10-Q 1 k21567e10vq.txt QUARTERLY REPORT 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 September 30, 2007 Commission file # 033-00737 CNB CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-2662386 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
303 North Main Street, Cheboygan MI 49721 (Address of principal executive offices, including Zip Code) (231) 627-7111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and larger accelerated filer" in Rule 12b-2 or the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 November 8, 2007 there were 1,216,617 shares of the issuer's common stock outstanding. CNB CORPORATION Index PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Condensed): Consolidated Balance Sheets - September 30, 2007 and December 31, 2006 ........................................ 3 Consolidated Statements of Income - Nine Months Ended September 30, 2007 and 2006 ............ 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2007 and 2006 .............................. 5 Notes to Consolidated Financial Statements .................. 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 8-13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk ........................................................ 13 Item 4 - Controls and Procedures ............................... 13 PART II - OTHER INFORMATION Item 1 - Legal Proceedings ..................................... 14 Item 1A - Risk Factors ......................................... 14 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds .................................................... 14 Item 3 - Defaults Upon Senior Securities ....................... 14 Item 4 - Submission of Matters to a Vote of Security Holders ... 14 Item 5 - Other Information ..................................... 15 Item 6 - Exhibits and Reports on Form 8-K ...................... 15 Signatures ..................................................... 16 Exhibit Index .................................................. 17
2 PART I - FINANCIAL INFORMATION ITEM 1-FINANCIAL STATEMENTS (CONDENSED) CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
September 30, December 31, 2007 2006 ------------- ------------ (Unaudited) ASSETS Cash and due from banks $ 6,197 $ 8,444 Interest-bearing deposits with other financial institutions 1,304 -- Federal funds sold 7,900 6,368 -------- -------- Total cash and cash equivalents 15,401 14,812 Securities available for sale 50,412 51,331 Securities held to maturity (market value of $9,189 in 2007 and $4,582 in 2006) 9,139 4,543 Other securities 1,008 1,008 Loans, held for sale 205 -- Loans, net of allowance for loan losses of $1,667 in 2007 and $1,498 in 2006 172,882 165,730 Premises and equipment, net 6,434 6,626 Other assets 8,609 7,850 -------- -------- Total assets $264,090 $251,900 ======== ======== LIABILITIES Deposits Noninterest-bearing $ 41,473 $ 39,620 Interest-bearing 191,877 181,745 -------- -------- Total deposits 233,350 221,365 Other liabilities 5,392 5,537 -------- -------- Total liabilities 238,742 226,902 SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares authorized; and 1,226,097 and 1,239,512 shares issued and outstanding in 2007 and 2006 3,065 3,099 Additional paid-in capital 19,972 20,482 Retained earnings 2,941 2,235 Accumulated other comprehensive loss, net of tax (630) (818) -------- -------- Total shareholders' equity 25,348 24,998 -------- -------- Total liabilities and shareholders' equity $264,090 $251,900 ======== ========
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2007 2006 2007 2006 ------ ----- ------- ------- (Unaudited) INTEREST INCOME Loans, including fees $3,334 $3,114 $ 9,720 $ 8,943 Securities Taxable 569 453 1,501 1,362 Tax exempt 114 121 352 358 Other interest income 144 198 594 358 ------ ------ ------- ------- Total interest income 4,161 3,886 12,167 11,021 INTEREST EXPENSE ON DEPOSITS 1,499 1,229 4,485 3,355 ------ ------ ------- ------- NET INTEREST INCOME 2,662 2,657 7,682 7,666 Provision for loan losses 68 30 206 90 ------ ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,594 2,627 7,476 7,576 ------ ------ ------- ------- NONINTEREST INCOME Service charges and fees 312 296 884 765 Net realized gains from sales of loans 26 31 93 113 Loan servicing fees, net of amortization 33 39 96 98 Gain on sale of premises and equipment -- 8 -- 517 Other income 43 40 179 132 ------ ------ ------- ------- Total noninterest income 