006. Total equity of the Company at June 30, 2006 was $25.3 million compared to $24.5 million at December 31, 2005. RESULTS OF OPERATIONS CNB Corporation's 2006 net income for the first six months was $1,690,000, a decrease of $47,000 compared to 2005 results. This decrease in net income can be attributed to a decrease in net interest income resulting from the increased deposit rates from the same time last year. Basic earnings per share were $1.37 and diluted earnings per share were $1.36 for 2006 compared to basic and diluted earnings per share of $1.40 for 2005. The return on assets was 1.34% for the first six months of the year versus 1.35% for the same period in 2005. The return on equity was 13.57% compared to 14.12% for the same period last year. Net income for the three months ending June 30, 2006 was $996,000 compared to $932,000 for 2005. This was an increase of $64,000 or 6.7%. Basic and diluted earnings per share were $0.80 compared to $0.75 for 2005. The return on average assets was 1.60% compared to 1.45% for 2005. The return on average equity was 15.89% compared to 15.11% for 2005. 10 For the first six months of 2006, net interest income was $5.0 million representing a decrease of 1.8% from the same period in 2005. The fully taxable equivalent net interest margin increased to 4.35% for the six month period ending June 30, 2006 compared to 4.32% for the same period ending June 30, 2005. Net interest income decreased due to the changing interest rate environment. Deposits are repricing faster than earning assets and at higher rates. Although net interest income is down slightly from the same period last year, the fully taxable equivalent (FTE) net interest margin has increased. The FTE net interest margin is calculated by dividing the FTE net interest income by the year to date average earning assets. The calculated increase in the FTE net interest margin is due to a decrease in average earning assets compared to the same period last year. Average earning assets have decreased, but a change in the asset mix has aided in continuing a level interest income. As the loan portfolio has grown, maturities of lower yielding investment securities have been used to fund loan growth at higher yields. In response to the change in the loan portfolio composition and loan growth, management recorded a provision expense of $60,000 in the first six months in 2006 and 2005. Noninterest income for the six months ending June 30, 2006 was $1.2 million, an increase of $182,000 or 17.7% from the same period last year. The majority of this increase can be attributed to the recording of a gain on the sale of property where our old south branch was located. This increase was offset in part by a decline in other income from the prior year period. Other income for the six months ending June 30, 2005 included life insurance proceeds of $300,000 due to the death of a director. Noninterest income for the quarter ending June 30, 2006 was $867,000 compared to $680,000 from the same period last year. This represents an increase of $187,000 or 27.5% from the same period last year. This change between the two periods is for the same reasons as noted above for the six month period. Noninterest income for the second quarter of 2006 includes $509,000 as a gain on the sale of property as mentioned above. Noninterest expense for the first six months of 2006 and 2005 was $3.8 million. Although the 2005 expense included $315,000 of additional expense to recognize the amount payable to a director upon death under the deferred compensation plan, 2006 also includes some additional noninterest expenses. The 2006 noninterest expense includes an increase to the occupancy expense which can largely be attributed to increases in depreciation expense due to the purchase of new processing equipment and new branch facilities in Cheboygan and Indian River. Also, an increase in salary and benefit expenses as the Company increased its number of employees from 77 full-time equivalent employees at June 30, 2005 to 81 full-time equivalent employees at June 30, 2006. This increase in employees is due to increased branch hours and a new branch facility, both of which require additional staffing. Also during 2006, the Company has recognized $51,000 of expense due to the loss on sale or write-down of other real estate properties owned. The provision for federal income tax was 28.8% of pretax income for the six months ended June 30, 2006 as compared to 24.8% for the same period in 2005. The difference between the tax rates for the two periods is due to the non-taxable character of the income from insurance proceeds during 2005. 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. 11 Management believes that there has been no significant changes to the interest rate sensitivity since the presentation in the December 31, 2005 Management Discussion and Analysis appearing in the December 31, 2005 10K. ITEM 4-CONTROLS AND PROCEDURES The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed summarized and reported within required time periods. Our Chief Executive Officer and Treasurer, who serves as the Company's CFO have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in providing them with material information relating to the Corporation which is required to be included in our periodic reports filed under the Exchange Act. There have been no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting. 12 PART II-OTHER INFORMATION ITEM 1-LEGAL PROCEEDINGS None ITEM 1A.-RISK FACTORS None 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 16, 2006. Elected as Directors for one year term were Steven J. Baker; James C. Conboy, Jr.; Kathleen M. Darrow; Thomas J. Ellenberger; Vincent J. Hillesheim; Kathleen A. Lieder; John L. Ormsbee; R. Jeffery Swadling; and Francis J. VanAntwerp Jr.. Votes cast for: 886,687 Votes cast against: 5,990 Votes withheld: 4,219 Votes cast for were for all nine directors listed above with the exception of the votes cast against as noted. Votes cast against were 2,246 for Kathleen A. Lieder, 3,553 for John L. Ormsbee, 86 for R. Jeffrey Swadling and 105 for Francis J. VanAntwerp. Votes withheld were for all nine directors listed above. ITEM 5-OTHER INFORMATION CNB Corporation announces the retirement of John P. Ward as Chairman of the Corporation. Mr. Ward was Chairman of the Corporation for one year and his retirement is due to the Corporation's mandatory retirement policy of age 70. Mr. Ward served as Secretary of the Corporation since its formation in 1985. He served as Senior Vice President of the Corporation from 1993 until his retirement in 1998 and as Senior Vice President and Cashier of the Bank from 1984 until his retirement in 1998. He served as a director of the Corporation and the Bank since 1994. Mr. Ward is succeeded by Vincent J. Hillesheim (55) as Chairman, who was elected for a one year term by the Board of Directors at the May 16, 2006 annual meeting. Mr. Ward's retirement and Mr. Hillesheim's appointment as Chairman were both effective as of May 17, 2006. Mr. Hillesheim is President of Anchor In Marina of Northern Michigan, Inc and Co-Manager of Crusoe Enterprises, LLC. He has served as a director of the Corporation and the Bank since 1994. ITEM 6-EXHIBITS AND REPORTS OF FORM 8-K a.) Exhibits 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 b.) Reports on Form 8-K None 13 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: August 9, 2006 /s/ James C. Conboy, Jr. ---------------------------------------- James C. Conboy, Jr. President and Chief Executive Officer Date: August 9, 2006 /s/ Susan A. Eno ---------------------------------------- Susan A. Eno Executive Vice President 14 EXHIBIT INDEX
Number Exhibit - ------ ------- 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18 EX-31.1 2 k07792exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER I, James C. Conboy, Jr., President and Chief Executive Officer, certify that: 1) I have reviewed this quarterly report on Form 10-Q of CNB Corporation; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant we have: 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) [intentionally omitted]; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly 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 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): e) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and f) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 9, 2006 /s/ James C. Conboy, Jr. - ------------------------------------- James C. Conboy, Jr President and Chief Executive Officer EX-31.2 3 k07792exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Shanna L. Hanley, Treasurer, certify that: 1) I have reviewed this quarterly report on Form 10-Q of CNB Corporation; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant we have: 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) [intentionally omitted]; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly 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 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): e) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and f) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 9, 2006 /s/ Shanna L. Hanley - ------------------------------------- Shanna L. Hanley Treasurer EX-32.1 4 k07792exv32w1.txt CERTIFICATIONS PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 ("Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the registrant. CNB CORPORATION (Registrant) By: /s/ James C. Conboy, Jr. ------------------------------------ James C. Conboy, Jr. President and Chief Executive Officer Date: August 9, 2006 By: /s/ Shanna L. Hanley ------------------------------------ Shanna L. Hanley Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----