414 414 1,252 1,625 NONINTEREST EXPENSES Salaries and employee benefits 937 905 2,750 2,654 Deferred compensation 80 80 240 240 Pension 33 65 100 194 Hospitalization 151 151 400 436 Occupancy 301 275 887 812 Supplies 43 42 156 153 Legal and professional 79 79 296 274 Other expenses 266 338 789 959 ------ ------ ------- ------- Total noninterest expense 1,890 1,935 5,618 5,722 ------ ------ ------- ------- INCOME BEFORE INCOME TAXES 1,118 1,106 3,110 3,479 Income tax expense 287 312 848 995 ------ ------ ------- ------- NET INCOME $ 831 $ 794 $ 2,262 $ 2,484 ====== ====== ======= ======= TOTAL COMPREHENSIVE INCOME $ 978 $1,049 $ 2,450 $ 2,821 ====== ====== ======= ======= Return on average assets (annualized) 1.29% 1.23% 1.16% 1.30% Return on average equity (annualized) 12.95% 12.37% 11.91% 13.16% Basic earnings per share $ 0.67 $ 0.64 $ 1.83 $ 2.01 Diluted earnings per share $ 0.67 $ 0.64 $ 1.83 $ 2.00 Dividends declared per share $ 0.42 $ 0.42 $ 1.26 $ 1.26
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
Nine months ended September 30, ------------------- 2007 2006 -------- -------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 2,262 $ 2,484 Adjustments to reconcile net income to net cash from operating activities Depreciation, amortization and accretion, net 430 251 Provision for loan losses 206 90 Loans originated for sale (3,535) (5,729) Proceeds from sales of loans originated for sale 3,361 4,957 Gain on sales of loans (93) (113) Gain on sales of premisis and equipment -- (517) Increase in other assets (233) (114) Increase in other liabilities 606 912 -------- -------- Total adjustments 742 (263) -------- -------- Net cash provided by operating activities 3,004 2,221 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 18,696 26,359 Purchase of securities available for sale (17,465) (13,840) Proceeds from maturities of securities held to maturity 2,290 1,687 Purchase of securities held to maturity (6,886) (2,439) Proceeds from maturities of other securities -- 30 Net change in portfolio loans (7,919) (8,187) Premises and equipment expenditures (265) (1,254) Proceeds from sale of premises and equipment -- 550 -------- -------- Net cash (used in) provided by investing activities (11,549) 2,906 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 11,985 7,529 Dividends paid (2,307) (2,276) Net proceeds from exercise of stock options -- 44 Purchases of common stock (544) (5) -------- -------- Net cash provided by financing activities 9,134 5,292 -------- -------- Net change in cash and cash equivalents 589 10,419 Cash and cash equivalents at beginning of year 14,812 11,943 -------- -------- Cash and cash equivalents at end of period $ 15,401 $ 22,362 ======== ======== Cash paid during the period for: Interest $ 4,415 $ 3,266 Income taxes 713 844 Non-cash transactions: Transfer from loans to other real estate owned 561 35
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, 2006. 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 Options The Company adopted a stock option plan in May 1996 under which the stock options may be issued at market prices to employees. The plan states that no grant or award shall be made under the plan more than ten years from the date of adoption of the plan and therefore the plan ended in 2006. Stock options were used to reward certain officers and provide them with an additional equity interest. Options were issued for 10 year periods and have varying vesting schedules. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. The Company has a policy of issuing new shares to satisfy option exercises. There were no modification of awards during the periods ended September 30, 2007 and 2006. Due to the plan end date, there are no options available for grant as of September 30, 2007 and there were no stock options granted during the nine months ended September 30, 2006. 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, 2007 23,438 $49.00 Options exercised -- -- Balance at September 30, 2007 23,438 $49.00 3.0 years $13,826 ======
The aggregate intrinsic value of options exercised for the three and nine months ended September 30, 2007 was $0. The aggregate intrinsic value of option exercised for the three and nine months ended September 30, 2006 was approximately $1,800 and $29,800, respectively. There were no shares vested for the same periods. Cash received from option exercises for the three and nine month periods ending September 30, 2007 was $0 and for the three and nine month periods ending September 30, 2006 was approximately $7,000 and $44,000, 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, 2006. 6 Note 2-Earnings Per Share Basic earnings per share are calculated solely on weighted-average common shares outstanding. Diluted earnings per share will reflect the potential dilution of stock options and other common stock equivalents. For the three and nine month periods ending September 30, 2007 the weighted average shares outstanding in calculating basic earnings per share were 1,232,384 and 1,237,107 while the weighted average number of shares for diluted earnings per share were 1,232,957 and 1,237,879. As of September 30, 2007 there were 19,407 options not considered in the three and nine month earnings per share calculations because they were antidilutive. For the three and nine month periods ending September 30, 2006 the weighted average shares outstanding in calculating basic earnings per share were 1,238,797 and 1,238,111 while the weighted average number of shares for diluted earnings per share were 1,239,842 and 1,239,680. As of September 30, 2006 there were 19,707 options not considered in the three and nine 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 nine month period ending September 30, 2007. 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 2006 Annual Report. FINANCIAL CONDITION As of September 30, 2007 total assets of the company were $264.1 million which represents an increase of $12.2 million or 4.8% from December 31, 2006. The Company recognized an increase in the loan portfolio of $7.3 million or 4.4% while deposits increased $12.0 million or 5.4% since December 31, 2006. SECURITIES The total securities portfolio increased $3.7 million since December 31, 2006. The available for sale portfolio decreased to 83.2% of the investment portfolio down from 90.2% at year-end. The reason for the decrease of the available for sale portfolio in relation to the total investment portfolio is due to the increase in the held to maturity securities. Held to maturity securities increased $4.6 million and is now 15.1% of the investment portfolio up from 8.0% at year-end. The remaining small percentage of the investment portfolio is the Other Securities category made up of Federal Home Loan Bank and Federal Reserve Bank Stock which are required holds to have a correspondent bank relationship with these entities. The fair values and related unrealized gains and losses for securities available for sale were as follows, in thousands of dollars: 8
Gross Gross Fair Unrealized Unrealized Value Gains Losses ------- ---------- ---------- Available for Sale SEPTEMBER 30, 2007 U.S. Government agency $20,250 $ 81 $ (7) Mortgage-backed 10,698 15 (52) State and municipal 5,464 62 (4) Money market preferred stocks 14,000 -- -- ------- ---- ----- $50,412 $158 $ (63) ======= ==== ===== DECEMBER 31, 2006 U.S. Government agency $21,307 $ 8 $(125) Mortgage-backed 10,491 4 (107) State and municipal 8,549 59 (13) Money market preferred stocks 10,984 -- (16) ------- ---- ----- $51,331 $ 71 $(261) ======= ==== =====
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
Gross Gross Carrying Unregnized Unrecognized Fair Amount Gains Losses Value -------- ---------- ------------ ------ Held to Maturity SEPTEMBER 30, 2007 State and municipal $9,139 $59 $ (9) $9,189 ====== === ==== ====== DECEMBER 31, 2006 State and municipal $4,543 $54 $(15) $4,582 ====== === ==== ======
The carrying amount and fair value of securities by contractual maturity at September 30, 2007 are shown below, in thousands of dollars.
Held to Maturity Available for sale ----------------- Fair Carrying Fair Value Amount Value ------------------ -------- ------ Due in one year or less $27,857 $2,191 $2,191 Due from one to five years 21,301 3,242 3,273 Due from five to ten years 554 2,781 2,797 Due after ten years 700 925 928 ------- ------ ------ $50,412 $9,139 $9,189 ======= ====== ======
LOANS Net loans at September 30, 2007 increased $7.2 million from December 31, 2006. The table below shows total loans outstanding by type, in thousands of dollars, at September 30, 2007 and December 31, 2006 and their percentages of the total loan portfolio. All loans are domestic. A quarterly review of loan concentrations at 9 September 30, 2007 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 12.1% of total loans.
September 30, 2007 December 31, 2006 --------------------- --------------------- Balance % of total Balance % of total -------- ---------- -------- ---------- Portfolio loans: Residential real estate $ 82,637 47.34% $ 82,842 49.53% Consumer 9,379 5.37% 9,444 5.65% Commercial real estate 69,678 39.92% 61,740 36.92% Commercial 12,860 7.37% 13,208 7.90% -------- ------ -------- ------ 174,554 100.00% 167,234 100.00% ====== ====== Deferred loan origination fees, net (5) (6) Allowance for loan losses (1,667) (1,498) -------- -------- Loans, net $172,882 $165,730 ======== ========
Loans held for sale were $205,000 at September 31, 2007 and $0 at December 31, 2006. Loans held for sale include loans closed as of the reporting period, but not yet sold on the secondary market. The Bank retains all servicing rights for loans sold. Since December 31, 2006 commercial real estate mortgages have increased $7.9 million while other loan types remained stable or slightly lower than December 31. This is primarily due to a slow down in residential refinancing and a stronger emphasis by the bank on commercial lending. There has been no change in the bank's lending policies. The lending staff continues to be well-trained and experienced. ALLOWANCE AND PROVISION FOR LOAN LOSSES An analysis of the allowance for loan losses, in thousands of dollars, for the nine months ended September 30, follows:
2007 2006 ------ ------ Beginning balance $1,498 $1,456 Provision for loan losses 206 90 Charge-offs (56) (59) Recoveries 19 21 ------ ------ Ending balance $1,667 $1,508 ====== ======
The Company had impaired loans of $784,000 during the first nine months of 2007 and no impaired loans during the first nine months of 2006. 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 $206,000 in the first nine months of 2007 and $90,000 in the first nine months of 2006. 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 10 borrower (exclusive of loans in (1) or (2) above). The aggregate amount of nonperforming loans is shown in the table below.
September 30, December 31, 2007 2006 ------------- ------------ (dollars in thousands) Nonaccrual $ 784 $ -- Loans past due 90 days or more 612 177 Troubled debt restructurings -- -- ------ ---- Total nonperforming loans $1,396 $177 ====== ==== Percent of total loans 0.81% 0.11%
At September 30, 2007, total nonperforming assets increased by $1.2 million from December 31, 2006. The Bank is closely monitoring and managing nonperforming loans. Nonaccrual loans increased to $784,000 since December 31, 2006. This amount is from five loans and is a combination of one that went on nonaccrual status in March 2007 and two loans that went on nonaccrual status in June 2007 and two that went on nonaccrual status in September 2007. Management reviews loans for impairment prior to placing them on nonaccrual status. Loans past due 90 days and still accruing are loans that management considers to be collectable, including accrued interest. The increase in nonperforming loans was primarily in residential and commercial loans and management believes the Bank is adequately reserved on these loans. Management fully expects that diligent servicing of these loans will minimize losses. Although uncertain overall economic conditions have negatively affected Michigan, the Company's marketplace remains relatively stable. The Company expects the amount of nonperforming loans to remain elevated into the foreseeable future, as the Bank works with these few customers who have felt the economic pressures of the overall Michigan economy. The Bank maintains an active loan collection process to mitigate loan losses. Loan quality is continually and systematically monitored and reviewed by management. Management is also monitoring the trends of delinquent loans. In addition to nonperforming loans, the Company has Other Real Estate Owned totaling $1.5 million as of September 30, 2007 as compared to $1 million at December 31, 2006. The Company has acquired these properties due to foreclosures or deeds in lieu of payment. Due to the increased emphasis in commercial lending, the bank has outsourced a loan review to occur in the fourth quarter of 2007. The Bank's ability to perform loan review internally has been difficult to achieve due to compliance with section 404 of Sarbanes Oxley and the personnel hours devoted to that task. DEPOSITS Deposits at September 30, 2007 increased $12.0 million since December 31, 2006. This increase is due, in part, to a deposit promotion the bank offered in the first quarter of 2007 and in part to the new branch location that opened in January 2007. The bank has also introduced a "Free Checking" product since the end of the second quarter 2007 in addition to several other demand deposit products in an effort to attract new customers. Interest-bearing deposits increased $10.1 million or 5.6% for the nine months ended September 30, 2007, while noninterest-bearing deposits increased $1.9 million or 4.7%. The Bank expects to continue this trend of offering deposit promotions as it sees opportunities to attract new customers. LIQUIDITY AND FUNDS MANAGEMENT The Company's balances of cash and cash equivalents increased $589,000 or 4.0%. During the nine month period ending September 30, 2007, $2.4 million in cash was provided by operating activities. Investing activities used $11.0 million during the nine months ended September 30, 2007, primarily due to loan funding and the purchase of securities and financing activities provided $9.1 million as a result of deposit growth. As of September 30, 2007, the Company had $7.9 million in federal funds sold, $50.4 million in securities available for sale and $2.2 million in held to maturity securities maturing within one year. These sources of liquidity are supplemented by new deposits and loan payments received by customers. These short-term assets represent 25.9% of total deposits as of September 30, 2007. The Company's liquidity position is adequate to respond to extensions of credit, short-term demand for funds caused by withdrawals from deposit accounts and for the payment of operating expenses. 11 Total equity of the Company at September 30, 2007 was $25.3 million compared to $25.0 million at December 31, 2006. The Company's equity including Risk Based Capital and Leverage Ratio are above the "Well Capitalized" status for regulatory guidelines. RESULTS OF OPERATIONS CNB Corporation's 2007 net income for the first nine months was $2.3 million, a decrease of $222,000 compared to 2006 results. This decrease in 2007 net income can be attributed to a one time gain on sale of a closed branch site to Walgreen's for $517,000 that occurred in June 2006. Basic and diluted earnings per share were $1.83 for 2007 compared to Basic and diluted earnings per share of $2.01 and $2.00 for 2006. Taking the one time event out of the calculations for 2006 basis and diluted earnings per share would have been $1.73. The Bank maintains a strong income by continuing to control costs as it closely monitors noninterest expenses. The Bank is also able to maintain a level net interest margin in a flat yield curve rate environment due to its core deposit base in addition to offering new noninterest bearing deposit account products. These low cost core deposits help control the Bank's interest expense. The return on assets was 1.16% for the first nine months of the year versus 1.30% for the same period in 2006. The return on equity was 11.91% compared to 13.16% for the same period last year. Net income for the three months ending September 30, 2007 was $831,000 compared to $794,000 for 2006. This was an increase of $37,000 or 4.7%. Basic and diluted earnings per share were $0.67 compared to $0.64 for 2006. The return on average assets was 1.29% compared to 1.23% for 2006. The return on average equity was 12.95% compared to 12.37% for 2006. Interest income for the first nine months of 2007 was $12.2 million, an increase of $1.1 million or 10.4% compared to 2006 results. The majority of this increase can be attributed to the Company's loan growth. Interest income for the quarter ending September 30, 2007 was $4.2 million compared to $3.9 million from the same period last year. Interest expense for the first nine months of 2007 was $4.5 million, an increase of $1.1 million or 33.7% compared to 2006 results. This increase is attributable to not only growth in total deposits, but also the change in deposit mix as customer transfer money from their lower yielding savings account into higher yielding certificates of deposit. The Bank had also offered several higher than average rate deposit promotions in the first six months of 2007 in order to draw attention to our new branch location and to attract new customers. Interest expense for the quarter ending September 30, 2007 was $1.5 million compared to $1.2 million for the same period last year. This increase is attributable to the same reasons as noted above for the year to date time period. For the first nine months of 2007, net interest income was $7.7 million representing an increase of 0.2% from the same period in 2006. The fully taxable equivalent net interest margin increased to 4.41% for the nine month period ending September 30, 2007 compared to 4.40% for the same period ending September 30, 2006. This marginal change can be attributable to a flat interest rate environment during 2006 and so far in 2007. In response to the change in the loan portfolio composition and loan growth, management recorded a provision expense of $206,000 in the first nine months in 2007 and $90,000 in the first nine months in 2006. Noninterest income for the nine months ending September 30, 2007 was $1.3 million, a decrease of $373,000 or 23.0% from the same period last year. This change between the two periods is attributed, in part, due to a gain on the sale of premises and equipment in the amount of $517,000 in 2006 and in 2007 an increase in our per item NSF fee effective June 2006 and an Overdraft Privilege program that was introduced to our customers in the beginning of August 2006. Noninterest income for the quarter ending September 30, 2007 and 2006 was $414,000. The noninterest income was the same amount and a similar mix for the two periods. 12 Noninterest expense for the first nine months of 2007 and 2006 was $5.6 million and $5.7 million, respectively. Although the noninterest expense remained at relatively the same level during the two periods, the expense mix did change slightly between the periods. The increase in occupancy expense can largely be attributed to increases in depreciation expense due to the purchase of new processing equipment in the second quarter of 2006 and a new branch facility in Alanson opened in January 2007. Hospitalization expense decreased due to a change in benefit coverage. Also, other expenses for 2006, includes $51,000 of expense due to the recognition of loss on sale or write-down of other real estate properties owned. Noninterest expense for the quarter ending September 31, 2007 and 2006 were $1.9 million. Although the noninterest expense for the two periods was similar, the mix of the expense had some differences. The other expenses category in the third quarter of 2006 included $25,000 due to losses from Other Real Estate Owned properties. While the same period in 2007 saw a credit of $30,000 to other expenses due to a signing bonus paid for switching ATM/Debit card processing companies. The third quarter of 2007 also had increased occupancy expense due to additional expenses for property taxes with the completion of our new Alanson Branch and increased building, equipment and software maintenance expenses due to new facilities and equipment. The Bank continues to closely monitor noninterest expenses. The provision for federal income tax was 27.2% of pretax income for the nine months ended September 30, 2007 as compared to 28.6% for the same period in 2006. 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. The effect of the future Michigan Business Tax as the replacement for the Michigan Single Business Tax has been calculation based on preliminary guidance to date. The effect of the new tax appears to provide the Company with similar tax level as the outgoing Single Business Tax. 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, 2006 Management Discussion and Analysis appearing in the December 31, 2006 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. 13 PART II-OTHER INFORMATION ITEM 1-LEGAL PROCEEDINGS None ITEM 1A.-RISK FACTORS There have been no material changes to the risk factors disclosed in Item 1A Part I of the Company's 2006 10K. ITEM 2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ISSUER PURCHASES OF EQUITY SECURITIES
Total Approximate number dollar value of shares of shares Total Average purchased that may number of price as part of publicly be purchased shares paid per announced under the plans PERIOD purchased share plans or programs or programs ------ --------- -------- ------------------- ----------------- $1,000,000 July, 2007 9,000 $40.65 9,000 $ 634,150 August, 2007 4,400 $40.40 13,400 $ 456,390 September, 2007 None 13,400 $ 456,390 Total $ 456,390
The Company adopted a Stock Redemption Plan on June 14, 2007 with the provision that it would remain in effect until $1 million had been expended on the purchase of common stock. As of September 30, 2007, the Company has $456,390 remaining to purchase stock. ITEM 3-DEFAULTS UPON SENIOR SECURITIES None ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5-OTHER INFORMATION None 14 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 A Current Report on Form 8-K was filed on October 10, 2007, with an accompanying letter to shareholders, disclosing the Corporation's financial performance for the first nine months of 2007 and announcing the Corporations dividend declared. A Current Report on Form 8-K was filed on October 17, 2007 announcing the fourth share repurchase under the Corporations stock repurchase plan. A Current Report on Form 8-k was filed on October 23, 2007 announcing the firth share repurchase under the Corporations stock repurchase plan. 15 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: November 8, 2007 /s/ James C. Conboy, Jr. ---------------------------------------- James C. Conboy, Jr. President and Chief Executive Officer Date: November 8, 2007 /s/ Susan A. Eno ---------------------------------------- Susan A. Eno Executive Vice President 16 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
17